Weekly Market Overview January 10, 2021

market regime overview Jan 10, 2021

The first week of 2021 was a bit of a roller coaster, but if you take a look at the weeks candles on $NQ, they tell you the most important information that you need to know.

NQ has moved from a Bull Quiet to a Bull Volatile market regime, based on price action. This is a micro regime within and more closely translated as a current indicator and possibly even a leading indicator. 

Let me give you some insight into what working with us in the Trading Lab looks like. This is what we've been covering in our daily Livestreams as well as collaborative work throughout the day. 

We come to this conclusion because the price action within a Bull Volatile regime is characteristic of this type of trading. 

There are some interesting characteristics of the Bull Volatile regime (using the SQN indicator as a point of reference to identify Bull Volatile vs Price Action).

  • This is a requirement for a Major Market Top as defined by a >8% selloff, but doesn't mean it WILL BE a major market top. 
  • Bull Volatiles can go parabolic and last a lot longer than anyone expects. 
  • Bull Volatiles account for nearly 12% of all trading days for $NQ as per the SQN.
  • Average daily change from day to day is >1.7%
  • Average price gain in a Bull Volatile regime for $NQ is >10% higher from the beginning to the peak
  • the >8% selloffs happen quickly and violently, there were 2 of them in 2020 (Covid meltdown in March and September's selloff)

With all that knowledge of Bull Volatile we want to be well positioned heading into it when $NQ actually confirms Bull Volatile via the SQN. 

That is to say, we've determined Bull Volatile is on the horizon using price action of the characteristics, now we wait for SQN to confirm. Given that we know the characteristics of Bull Volatile and we already have warning, we can figure out the appropriate strategy to ride the bullish wave in. 

For us in the lab it will be getting long $NQ when the market pulls us into the trades, not forcing them, on a swing basis.

Our day traders will be trading it similarly with different rules, but generally letting the market pull us in long.

Then as we flip SQN to Bull Volatile we'd expect ~10% higher move, so we can lower risk and still catch the big moves, as it is a much riskier environment. 

Here's how we did this work...

Using the SQN indicator which is a statistical formula measuring the average change and direction of the past 100 trading days. This gives us a point of reference to index to. 

Similar to the way a calendar works, the SQN gives you a place to start from, you can then take it from there to identify the characteristics associated with the month. 

An example would be if you knew you were going to be in Calgary, AB. Canada there is some very useful information the calendar can give you. Without the use of the calendar you would have no idea the attire to wear. The difference between July in Calgary and January in Calgary is massive, when we are talking about wearing shorts and a t-shirt or wearing a big heavy coat. 

The calendar, though a lagging indicator, is a useful tool because you can use that as a point of reference to identify characteristics by, and index them there, so that next time you hear Calgary, you can check the calendar against the characteristics you now have. 

Same with SQN. When you see Bull Quiet readings on the SQN you then know you can go to your list of characteristics of a certain market/asset and how it trades in that regime. 

Each asset that you trade should have characteristics of the asset within each different regime. 

Another thing that is crucial to your list of characteristics is what are the incentives of the asset. 

For example, the incentives for a Stock Market Index like the $NQ or $ES are to go higher. The indexes are always kicking out poor performing companies and adding in better performing companies. 

So naturally there is a bit of a tail wind for these indices to go higher. 

Add to that the natural incentives for a business are to improve sales, revenues, profitability, market share and company value (shareholder value). 

Nearly everyone who works at the company, uses the companies products, invests in the company or is family members to any of these people, wants and actively works toward the above incentives. 

This gets you about 70% of the way simply by aligning incentives.

But not all assets have the same incentives behind them. Currencies, Commodities, Cryptocurrencies all have different incentives and different characteristics about how they trade within each regime. 

Below is the SQN of each underlying asset for the past 20 to 70 years. Why the discrepancy? It depends on how long that asset has existed, $NQ started trading in 2000 where as we have daily data on $SPX back to 1950, and $BTC has only been around for a little more than a decade. 

There is a bunch of very useful information that we can learn from this data. Most notably for me is that the Equity Indices, $BTC, Metals and a lot of the commodities spend over 70% of their time in a new regime I term "Blended Bull Quiet"

Blended Bull Quiet bundles together Neutral and Bull Quiet regimes. 

The reason I did that is because the characteristics of the Neutral and Bull Quiet regimes were very similar. 

We can see this in the $NQ chart starting back in April of 2020, when we first started buying. 

On the chart you can see the SQN indicator (lower histogram) shows that the period of time from March lows to Mid July, the $NQ was in neutral market regime (yellow) and only spent two weeks in Bull Quiet (green) before entering Bull Volatile (blue area).

 However the characteristics of the rice action of $NQ in Neutral regime is similar to that of Bull Quiet. 

So I took this information and started backtesting the Neutral market regimes for the Bull Quiet characteristics to validate/invalidate this hypothesis. It did work out for this universe of assets on the spreadsheet, thus birthing the Blended Bull Regime!

Seeing well over 70% average in Blended Bull regime means that I don't need to worry so much about the remaining regimes. 

Especially don't need to worry myself with the Bear Volatile regime, which we already know is a poor regime to trade, but statistically it accounts for less than 1% of total trading days, I can simply skip that regime. 

More importantly I can spend the majority of my time focused on making money, and less worrying about having ALL the information on every regime.

Armed with this information I built a simple strategy to help validate. 

Buy The Dip

Without using SQN or Market Regime filters I built a strategy that would look back 2 days and buy above the high if a lower bar, then sell 10 days later. 

Buy The Breakout

Without using SQN or Market Regime filters I built a strategy that would look back 2 days and buy above the high if a higher bar, then sell 10 days later.

There is no optimization to this, no market regime filters, no position sizing adjustments.

They basically look like the same chart with a few minor differences.

That was solid evidence that any long only approach to trading $NQ was the easiest approach to it. Whether you bought a dip, or bought a breakout it was going to work in your favor 52.2% or 52.9% of the time, respectively. 

The same results for $NQ as they were with $ES, and $YM.

This same strategy works on intraday time frames as well. 

If you were to add in stop losses, position sizing and a market regime filter you'd have a pretty good strategy. 

If you were looking to become a funded prop trader at FTMO, City Traders Imperium, Funding Talent, 5%ers or any of the others you could trade the CFD's using this simple strategy to get funded. 

You'd have to ensure your position sizing was figured out, at appropriate risk to what these firms require. You'd have to set stop losses and profit targets and most importantly trade the appropriate market regimes.

If you were to look at daytrading futures with TopStepTrader you could trade an intraday only strategy using the buy the dip/buy the breakout methodology. 

We have traders trying out, and already fully funded at the different prop firms. Trading with fellow successful traders with a success based mindset and continually improving all along the way is the best way I know to dramatically improve as a trader.

This is the type of data and knowledge you need to trade at a higher level. Working with a team to improve your trading, become consistent and earn a good living as a trader. Come join us in the Trading Lab

 Join The Lab


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