A System Of Systems

Trading systems are great and all, however even the best systems have periods in the cycle where they are less likely to be successful. At least, there are periods in time when those systems may benefit from having a hedge by another system. The hedge will reduce your correlation and in effect increase your exposure to the market when times are good (by hedging less) and decrease the correlation or exposure to market's movement when the market is more vulnerable.

Basically I follow the sentiment chart, which is not so much of a system on it's own.
I follow the risk cycle which also isn't it's system on it's own.

But I can choose between successful systems and this allows me to get the correlation I want and the risk I want.

SO let's break it down....

So focus on what works well within the sentiment chart, but also remember the "risk cycle"...

The risk cycle shifts from quality to growth to momentum to short squeezes to "trash" to "lotto", to correction (shorts) and back to quality again). You will go through this cycle several times over the sentiment chart on a weekly chart and daily chart, but the cycle itself works on a 30m basis or even 15m and in that case one "cycle" from quality and on back to quality again may actually look quite similar to this chart on some timeframe. In other words after Panic, you may trade quality and again at discouragment. Then the equal high and pullback you begin to look at growth. Then momentum after that low holds and as the equal highs are broken. Then it chops and offers some confusing signals during the "anxiety and wall of worry" phase. Quality still does well here, but after Aversion  it's the growth and momentum that take off, and after denial everything works great, particularly the short squeeze. The trash works in the returning confidence and euphoria phrases and then the hedges work well at the top of returning confidence and euphoria phase.  Then the panic low and hedges should be taken off or reduced and closed after the first low after the equal high during discouragement phase.

The markets can have multiple interpretation of some of these signals and it won't always work out as you expect, but they serve as a guideline. You could have a second wave down of panic when you thought it was just aversion or discouragement. But the other problem is the longer timeframe chart usually rules the day. This can cause some short term 30m charts to fail when the daily is setting up a certain phase but the weekly buyers are in another phase and even the daily which just messed up the 15m or 30m chart now interferes. This is what makes the chart a bit challenging but it does serve as a great guideline to anticipate and the sentiment chart goes along well with the risk cycle.

In terms of systems, you should always have one that makes sense with the given environment. You wouldn't want to trade high tight flags aggressively through the panic phases without a hedge even though they do tend to work even in bear markets. You wouldn't want to start hedging after aversion or denial phases even though the hedging strategy is profitable in bull markets. That doesn't mean you pass up the good setups and go fullly exposed long just because your interpretation of both the risk and sentiment cycle is hat you are bout to launch. Rather it means that you would have the fewest amount of hedges and require the setups to be much more ideal to take a hedge just before it goes higher, and you would take on MORE bullish trades. You shift allocations towards various strategy to favor the environment you suspect will occur.


For example, You might have a simple version of this where you only trade the high tight flag system and the bearish candlestick patterns as hedges. You have a decision to make on whether you want to shift between mostly cash and high tight flags, with the occasional hedge, or if you are willing to swing entirely bearish when the time is right or somewhere between. Generally history favors those with at least some kind of bullish bias, so you might say the maximum amount of high tight flags you have on is 10, but the maximum bearish candlestick bets you will hve on at once is 8. The total maximum trades you might have on might be 12.

These aren't number determined by random guesses, but instead should be scientifically calculated based upon risk. That means you probably will want a kelly criterion calculator adjusted for fees like the one I have discussed before to determine maximum number of trades at once as well as given the strategy. The difference is only correlation and expectation that determines why you might have 12 total trades even though you are limited to only 10 high tight flags. The ratio of long to short may depend upon your skill and ability as well as your comfort level with the risks of being bearish.

I believe you want a master checklist to run the systems so that you can follow it as intended when perhaps your emotions may be more inclined to take over. The master checklist may refer to individual checklists to run individual systems.