Home > Creativity, management, Markets, Planning, Uncertainty > Profitable ETF trading strategies: adapting to chaos

Profitable ETF trading strategies: adapting to chaos


When you find yourself in conditions of chaos,  you discover that your robust systems are beginning to break down.  They no longer perform as designed, simply because the volatility is greater than the system boundaries and feedback mechanisms can account for or moderate.

Slack, buffers,  filters and boundaries all work to dampen waves of change. When volatiltiy gets to extremes then these mechanisms fail and further, begin to degrade. They lose the ability to modulate the waves of change.  The outrigger on a Polynesian canoe acts as a drag and provides stability at the cost of friction. This allows the boat to navigate the waves successfully. When waves get too large for the outrigger, the boat founders and capsizes.  The system didn’t change, but you crossed the environmental boundary of the system.

Trading systems are like that. You have to have a sense of what the range of acceptable environments are for the system to perform as designed.  As a rule of thumb you could treat a moving average of equity as a bottom line inicator of favorable environment. 

When facing periods of chaos (here defined as moments of extreme volatility) you have to change your time horizon in one of 2 directions to continue to trade with some degree of confidence. You either shorten your time period and look for tradeable patterns that you can manage or  you lengthen your time period. The second strategy is a belief that after a period of chaos, the previous conditions of normal will reassert themselves and your previous set of systems will still perform to standard.

The only problem with that idea is that its an act of faith that cannot be relied upon. If you make that decision, make sure you take responsibility for your faith.  I am unwilling to do that since I am currently finding tradable patterns in the shorter time frames.  You can always stand aside too until such time as your paper trading systems have an equity curve that is returning to normal. That’s not a bad idea.

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