You have found an edge, and have been trading successfully for a few months or years. You suddenly have a few weeks of mostly bad trading days. But this time it isn’t just a drawdown. Something has fundamentally changed about the market, rendering your erstwhile successful strategies no longer viable.
Has it ever happened to you? How long did it take you to realise that the market has changed? How long did it take to find a successful strategy for the new market?
Markets remain unchanged over time. The principles of Dow Theory, written almost 100 years ago, are still valid today. This is because price action is fundamentally tied to human nature, and unless human nature changes, markets will remain the same.
If your trading strategy is not working, it is likely due to inherent flaws in the strategy itself. Its initial success may have been coincidental, rather than a reflection of its robustness. Markets exist in two primary states: trending or range-bound.
In a bull trend, one group of institutions buys aggressively, while another sells just as aggressively—this balance is necessary for trades to occur. It is not the case that retail investors, who may lack deep market knowledge, are the primary participants in these trades. Institutions account for approximately 95% of trading volume.
Thus, even in a bull trend, one group of institutions sells aggressively while another buys with equal conviction. Does this mean that one group is uninformed? Certainly not. It reflects the diversity of strategies and perspectives among institutional participants.
In conclusion, markets don’t change because the underlying dynamics and human nature driving them remain constant.
Edges can go away, markets can change. Wrong to assume it doesn’t. We need to adapt. Market wizards need to adapt. Even discretionary traders need to adapt with time, as and when its needed. The guy i learned from (discretionary, i am systematic) mentioned that his style ‘drifts’.
Its very hard to be sure that edge is gone. It could have just paused or having an extended drawdown.
That’s why its important to have a large enough backtest to get a feel of things, but future can still be different.
I know of a system that worked well every year for many years, then stopped working for 1-2 years ( depending on rules ), had more than 2x the max past DD, then came back, did very well in 2020 (probably best year in all data) and is now struggling for few years again.
Another trader i know had trouble for a year or two recently, but is doing well this year.
In my own trading (5-6 years) i have not yet faced this in my main systems, but i have had to adapt when times got tough.
Best way to manage this - trade multiple systems, preferably different types of systems / different TF / different markets. I have to do more to diversify further , but a mix of trend and CT systems works well for example.