On episode #24 of the Better System Trader podcast, Van Tharp describes six basic market condition types, along the two axis of trend and volatility:
- trend: up, down, sideways
- volatility: low, high
According to Van Tharp, a good trading strategy can perform well in more than one type of market, but probably not all types. Thus, one needs more than one trading strategy to achieve what he refers to as a “smooth equity curve”.
But, how do you even determine the current type of market condition?
Van Tharp suggests two indicators:
- percent change, as an indicator for trend
- average true range, as an indicator for volatility
He mentions that he uses a 20 days period for the percent-change-indicator, and a 100-days-period for the average true range indicator.
I decided to plot those two indicators to get a feel for what they look like on a chart.
About this plot:
- the raw data are 15 minutes bars
- I plotted the average true range for periods of 1 to 80 bars (the first seven sub-charts)
- I plotted the percent change for periods of 1 to 512 bars (the rest of the sub-charts)
While those charts look interesting and impressive, it is not immediately obvious to me, which value-ranges of the indicators I would use to determine a certain type of market. Maybe as a next step, one would need to either manually pick some value-ranges for each indicator, or do further research, maybe using something like standard-deviation and percentiles?