How to trade profitably no matter what the market is doing — systematically implement three or more non-correlated automated trading systems at the same time…
Successful traders do not care about the direction of the market; up, down, sideways….it does not matter. This is because we have multiple automated trading systems for each market condition. Additionally, we do not pretend to know the future of the market, and we do not care that we don’t know. Why? We trade multiple, non correlated systems simultaneously.
Many market professionals and traders like to talk about the long-term trends in the market. What they are essentially saying is ‘given enough time, the market always goes up’. But you and I don’t necessarily have a long time.
I like to follow the S&P 500. It’s a broad range of high-volume stocks and provides a great benchmark. If you had invested in an index in 1929, it would have taken you 25 years just to get back to break even. In 2000 – 2003, the market dropped 49% and took seven years to recover. In 2008 the market dropped 56% and took five years to recover.
If you’re just starting out trading, or you’re at the end of your trading career, these drawdowns can be catastrophic…unless you’re prepared.
Elite traders who have learned to master the trading game at my Trading Mastery School accept that they don’t know the future. What they DO know is that markets tend to act within certain ranges and behave in certain ways. That’s why I teach them algorithmic trading strategies to make best use of what they DO know and predict what they don’t: maximizing their profit and minimizing their risk.
It’s a lot like anything else in life…we all know that we might get rained on, but usually there are some signs that warn us. We all know that we might get struck by lightning, but it’s very unlikely. We live accordingly.
It’s the same with trading. We follow the price action of stocks (or anything else), and we trade based on what is most probable. If we continue the previous analogy, we don’t care whether it’s going to be sunny or cloudy, warm or hot, dry or wet; we just accept that we don’t control all that and we adapt and plan based on the best information available to us.
So let’s talk about exactly how this works.
Four Proven Go-To Automated Trading Systems To Profit In Any Market Condition
There are four basic automated trading systems I’ve used for the last two decades and shared with students at Trading Mastery School that have been central to my success. Each of those four has a place, and when one or more are traded simultaneously, they allow me to profit regardless of market direction.
The first system I want to review is the Long Term Trend Following Long. This is a simple system of trend following where we enter a long position when the trend is confirmed. We exit when the trend is confirmed to have ended. In this position we’re making money as prices are rising.
The second system is the Long Term Trend Following Short. In this system we enter a short position when the trend of falling prices is confirmed. We exit when the trend is confirmed to have ended. We’re making money as prices are falling.
The third system is the Mean Reversion Short. In this system we enter a short position when a stock is so overbought that a reversion to the mean is probable. We short the stock with the goal of an exit within a few days. With this system we make money as prices are falling, and we’re not looking to make a lot of money, but rather, to have a high-probability short term trade.
The fourth and final of my is the Mean Reversion Long. In this system we enter a long position when a stock is oversold and a reversion to the mean is likely. We enter a long position with the goal of an exit within a few days. With this system we make money as prices are rising, and we’re looking for a high-probability, short term gain.
Each of these automated trading systems alone is powerful and profitable, but their real value is when they are combined. When we trade multiple, non-correlated strategies simultaneously, we reduce the value and duration of drawdowns in portfolio value. The result is lower risk AND higher profits.
So you might trade the Long Trend Following Long system with the Mean Reversion Short System. Or, you Trade the Long Trend Following Short system with the Mean Reversion Long System. The prevailing marketing direction establishes the first system, and then you choose the appropriate ‘pair’ for your second system.
Let me give you an example.
Between 1995 and 2019 the SPY had a CAGR of 8% with a maximum drawdown of 56% and annualized volatility of 19%. According to my simulations, had you traded the Long Trend Following Long system and the Mean Reversion Short System, you would have seen a CAGR of 43%, a max drawdown of 31%, and an annualized volatility of 20%
Here’s the really impressive number: the total return of the SPY was 536% while the simulated return of those systems was 666,000%. Put another way, the return was 100X greater than what the index returned.
I cover these systems and strategies in detail in chapter three of “Automated Stock Trading Systems”, which you can find on Amazon.
Owner of Trading Mastery School and Tradingsystems.com