Bull and bear markets.
Every trader knows that a rising market is called a “bull market“ and a falling market is called a “bear market”.
And if you have at least a bit of trading experience, you already know there is another type of market, which we call a CHOPPY market. A market that basically moves sideways, or not at all.
But today, I came up with another type of market, it’s called:
A KANGAROO MARKET.
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Well, I mean it in a funny way, but if you have been trading markets like Crude Oil recently, you probably know what I’m talking about:
A market that goes up a bit, then back down, then up a bit, and back down again… Jumping around like a kangaroo. No significant breakouts. No follow through. And no consistent DIRECTION.
And believe me, this type of market can be extremely frustrating and cost traders a TON of money.
Because many trading signals, including momentum, trend-following, breakout, or even mean-reversion, will give you the right direction in its essence, but the movement will be often too short to lock in profits, or even to move your stop-loss to break-even. So, as a result, you start experiencing many losses in a row, which, of course, is painful and frustrating.
So, what can we do with KANGAROO markets?
Realistically, these phases DO happen in trading and are part of the game, so it would be naive to think you can alleviate them completely. But fortunately, there are always some savvy ways to deal with markets like this, and in this case, I would recommend 3 things:
- BROADER DIVERSIFICATION. Kangaroo markets rarely happen in all markets at the same time. If you trade futures markets, you have the luxury of wide diversification, among fundamentally different markets. So, the chances are, your Kangaroo losses will at least be covered elsewhere.
- DYNAMIC POSITION SIZING. During my trading career I learned that dynamic solutions work better than binary ones. In other words: I would never completely stop trading in Kangaroo markets, because the next BIG breakthrough can be just around the corner, and I don’t want to miss it. So I prefer to adjust my position size. Our own proprietary hedge fund D.P.S. Technique works pretty well, even in certain types of Kangaroo markets.
- IMPROVED TIMING. Again, you can’t avoid Kangaroo markets completely. But you can SIGNIFICANTLY improve the timing of your entries, which will help you avoid many of these whipsaw trades. There are many levels of timing and each of them can be improved with simple techniques. I suggest you start with the Smashing False Breakouts techniques, which have worked well for many traders already.
Again, the goal is not to avoid Kangaroo markets completely, that would be naive. But with the approaches above, you can reduce the negative impact of them by 30-50%, and that can be a huge difference!
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