Has Your Trading Strategy Lost Its Edge? How to Adapt, Thrive, and Stay Profitable in Changing Markets #239
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Welcome back to the TradeCity Traders Improve Podcast and today we are tackling a question I get all the time: When does a trading strategy lose its edge and what do you do when a strategy stops working?

So we'll dive into how you can stay relevant as a trader, how to adapt your trading strategy over time and how to avoid common pitfalls. So let's get right into it. The markets are constantly changing and that's something every trader needs to understand. And there's a really great quote from Ed Seykota and he said: "The markets are the same now as they were five or ten years ago because they keep changing just like they did then."

And it's true, markets are always changing, yet fundamentally they stay the same because they've always been dynamic. And if we look back, trading has evolved dramatically. Decades ago people traded by phone, then the computer came, then the internet and now algorithmic trading and high frequency trading are reshaping the landscape of trading.

But trading itself hasn't disappeared and I personally believe it will never disappear. But those who stay flexible continue to thrive in this environment. And just think about it: Just within the last five years we had market crashes, we had insane rallies, there were months of sideways inactivity, we had a pandemic, there are wars that created a lot of uncertainty and many other major influencing factors.

Today, to remain profitable, you have to keep adapting. And in this episode, I'll share practical tips for building that adaptability into your trading strategy. But first, let's ask us what happens to traders who don't adapt.

Often you will see that they blame external factors like their broker, algorithms, big institutions, insider trading. But this blame game creates a victim mentality. If you're blaming outside forces, you are essentially giving up control and as traders we need to take full ownership of our own decisions. So let's start by defining two main types of traders and trading strategies that I see.

One is static traders or static trading strategies and the other is adaptive or flexible traders or flexible trading strategies. Static traders look for a fixed rule-based system, very well clearly defined rules for the entries, exits, stops, take profits and risk management that don't change.

Some static traders even have specific rules that define the point or the pip distance for their stop loss and take profit orders that they will then use for every single trade. Adaptive or flexible traders on the other hand, they modify their trading approach as the market conditions shift and every trade looks slightly different without changing the foundation of their system. But what is better, static or flexible?

Static trading systems can be very tempting because they seem simple. You just have to follow these steps and you will make money. But there is one major issue: Markets evolve. With a static trading system, there are times when they work beautifully and then there are times where they completely fall apart. And when it does break down, traders are often left confused and they're giving up their hard-earned gains because they haven't adapted and they don't know how to adapt.

Static traders therefore need a much better filtering routine and they have to understand when to sit out.

In contrast, adaptive trading strategies make adjustments. For example, adaptive traders might vary their timeframe, they will switch the forex pairs or the markets around that they trade on a given weekly basis or even on a daily basis, they might change the distance of their stop-loss and take-profit orders depending on how much the market is swinging, and they might adjust risk levels based on current market conditions.

So those flexible traders, they might still follow a core set of principles and the core trading strategy doesn't change, but they are flexible and open to change, ready to shift gears as the market demands. So personally, I wouldn't say that one is superior over the other. They just require very different approaches.

Static traders have to know when their system performs best and what market conditions favor their trading system. And this is the most important aspect about trading a static trading strategy. Static trading systems are optimized for one very specific set of market conditions and that's where they perform best.

But those static systems fall apart as soon as the market forces change slightly. And therefore, traders with static trading systems must have a really good understanding how to read and define the conditions their strategy needs, they must have a way of defining the current market state, and they need to be 100% disciplined with sitting out and not trading while conditions aren't optimal currently.

And flexible trading systems can perform in different market environments and they are not optimized for a specific condition. This means that they can perform okay all the time or at least most of the time without having any extraordinary periods. However, traders who trade flexible systems must know how and when to adapt their trading parameters.

and i will come back to this as well later as we move through this podcast so to stay relevant in trading you usually have three options you optimize your current setups you add new setups for different types of market conditions

And you know when to sit out entirely and not trade. Learning to sit out, especially in markets where you don't have an edge, is one of the most powerful skills you can build. So let's break down those three options. First, let's talk about optimizing your trading strategy. And rather than constantly overhauling your complete approach, you just make small tweaks to keep it effective.

For example, you can consider re-evaluating which Forex pairs you are trading weekly based on the market conditions.

Each weekend you go through your list of all the forex pairs or all the markets that you are trading and you identify the pairs with strong, clear patterns that have well-defined trends and you avoid the pairs in messy and unpredictable states. And this is what I do in my own trading. I call it my watchlist process. So every Sunday I pull up the list of all 30 markets and pairs that I trade

and then I will sort out the ones that don't align with the premise of my system. So I'm a trend following trader, which means that I will sort out all of the markets that are in ranges and that are not currently in a state that would make sense for my trading system.

And usually what happens is that out of those 30, I can sort out very reliably 20 or even more Forex pairs every week. And this leaves me then with 10 Forex pairs that I monitor more closely going forward. It doesn't mean that I would trade all of those 10 pairs in a given week, but those are the ones that make sense for my trading strategy. The other ones I wouldn't even consider trading because they are in a state where it doesn't make sense for the strategy that I'm trading and I wouldn't have an edge.

Next, let's talk about risk management. And markets condition vary a lot. And therefore, a one-size-fits-all approach to, for example, stops and targets, doesn't always work. If volatility is high, you need to have wider stop loss because the market just swings more. And if you generally use small stop loss orders, you will see that when volatility is high, so when you have large candles and large candlestick wicks, you will get taken out much easier.

And very often you will see that your trade idea is correct, but you will get taken out before the market has a chance to reach you or take profit. And that is often because you have underestimated the market volatility. And by using wider stops and wider targets, you can often counter that. In my trading, I have built in this process automatically, kind of.

So what I do is I place my stop loss orders behind a swing point after a breakout or before the breakout level rather. And this means that when the market is swinging a lot, the swing point will naturally be much further away from the breakout area and therefore I'm forced to use a wider stop loss.

Also, generally I look for targets when I look left on my charts, I look for previous support and resistance levels, previous swing points. Which means that when the volatility is high and the market is moving a lot, the targets will naturally be wider and further away because the market just has swing points that are much further away from the breakout. And therefore you can see when the volatility is high, my stops will be further away, my targets will also be naturally further away.

This doesn't change the reward to risk ratio of my trades because both the stop and the target will be moved further away, but keeping the reward to risk ratio constant. And that's how you can automatically include an adaptable approach to your flexible trading system. If on the other hand volatility is low, then my stop loss will naturally be much closer to my entry price

because the market just doesn't swing a lot and the swing points will be much closer and smaller to the entry. Also my targets will naturally be smaller because I don't expect the market to move as much and when you look left, the volatility has been low, the market hasn't moved a lot, then the previous support resistance level will also be much closer to your entry.

Therefore, stops and targets are much smaller compared to high volatility times. But because I'm shrinking the target and the stop loss at the same time, the reward to risk ratio is at the same level. So you can see the underlying premise of the system and the core principles don't change. But how I place my trades and how I adjust

That is always dependent on the market situations and the circumstances. Your second option for staying relevant is adding new trading setups. Over time you may notice certain patterns and conditions that don't fit your main setup and that you often have to pass. But you start noticing that the pattern comes up often and you repeatedly are observing it and the pattern seems to be kind of working.

So what you can then do is capture those moments, take screenshots, write notes and slowly build a new setup around them. In EdgeRank we have the feature called "Missed Trades" and what you can do there is add all of the trades that you didn't take for whatever reason, maybe because they don't currently fit your trading system and then over time as you collect more data you will start to see how you can approach this pattern and how you can develop this into a trading system.

And this happened to me in the past. I used to start out as a reversal trader around 15 years ago, but then I noticed over time that trends are actually probably the way to go. And I constantly kept seeing that trends follow a very similar rhythm that keeps showing up all the time. And then therefore I started to experiment with trend trading and I added a trend trading approach

And that way I have a trading system when the market is reversing, so when a trend is changing its course, and I had a trading system for a trending market. Before I always had to sit out when the market was in a trending mode because I was waiting for a reversal. And now I have two systems that follow different trading conditions or market conditions.

And that is a very great way of just having two trading systems that are adapted to different market situations and therefore you have more trading opportunities. And finally the third option and probably one of the most important skills that you can learn as a trader is knowing when to sit out. Many traders feel pressure to trade all the time. And I see this well almost every day in the trading group with my traders.

But sometimes the best move is to stay out of the market. If you recognize that a market lacks the conditions for your trading strategy to work, sitting out protects both your capital and your mental energy. And what you should do is you write down key events or key criteria of a no-trade market and then revisit them regularly.

So every Sunday I upload a new watchlist to my private group where I coach my traders and I point out week after week conditions where we don't trade. What are the events and what are the price action signals on a chart that make us go and avoid this market?

And knowing when not to trade is so important and has helped the traders I coach significantly because previously a lot of traders will end up forcing trades. But knowing when not to trade and really understanding this and seeing it week after week that knowing when not to trade and not taking the trades that you know you shouldn't be in because they don't favor your system will protect your bottom line. And it will be much, much easier on your mental capital as well.

Another tip here is to keep a visual record of your trades. And again, of course, we built the Edgewonk.com Trading Journal. And as a TradeCity podcast listener, you can use the discount code TRADECITY when you go to Edgewonk.com to get the biggest possible discount. And what you do is you record your trades, both the good and the bad trades, and then you go through your last 30, 40, 50 trades and you identify the best setups and you look for common patterns.

And most likely you will start seeing themes in your trades that show you which market conditions are present when you are realizing more winning trades. And what do your losses have in common? What has happened before you enter a trade that turned into a loss? Not always, but very often you will see certain things keep coming up during your review then. So to wrap this up, remember that adaptability is one of your biggest assets as a trader.

Markets will keep changing, but you can as well. You optimize what you already do well. You can add new setups to handle different market conditions. And remember that sometimes the best trade is no trade.

Keep an explorer mindset. You will find ways to stay relevant, successful and as importantly, enjoy your trading journey. So thanks again for listening. I hope you found this podcast helpful. Maybe some of you may have heard it. I'm a little bit sick. I caught the flu recently, but I thought I cannot break the podcast streak and I cannot break the promise that I made you just in the last podcast episode where I said we are back to weekly episodes. So I hope you found this helpful and I will be back next week.