Adjusting your trading for down markets – CBRE as an exampleI trade almost exclusively long, and like everyone else who does, it’s harder to make a buck in this kind of environment. Swimming against the current is generally for salmon, not traders. But when you don’t have that choice, learning how to adjust your approach can make you a more profitable trader. Apologies for the baseball analogy here, but it’s like hitting with 2 strikes. You never want to be in that position, but if you are, adjustments are the key.
1) BE MORE SELECTIVE WITH YOUR TRADES
A LOT (too many) people trade because they feel like they have to - in an addiction sort of way. But patience is a key to good trading. You should always have very a disciplined methodology for entering a trade, but even then, too many people take the first trade they find that fits their criteria. That may work in up markets, but waiting for the BEST trade makes MUCH more difference in a down market.
Another way to be selective is related to the previous idea. When times are tough, I am more selective about which tickers I trade and trade only the ones that have been historically safer and produced better gain per day returns, or are higher in other metrics I use than most stocks. That does take quite a bit of data crunching, but that investment of time protects my investment of money.
So today I’m trading CBRE. Not a household name, but one that has produced results FAR better than most stocks in my tradeable universe with the system I use. It is a large cap stock (safer than mid or small caps in tough times) and among large caps, carries a top 15% ranking for me. Of all the stocks I follow that my algorithm had “buy” signals on today (almost 100), it was the highest rated based on my selection criteria. When times are tough, STICK WITH QUALITY. Now is not the time to be trading penny stocks. Safety matters right now. Go with names that have proven themselves in tough times before.
2) RAISE THE BAR
The algorithm I use can be adjusted in terms of how liberal it is in terms of identifying stocks as “buys”. But doing this for yourself can be as simple as adding a “filter” such as only trading long using stocks that are above their 200d moving average, in strong uptrends, or adjusting the settings on indicators to give fewer but higher quality signals. For what I do, there needs to be a balance. I can’t be TOO restrictive and not generate enough trades. But I definitely want the trades I take in a down market to be the best ones I can. Depending on the type of trading you do, you may be able to trade only once or twice a week and so can afford to be extremely selective. CBRE is still solidly in a longer term uptrend, although it has broken through its 200d MA. For my system, that is not a big deal, given how I trade. It is near significant support (something I’m more apt to care about in tough times than in good ones). FInd out the variables that affect the way you trade, and select trades based on them, and you’ll do a much better job trading in tough times.
3) TIGHTEN STOPS
Full disclosure: I don’t use stops. For the way I trade, they do more harm than good. That said, for most trading systems, they are a good idea and act as protection in moments just like we are living in today. Pulling in stops can keep losses small and easier to recover from when you finally trade a setup that does exactly what you want it to. There is an art and science to setting stops that I am definitely not the person to learn from, but knowing how to set good stops can be the difference between being a profitable trader and a losing one.
And just to be clear - I have well over a million backtested trade results covering every market meltdown in the last 50 years that validate my decision not to use stops with my trading system. That is not a haphazard guess or laziness on my part. I can’t say strongly enough how important it is to use data to drive decision-making when you trade, and even more so in markets like this one. You NEED to backtest your system and validate that it continues to be profitable in times like these. Because if it isn’t, you should be spectating right now instead of trading. And the math backs me up on this one - not losing money is FAR more profitable than making money. Not losing should always be your #1 priority. Digging yourself a -30% hole takes 43% in gains from that level just to break even. If you don’t have a very high probability of winning, ESPECIALLY in times like these, your best financial decision is to not trade at all.
4) MATCH THE SYSTEM TO THE MOMENT
Good traders have one of two things going for them - either they trade a system that works in any market conditions (those are tough to find) or they have different systems in their toolbox for different times. Trading a system that is a trend-following long system is a tough way to make money in markets like this one. Something that gets you in and out of trades quickly in markets like this one are far safer and more profitable. Trend following works better in the middle of bull markets. Know the conditions you are trading and use the right tool for the job and you’ll make more money.
5) TRADE WITH CONFIDENCE
That isn’t a trite line from a self-help book. Trading with confidence means KNOWING that what you are doing works in the conditions you’re trading in. I have collected ridiculous amounts of backtest data that drive my trading. I KNOW what I am doing will work over the long haul, even (and especially) in markets like this one. However, false confidence (being sure of yourself without justification) is the literally most dangerous personality trait a trader can have, in my opinion. To trade with real confidence requires investment of time and effort so that you are sure that what you are doing is the right thing to be doing. Experience helps, but success in a small sample size can create a false sense of confidence. If I successfully fight off a bear in the woods, that doesn't mean fighting bears is a good idea or that I’m a bear fighting phenom, it just means I got lucky.
I am a HUGE proponent of making sure you know the statistical edge you have when you trade, and if you don’t know what that edge is, assume you don’t have one. SO many people lose in trading, not because of the “big money” “manipulating” stocks, but because they are trying to trade without an edge. Over the long haul, you’ll lose doing that. And I assure you, big money trades knowing their “edge” and that’s why they win and most little guys don’t. They are better prepared. Sorry for the tough talk, but winning at trading is about finding an edge and consistently exploiting it. Period. IF you have an edge and you know it, the confidence comes automatically. If you aren’t certain that you have an edge, doubt will always be there. Foolhardy confidence is even worse, though. KNOW YOUR EDGE.
Example - CBRE. Using the system I trade on CBRE, my algo has generated 575 trade signals, going back to 2004. Do you know how many have resulted in losing trades? ZERO. 575-0. Knowing that means I KNOW I have a massive edge when I trade. If the trade goes against me initially, do you know how much I stress about it knowing that it has a 100% win rate over 20+ years on this stock? NONE. And justifiably so, in my opinion. Could the next one be the first one? Sure, but the odds against it are astronomical. But here’s the deal - say it does go all the way to zero - a 100% loss. Historically, the average gain per trade for those 575 trades is over 2% each. That means 50 of those cancel out completely one that goes to zero. The rest of the story here is that the results are not unique to CBRE. I’ve traded these signals 1000s of times in real life using more tickers than I can count, and over a million backtested trades on over 1500 tickers. I know what I’m doing works. That’s where confidence comes from. If you are new to trading, you need to seek out DATA to back up trading chart patterns, trendlines, or whatever it may be. KNOW that you have an edge, and sticking to what you do comes very easily.
So I’m entering my initial position in CBRE here at today’s close for 125.83. Per my usual strategy, I'll add to my position at the close on any day it still rates as a “buy” using my algo and I will use FPC (first profitable close) to exit any lot on the day it closes at any profit.
As always - this is intended as "edutainment" and my perspective on what I am or would be doing, not a recommendation for you to buy or sell. Act accordingly and invest at your own risk. DYOR and only make investments that make good financial sense for you in your current situation.
