A Market Strategy for a Trendless Market

Gil Morales and Chris Kacher
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Posted: Jul 01, 2011 12:01 AM

Trendless 2011

2011 has, so far, been a mostly trendless environment. Even the market wizards who are tracked as 'trend followers' are down this year:

http://www.automated-trading-system.com/may-for-trend-following-wizards-yo-yo-back-down/

Fortunately, such difficult periods to come to an end, and new trends do begin. It the meantime, it's wise to keep an eye on the markets, and keep taking shots, though with perhaps smaller positions, until the market proves itself.

A Pyramid Strategy During Frustrating, Trendless Markets

Pyramiding into positions using strictly price points is one strategy that can be useful during trendless periods. Rather than throw in the towel and stop watching the market altogether as some investors are prone to do, it is always best to keep an eye on the market, monitoring for the next possible big winners.

Since there is no way to know when a trendless period will come to an end, it can be useful to position size your way into a stock using strict price methods.

For example, for fundamentally strong, high relative strength stocks (>95), one could add a fixed % (say 20%) each time the stock advances 10%. More conservative investors may want to only add 10% each time the stock advances 20%. Remember, one is always looking to pyramid into the next leading stock. Leading stocks can trend for many weeks if not months. That is how we have managed to be up nearly 50% before fees so far in 2011, by finding the best then pyramiding the best.

For stocks between 80-94 relative strength, one could add 10% each time the stock advanced 10%.

The advantages to this strategy are two-fold: 1) smaller drawdowns on less capital, and 2) the longer the trend goes, the larger one's position size as one continues to pyramid their position as their stock moves higher, yet their average cost should remain under the price of the stock, even when it does finally hit its sell stop.

And if the trade doesnt work, most likely in trendless market environments, it's money lost on a small amount of capital, since one most likely bought only their first position.

This strategy will enable one to keep their focus on the markets without getting disgusted with continual capital losses since the losses should be quite small. Then when a new trend emerges, one will be there to ride and pyramid the new trend.




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