Profitable ETF Trading Strategies: 3 Tips for developing a market classification system that fits your style
In previous articles I have described why a market classification scheme is a high payoff strategy for improving your trading results. I now want to describe a few things for you to consider as you look to take advantage of your edge in market classification.
Focus on the following issues to make sure that your research efforts can be applied to your style and objectives. Remember that you are not in search of eternal truths for all times and places, for all traders and styles. You are just trying to make a reasonable, risk-adjusted return on your invested time and money to achieve financial freedom, This will take you down different paths than those of the pure academic, and with the intent of adding value to your bottom line.
1. Focus on your time frame for trading, especially if you are looking initially to supplement your income and have not yet made the leap to full time, professional, independent market trader for a living. You will have constraints placed on your time by the competing demands of work and family and there will be some styles that are simply not within your reach. No sense trying to develop a classification scheme for a style that will not fit you.
2. Identify interesting markets and targets for you to specialize in. You want these to offer you the kinds of volatility you can trade yet are within your tolerance for excitement. As a trader you must trade on volatility, the fluctuation of price around the idea of “fair value”. It will be important for you in the early years to focus on markets that you find appealing and interesting and about which you will develop a feel and an expertise that will give you an edge. It is these markets where your classification scheme can be informed by both art and science.
3. Look for a blend of art and science in your classification scheme. Find elements of the market’s behavior that may be expressed as rules, like seasonality volatility cycles, time frames that seem to repeat, typical patterns and express those quantitatively. Find those patterns and themes that seem to emerge in the course of your trading to add an element of qualitative description to your scheme. By blending the best of both worlds you will have a market classification scheme that leverages the 2 primary domains of your cognition: art and science, qualitative and quantitative reasoning.
Your classification scheme will help you to interpret price into useful meaning which can be placed into favorable risk-managed action.