Profitable ETF Trading Techniques — Market Classification

The very first thing I analyze after i am creating my daily trading plan is the current market classification. — stocks

The reason why? Because, depending on which scholar you read, the marketplace itself contributes up to 50% of the return of individual stock gains/losses. It makes sense if you ask me then the most important single factor ought to be the beginning to research.

If you only obtain one thing right, it should be the present market condition.

I examine market overuse injury in 2 time dimensions: Long-term and Intermediate term. The time periods I chose are specific for the way I trade and the typical time periods I turn to hold individual positions. I believe that your time frame should affect your appearance on the market. In my opinion one-size-fits-all strategies usually are not well suited for individual success. Therefore, I consider long term is the last 180 days and short-term is the last Ten days.

I take a look at long lasting market condition in 2 dimensions: Price range and Relative Volatility. Without starting the specific techniques I use to classify individual states, suffice it to say that I have 3 price categories: Bull-Sideways-Bear, about three volatility conditions: Quiet-Normal-Volatile. This produces a 3�3 matrix, with 9 possible market condition states. (See table below)

On reflection in the last 13 many years of S&P 500 price data (that’s as long as the S&P ETF: SPY, has price data available), I analyzed the data of the returns of the marketplace for the following day in line with the current market condition as defined, and concluded that there was distinct variations in the final results for each and every with the 9 states. Apparently , there are just 4 with the 9 states where, normally the following days return is positive.

It becomes an extraordinarily important piece of information to understand when viewing trading opportunities for the following day, especially if your trading instrument or “target” is strongly correlated for the US large cap market. The look below is an illustration of this industry classification matrix in action. It should not surprise you to see the marketplace is currently (as of Oct 4, 2008) in Bear Volatile: the worst condition for expected returns.

What’s important to note is that my analysis model classified the marketplace as Bear Volatile on Sept 9, and has remained there ever since. The marketplace is down more than 10% for the reason that period of time. It’s down over 20% since entering Bear Quiet mode on June 03, 2008. Being aware of market condition can prevent those kinds of losses from occurring and add tremendous value and insight to your long-term investment program as well as inform short term trading strategies. — stocks

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store