Scott Phillips here, taking over from Mole so he can pretend to step away from his computer for a few days (he won’t but it’s a nice thought)
Today I’d like to introduce you to the Rodney Dangerfield of market types.
Let’s look at the Sideways High Volatility Market and explore why it’s a FANTASTIC choice for building high expectancy trading systems. This market type gets no love, but I find building systems to outperform in sideways high volatility very easy.
Why? Because of recency bias. We are always viewing everything in context with what came before. Market is in uptrend and changes… we just naturally assume that a downtrend comes next.
When bulls are expecting a strong new uptrend… and bears a powerful new downtrend… there is huge fuckery potential. Yuuuge.
Because you have to understand that the highest probability outcome is the one that fucks over the greatest number of participants. Therefore the market type that fucks over bears AND bulls is always the highest probability. Which is the SIDEWAYS market.
This is gospel truth. Markets are a very efficient mechanism for screwing the greatest number of participants out of their money all the time.
Tell the truth… didn’t you think a new bear market was starting when it fell off the plate recently? If so, you got played by your own biases.
Back to first principles.
At any point in time we ought to be asking ourselves… what sort of market are we in?
We could be in an uptrend, downtrend, or sideways market.
Up until a month ago, we were 100% abso-fuckinglutely in an uptrend. No way to argue about that.
Now it gets interesting. What I want you to do is start examining bar by bar
If the uptrend is intact, dip buyers SHOULD magically appear. But when those dip buyers failed to show up … the market is a very high probability of shitting the bed.
It’s natural to assume that a downtrend is going to happen now. But trend changes are messy affairs. Topping is a process which takes a while, and rarely happens without a deep retest of the highs.
At this point we are no longer in a bull market. But we could be in a bear market OR a sideways market.
Fast forward a few days with me. This is a textbook bear flag setup. Any bear worth his salt will be salivating at the prospect of smashing through the old lows and driving a stake through the heart of the Trump rally.
So this is very interesting. We have a bearish setup so perfect it could be in a textbook. Bears are expecting to break those old lows and usher in a new regime of beartardness. A (stupid) part of me is always cheering for this… it’s ok to admit it.
So at this point… we aren’t in uptrend. We aren’t in downtrend. We *might* get a new uptrend if we break the old highs… but that’s unlikely.
What’s left? Oh yeah a sideways market. And obviously given the truly massive candles lately, a sideways high volatility market.
Now why are sideways high volatility markets good, and how do we trade them?
They are good because there is a huge distance between the top of the range and the bottom. Enough that you can usually get 3x risk reward ratio or more. AND usually 3x risk/reward comes with a very low win rate… but not with sideways high vola markets. You can find setups with around 50% win rate and 3x risk reward.
They are good because you have very clear guidance about where to get long/short and take profits. Which means that system building is EASY and QUICKER.
You do it just like this. Keep away from the trading platform until you enter the short zone or the buy zone. Pick ANY valid trade setup you like. It’s going to have a fantastic edge at those places.
Those who know me know I’ve been harping on about the same stuff for years.
The vast majority of traders “dine from the buffet of technical analysis”. They feel bullish, and post one set of indicators/averages. They feel bearish and post a different set.
When you do this you are always in grave danger of “seeing what you believe” instead of “believing what you see”.
I’ve been a participant in this blog since 2009, and I can tell you that every single profitable trader this community ever turned out trades with a system.
Mole trades with a system. Bobby trades with a system. I trade with a system.
You should too.
All the best