There are many ways to conquer the market beast and produce exceptional returns. Although many market players like to claim otherwise, there is no single approach or style to the stock market that is inherently superior over the long run. What works best is primarily a function of finding an approach that suits your personality and emotions. What works well for one person may be a disaster for another.
Great traders are constantly tinkering with their style and trying to improve their results, but the problem is that market conditions are always changing, and even the best approach to the market will do very poorly at times.
What do you do when market conditions make your investing or trading style ineffective?
One solution is to stand aside and wait for market conditions to shift again. The great certainty of the market is that there will be cycles, and if you are patient, then your approach will likely start working very well once again.
A second solution is to tinker with your style. The problem is that when you start tinkering with your trading style, then there tends to be less clarity which leads to a lack of disciple. A lack of discipline always leads to greater losses.
If you are going to shift your market approach, then you need to be very clear about the changes that you are making and how you will handle things differently.
Changing Time Frames
The most common shift in trading style to deal with market conditions is to change time frames. Typically the worse market conditions are then, the shorter the time frame. However, there are folks at the other end of the spectrum that view bear markets as an opportunity to build very long-term positions in favored stocks.
In bull markets with strong uptrends, the most favorable trading approach tends to be trend trading, where a stock is held for weeks and months in an attempt to catch sustained momentum. This can produce exceptional returns, especially if you are a stock picker that focuses on stocks with high betas that move faster than the overall market.
This is my preferred trading approach, but it doesn't work well in bear markets. There will still be some opportunities to catch technical breakouts and trends, but the time frames are much shorter, and the risk of failure is much higher.
Some traders will shift to pure day trading or focus more on shorting, but this requires a major change in thinking and behavior. Too often, what occurs is style drift, where traders end up reacting to market conditions but don't have clear trading guidelines to keep them disciplined.
When a trading style is not working, the most important thing you can do is stay patient and try not to force trades or make moves just to be doing something.
The current market is a particularly good example of how trend following and position trading are not working well. The market is mostly macro and news-driven, technical conditions are sloppy at best, and there are big reactions to economic news. Finding and holding 'good' stocks is not rewarded in this environment. It will change, but it will take patience.
Rather than reinvent your market approach every time market conditions shift, the best approach is to fool with time frames if you want to stay busy, but it is best to just understand and embrace that it is a good time to find something else to do until market conditions shift.