What do you do when your strategies stop working?

BellaMike Bellafiore's (Bella's) Blogs1 Comment

Hello Mike,

I have an interesting question for you.  Its about the life cycle of a trade set up.  I’ve realized that like businesses trading setups are also cyclical.  There will be periods where the set up produces an edge, and there will be periods when the set up is not producing an edge. Does this mean the setup no longer works and it has become extinct like a dinosaur? or Does this mean the market conditions are currently not favorable for this set up and it would be best to revisit this set up at a later date?  What does one do when a set up has stopped performing?

I’ve also heard the term “There is always a bull market somewhere”.  Which may indicate that maybe rather than changing the setup, finding another stock/commodity or instrument where your setup can perform for you may be the right way to go.

What do you suggest?


When we develop patterns that make the most sense to us, and place them in our PlayBook, we first start with the Big Picture.  Too many traders undervalue market structure before placing a trade.  I was in CT yesterday with 3 of our traders visiting a top US hedge fund, where a market veteran implored our traders to grasp the importance of a market structure’s effect on all trades.  A bullish flag pattern to them is traded the same whether we are in a range bound market, bull market or bear market.  This makes no sense.  They trade a bullish flag pattern whether the stock is In Play or not.  This makes no sense.  When you build your PlayBook you must develop setups that will work factoring in The Big Picture.

So let’s start with momentum trading as this is what most of our are.  We may call ourselves long term players or mico players but most of us are momentum trend traders.  Short term momo trading worked very well in 07 and 08 because of the increased volatility in the market.   Today we sit in a low vol environment.  Add to this HFTs have developed strategies against ours.  If you do exactly what worked very well in 07/08 you will see your results change from quite positive to decidedly negative.   This will not be a matter of you trading poorly it will be that your strategy needs tweaking or shelving until a different market environment.

Does this mean you cannot momo trade in this environment?  Of course not.  It means you must be more selective with your momo trades because of the new market structure and environment.  So the momo strategy will still work but only in more selective setups. If a sector gets very hot a momo strategy will still work well.  If a stock has real order flow a momo strategy will still work.

In this #newnormal as @sspencer_smb has tweeted extensively about, we recommend expanding your trading horizon and making sure there is a clear catalyst behind your trades.

I heard a trader of late chirping that some traders get hot and then they get cold.  And saying this as if this is just the way it is in trading.  Well it might be.  But only if those traders undervalue market structure, or as we say The Big Picture.  And do not adjust their trading setups for the market and/or dip into other setups that will work best in a new market.

Gr8 question.   I tackle this issue in more detail in The PlayBook.  I hope that helped.

Tomorrow you can be better than today!

Mike Bellafiore

The PlayBook

One Good Trade

One Comment on “What do you do when your strategies stop working?”

  1. I’ve seen some that seem to thrive on mean reversion trading – which is not very effective in a strong trend. I’ve seen momentum traders get chopped up by sideways market due to “failed momo” or “collapsed breakout”. If you gave a #1, #2, or #3 ranking as to “best trades” – the order/numerical ranking of what is #1/#2/etc would probably change based on the market overall picture. Excellent post.

Leave a Reply