How to adapt to the changing market environment

Perhaps a good time to deploy the idea that the nature of the stock market has changed, and we look at what investors can do about it, says David Moyning - market analyst at Wall Street.

It was recently suggested that the movements of the market, especially in the days when something big happens, "have become excessive due to the spread of algorithmic trading. When a bunch of trend-following algorithms begin to chase the tail of one another, the end result is an increase in the amount of daily movements ", is one of the key conclusions made.

As we explained, the key here is to understand that the daily price action is becoming more and more volatile (and perhaps even artificial) in both directions. After the algorithms already publicized move, they often simply continue to close the session. Then traders come the next day and start all over again.

And to reiterate that we will not complain about computers here. Trade-driven algorithms is good, honest and completely legitimate thing. The key point, which point out today is that investors must recognize that the game is changing. What can investors do?

In talks with investors (professional and other), it is obvious that this topic is important. Most people recognize that the game moves faster and farther than ever before. However, very few have any ideas on how to adapt their strategies to the changing environment. So today, we will discuss five different ideas to help in the fight against an environment where volatility throughout the day increases and movements become exaggerated.

1. Set your time frame
The first thing an investor can do is to adjust the time frame in which it operates. For example, if you trade intraday, you just have to realize that unless you can trade at the speed of light, you are at a competitive disadvantage. Do not think for a moment that you can deal with algorithms after news revenue or statements of Fed. So, in short, stop trying. In addition, it might be a good idea to extend the timeframe. Do not feel you have to go home empty-handed. It is better to hold the position overnight. Remember that movement throughout the day are often exaggerated. As such, you may need longer to hold positions longer, to stay in tune with the movement. Movement can be difficult, but the trend can sometimes really be your best friend.

2. Occupy sequence
The next idea is to stop being "diver" and go in and out of positions of steps. In other words, you do not need to put the whole position at once. You can do it in stages.
This is especially true at a time when the market makes large algorithmic-induced stroke. So if your strategy tells you to buy and market really moves up, it may be a good idea to put a partial position at the start. Then you can add to this position at every adjustment that occurs.

3. Discover mean reversion
Strategies in average reversion suggest that when a share or index go too far from its average value, eventually they will return to its normal trend. This is where often used overbought / oversold. For example, if a share is moving up well and then she started making "parabolas" may be a good idea to take some profits and wait for the stock to pull back a little.

This concept is also called a swing trade. Although it may sound simplistic, the key here is to buy low and sell high. Thus, when the shares become oversold and to support area, swing traders will buy at the bottom and look for sale items in the next few days or weeks, when the final restoration / rebound.
I admit that such a strategy does not work very well in the market with one hell of a strong trend. Remember that when the bulls are taking, as they did in 2013, the trick is to jump on board and enjoy the ride. However, it is also important to recognize that all trends end at some point. And when a strong uptrend is over, the implementation of mean reversion or strategy for swing trading can add significant value to your approach.

4. Stop looking at charts
Some time ago, the trend lines, moving averages, and areas of support / resistance are drafted with pencil and ruler. However, today every trader on the planet has access to a variety of graphics and more indicators than can be put on them. However, it may be worth to recall that "something that everyone already knows is not worth knowing."
The point is that all the game look the same key levels of graphics. And that is one reason why the movements of the day will accelerate once the important technical level is breached. You see the movement, your colleague sees movement, and be sure algorithms also see movement.
Therefore, it might be a good idea to put less attention to the key levels, all watching. Do not base your entire trade in breach of support area. For if and when this happens, the day can turn into a repeat of the February 3 very quickly.

5. Lift your foot from the accelerator
Especially when the environment becomes exuberant as rose from the middle of January, might be a good idea to play the game more conservative. Occupy less. Trade with less volume. And maybe even hold less money when VIX starts to bounce. If you ever find yourself dazed and confused, just relax. There's no shame in it to recognize that the movements do not make sense.
Remember that there is no law that states that you have to trade every day.
Finally, the real key to this meandering message this morning is that it is important to recognize that market conditions are constantly changing. The trick is to be able to determine the kind of environment and know what tools to use to cope best with what Mr. Market is serving now.

So, times are changing. The question that you should ask yourself is what do you do about it?

D. Moenning