First of all, we must understand the way in which traders look at market conditions and why some traders – usually inexperienced ones (no offense :o)!!) – judge the market’s quality by calling it good or bad. The conception usually arises from the use of mechanical trading systems. When a mechanical system starts to fail under a given market condition, users of a system usually call the current market conditions “bad” and stop trading this mechanical system because it simply “doesn’t work” around current market conditions.
There are several wrong things about this approach. Certainly we can say that market conditions were bad for a given trading system in the sense that it had a bad trading week, month, year, etc but we cannot know if future market conditions will or will not be favorable for a system. What I am saying here is simply that the fact that we cannot predict the future makes us unable to judge the currently developing market conditions as we have no idea of how the market will behave with good certainty. Users of a given mechanical system that stop trading it during “bad” market conditions may be surprised when they miss substantial periods of profitability due to their deductions based on past trading.
An example of such a case is easily taken from most long term profitable systems. For example, a 1 month losing period may mean that market conditions were bad but to stop trading the system could mean that a very profitable period would be lost as market conditions develop. When people wait for market conditions to improve they may start trading their system when a good period of profitability has already passed. A real life example showing this can be seen with the Ayotl trading system. The system had some unprofitable trades in February and March but if you had stopped trading the system in April you would have lost an entry that granted a profitable trade of nearly 3000 pips, showing that although you can judge the quality of market conditions after they happen, attempting to forecast future conditions and modifying an automated trading system’s behavior this way is nothing but detrimental.
In the end, in my opinion it simply makes no sense to attempt to judge the quality of developing market conditions as no one truly knows the way in which the market will develop. The best thing you can do is to build a trading system with limited market exposure that attempts to minimize loses when market conditions are unfavorable and cash on the market when market conditions allow it. In the end, the ability of a trading system to adapt to changes in market conditions and minimize its loses will allow you to trade it along very varied market conditions with confidence that your system will be prepared. Attempting to judge the quality of conditions that have not developed by calling them “good or bad” before they happen does not have a place in mechanical trading. My advice is to focus on limiting the market exposure of your trading system and increasing its adaptability.
If you would like to learn more about mechanical trading and how you too can build your own long term profitable systems based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !