Diversified Trading Strategies!

Hi Folks,

I just wanted to make a new blog post covering the power of diversifying trading strategies in order to take advantage of ever changing market conditions!

I think this will be a fantastic educational guide for new and seasoned traders alike. Especially for traders who are new to this business and may have some unrealistic viewpoints on the ability of themselves to net consistently money over a long period of time.

Trading isn't a "one size fits all" type of business. There are many highly successful traders that may do the complete opposite from each other or run completely different types of strategies that are successful because they've found the markets that these strategies consistently work best in.

This guide is here to help with outside the box thinking and idea generation so you yourself can become a stronger, more consistent trader. Whatever that may look like to you!

How do market cycles affect different trading systems and strategies?

Short term technical trading strategies come in all different types of flavors. Each unique strategy requires a unique environment for it to work to its full potential. Understanding that environment and what it looks like for your strategy is a key component to long term sustainability and profitability. Pivoting in and out of the technical strategy as markets cycle must be a defined concept within the strategy itself.

How do I get started?

Creating a toolset of diversified trading strategies can allow you to net money in a variety of trading environments by transitioning through your toolsets as the market cycles as it does over and over again. Now this doesn't mean you should be continuously seeking the newest and hottest trading strategy. This means you should identify trading strategies that interlace with your skill, ability and style of trading best. Focus on mastering 2 or 3 diversified strategies.

A good base to start with is:

• A day trading strategy

• A swing trading strategy

• A systematic strategy

• Exploiting a core strategy from multiple time frames

What might a day trading strategy look like?

A day trading strategy could be something as simple as identifying and trading intraday oversold or overbought conditions for short term intraday scalp trades and bounce trades. A market that has a greater level of volatility would be beneficial for such a strategy. This is where taking into consideration the market environment that you're presented with is a very important aspect of the strategy!

Using $VIX to gauge potential intraday volatility is what helps you identify the environment that the strategy will work best in. When the market is stable and intraday volatility is low the conditions may not be as ideal.

A common day trading strategy that I teach to Art of Trading members is the Red to Green strategy (R2G). Basically you scan for the strongest stock in the previous day and you make a list of those stocks. The next morning before the market opens you revisit that list and see if any of those same strong stocks from the previous day are a gapping down. Usually 1.5% - 3% gap downs is what you're looking for. Then if the stock quickly turns back green shortly after the open (Usually the first 30 - 60 minutes is best) You enter the stock when it goes green and look for a 2% - 4% "pop" higher, selling into that strength for quick short term gains.

I share these types of day trading ideas with Art of Trading members on nearly a daily basis. I have many step by step educational guides to help you get started with this very strategy

Position size is another aspect that needs to be taken into consideration. A more conservative day trading approach might use 15% capital allocation per trade with a maximum of a 1% draw down on the account. Where a more aggressive trader might use 25% - 35% size with a maximum drawn down of 2% on the account.

Red to Green day trading guide:

What might a swing trading strategy look like?

a swing trading strategy could be something as simple as buying a strong trending stock and using that trendline as your base where the entire concept falls on that particular stock staying above the trendline and that defines whether you're in the trade or not. If the stock is above the major trendline you're in the trade and if it isn't you're out.

Swing trades can be held for multiple days, weeks, months and more rarely years!

The best and most consistent swing trades often come from the strongest stocks but that doesn't mean you can't find consistently with swing trades through oversold conditions using something like a $NYMO / $NAMO indicator to identify extremes in the market often leading to strong, consistent multi-day and multi-week rallies.

A swing trade may also come from multiple sets of circumstances where a stock that has been highly shorted begins to show strength through a new Power Earnings Gap and begins to show signs of a short squeeze. Gathering the evidence isn't a complicated procedure if you know what you're looking for. You can create checklists to identify these setups and anticipate these moves well before they occur. Taking bigger trades with more confidence!

Here's a step by step swing trading guide to help!

What might a systematic strategy look like?

Systematic market following strategies come in many different types of packages as well. Some systematic market following strategies factor in cycle periods but don't transition away from the core strategy itself even when the market cycles away from the "ideal" performance environment that the strategy thrives in. Systematic market following strategies can utilize short term trading strategies that cumulatively compound into consistent progression over a defined period of time. A systematic strategy often enters and exits stocks over defined periods of time, price points, percentage gains or losses, and/ or proprietary indicators or a combination of some or all.

For example the Art of Trading Top Pick of the Week strategy (one of several other trading strategies we utilize at AOT) is a mostly systematic trading strategy, which is perfect for those who don't have enough time to sit in front of their screens all day to watch the market.  

The Top Pick of the Week strategy is a very simple to follow strategy. I identify "Top Pick" candidates each weekend and then share one "Top Pick" for Art of Trading members each week. The Top Pick is simply bought on the Monday open and then sold on the Friday close. Occasionally we will continue to hold a Top Pick for more then 1 week. Sometimes 2 -3 weeks.

Here is a full breakdown of that systematic strategy here:

Exploiting a core strategy on multiple timeframes!

A core strategy that I follow is my Power Earnings Gap strategy that I developed over 15 years ago now. We will use that as an example here but keep in mind that this could be any type of core trading strategy that you have found that interconnects with your trading style best.

Contained within a Power Earnings Gap stock you can trade it 3 completely different ways all in the same day depending on the market environment and the trading strategies that you developed that best suit that environment.

For example on the first day of a power earnings gap you can look for a day trading momentum setup in the form of a Gap & Go. This is where the stock gaps up out of a positive earnings report followed by strong continued momentum. A strong entry with a setup like that can easily turn itself into a strong entry for a trend following momentum swing trade or just simply traded out as a day trading setup that very same day.

The Power Earnings Gap Red to Green setup is usually best identified on the second day of a PEG as explained above earlier. Again using a core trading strategy to identify multiple trading opportunities dependent on the market environment that you're given.

You can explore this in depth here:

With time, effort, dedication and determination you to can build strategies that allow you to pivot with the market, anticipating these moves and preparing you for ever changing cycles.

The market cycles!

Downtrends turn into bases, bases turn into new trends. Uptrends turned into downtrends over and over again. The cycle continues.

Here is a helpful excerpt from Bo Yoder's Book; Optimize Your Trading Edge:

The Payout & Payback Cycle

"For every style of trading there will be "the ideal" market environment where the market action aligns to the strategy that you are trading. Almost every trade will work out "smoothly" and you'll effortlessly hop from one trade to the other.  Losses will be far and few between. Confidence will be high as your profits accumulate and your account grows quickly. After a while, the market environment will begin to shift for whatever reason, and you'll notice that losses will once again begin to appear more frequently. The market is constantly cycling."

The market is never going to be continuously stacked in your favor. If it was trading would be a much easier endeavor. The traders who can identify and admit to this early in their journey are often the same traders who create consistency through diversified trading strategies. They master 2 or 3 different types of strategies and techniques that collectively work in a variety of market environments. They're never trying to master everything they're just mastering what has worked best for them!

I hope this step by step guide helped! Cheers and happy trading!