Strategy Selection: Just Go with the Flow
One of the most common questions from new traders is often similar to the below:
“What strategy works best?”
My answer is the same almost every time. As far as I’m concerned, there is not one single strategy that works all the time. As a matter of fact, there are few strategies that work consistently – regardless of what the market is doing.
The key to strategy selection is often basing that strategy around the market condition that is being exhibited. Let’s go through an example.
Let’s take a very common range strategy, such as using RSI to buy when RSI crosses up and over 30, or selling when RSI crosses down and below 70.
Created with Marketscope/Trading Station 2
As you can see, while the initial short entry may have worked out well, the subsequent long trigger would have bought shortly before price went down. A second long entry may have worked, but the subsequent short entries may have been placed as the market is continuing to go up.
What happened there? Why was does the strategy look less viable on the latter trades?
This shows that a ranging system – regardless of how simple it may be – is operative for ranging markets.
You may notice the trend line that I had added – and what we’re seeing on the chart is a ‘Ranging,’ market turning into a ‘Trending,’ market. This can happen with regularity when trading.
Price is often exhibited ranging tendencies, or trending tendencies. If the range is at risk of being broken, or if price is breaking out of that range, traders can consider that a ‘breakout.’
I don’t know of a single strategy that will work optimally in all market conditions; and most traders will find that rare is the strategy that will perform in each condition.
The key, for me, is to identify the market condition and then apply the appropriate strategy based on what the market is telling me.
In the example above, when the market begins trending – I will then change to my trending strategy so that my strategy may perform optimally with prevailing market conditions.
If you would like to find out more information about how to decide whether the market is ranging or trending, the following articles on ‘Price Action,’ can help greatly; using only market supply and demand with prices that were actually traded to help you define the market condition you are seeing:
Additional resources:
Range Trading Lesson 1 - DailyFX PLUS Online Video Course
Trading with Moving Averages Lesson 1 – DailyFX PLUS Online Video Course
--- Written by James B. Stanley
To contact James Stanley, please email Instructor@DailyFX.Com. You can follow James on Twitter @JStanleyFX.
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