Course 11

The 3 market types

What you will learn:

  • The market goes up

  • The market goes down

  • The market goes sideway

  • You can develop a strategy for each side

  • You can also develop something for all 3 together, but it's hard

There is one thing that is important to understand when trading the markets, which may sound very obvious to all of you BUT wasn’t at all for me at first: the market can be classified in 3 categories:

- It goes up.

- It goes down.

- It goes sideways.

Your highest chance to make it algo trading is to have a system that adapts to these 3 market conditions OR to have 3 systems.

You are probably thinking that when the market goes up, it is the same as when the market goes down, it is just a matter of direction. Well, this is actually wrong!

Let’s look at the Bitcoin price on the daily timeframe for the last year or so.

On average, when the daily close above the open, it goes up by 5.8%.

As compared to then the daily close below the open (red candle), it goes down by 6.8%. OK I get it it is not a big difference. Consider also this, the maximum up move (Low to High), is 22% while the maximum down move (High to Low) is 45%. And yes, I confirm this is within 1 day of trading.

In conclusion, you should not trade Longs the same way you trade Shorts, in case you are in the 3 trading systems scenario. The reason is because the price moves downward faster that it moves upward.

Now, everywhere you look you can read about “Trade with the trend” and that is a great idea, but you should also consider trading the range! Markets are ranging most of the time. If you have a bot that buys/longs at range low and sells/shorts at range high, you have a system right there!

Check this out below, the blue line could be you middle range and then you stop when you get out of the range:

I know what you are thinking! What about a system that buys at the line and TP at the next line. I thought about it too! I have worked a lot on this, and never found something that works. You know why? Because it is too hard to predict the direction with enough repeatability to cover losses. Also, this is a system that adapts to what we see on the chart. Friendly reminder, when you trade, you don’t see the future bars yet. Also, you can’t predict the direction of the market. I talk about it in my conclusion.

I have worked a lot on ranging trading and I have built some pretty nice bots, I also learned a lot from a few people who are doing the same thing. Based on my experience, there are a lot of nice profits to be made and I know the one guy who taught me the stuff is profitable over the long haul, but me I was never able to tweak my bot to make it.

This being said, I am not the type of person who gives up and I do plan on going back at it because if he’s doing it, then I should be able to do it too. Remember the risk courses? We can’t just settle down and wait to see if the current bots/algos will perform in the future. Because, we can NOT predict the future. What we can do though is work on what we can control: new systems, news algos, more live trading and new learning.

So now, is it possible to have a system that makes consistent profits whether the market is ranging, going up or going down? Like a Holy Grail?

Well, most people will tell you that this is impossible. The other people will tell you it’s possible because they are good salespeople and they are selling theirs, which in the end doesn’t work because of slippage, fees, order execution or just because they back tested only during a very strong trend and now this strong trend is gone.

Me, I do think that it is possible to have something like a Holy Grail system, something that is quite flexible but most importantly something that is sizing positions properly, so that during high volatility, OR during very low volatility, the system is still reliable. I believe I’ve got something like that (though of course I can’t tell you for sure because again I can’t predict the future). My system doesn’t care what the market is doing, I just use all the principles/ideas I have been writing about in these courses, and so far it has worked for me.

I also think that if you have a macro indicator or a tool that tells you when this is ranging and when it is not, you could have a TV algo that trades differently, like 3 TV scripts into 1. Each of them would cover a market type.

Free alpha for you: believe it or not, a bot that buys randomly, all the time, with a fixed 0.20% Take Profit and 5 Safety Orders below it up (enough to cover a 25% drop), will be super profitable during a long term uptrend. Check the 3D Heikin Ashi chart below – don’t tell me it is impossible to identify a strong uptrend. If you start your bot LONG after 2 green candles OR you switch to SHORT once you get 2 red ones (get a 0.40% TP for short since it moves down faster than up), I can tell you that with a bot that is ALWAYS open, random entries, you will make at least 0.5% a day (at least!). 15% a month, you will 5x your money in 12 month.

This system, trades the range, the uptrend, and the downtrend. Here’s a holy grail. The problem is will you be patient enough and not too greedy hoping for more than 15%?

Conclusion

There are 3 major market types you need to be aware off (Up, Down, Sideways). You can develop something that works well on all 3 types if you follow the basic rules of trading (Position Sizing, Capital Preservation, etc.).