071 - Does that strategy belong here?

Hey there and welcome to another episode of Thursday trading thoughts, thanks for joining us.

I just like to start by wishing all the Aussies out there a happy Australia Day, I hope you’re all having an awesome day.

And everyone else too of course!

This episode is going to have an Australian theme. I want to share an email I received last week, from a fellow Aussie currently living in the UK.

His name Justin. (Thanks for the email Justin, it was quite amusing)

It was an email about a lamington.

What’s a lamington?

What’s a lamington I hear you ask?

For those who don’t know what a lamington is, it’s a small square piece of sponge cake, about the size of your hand, or the palm of your hand. It’s covered in a layer of chocolate icing on all sides and then dusted in shredded coconut.

Aussies have kind of adopted the lamington as a national treasure but I think we may have actually stolen it from New Zealand, like a lot of other things, but hey, we’re a nation of convicts anyway so what would you expect!

But usually when you buy a lamington from a cake shop it comes in a paper bag, and you just eat it out of the bag or with your hands.

So it’s pretty tasty but a very simple snack, definitely not something fancy.

Anyway, Justin sent me an email from a bakery in the UK that was promoting the pre-ordering of lamingtons for Australia Day.

And part of this promotional email was a really professional looking photo of a lamington.

No surprise there.

The photo was really beautiful, they had fantastic lighting, everything was positioned just perfectly, the lamington was tilted at what I assume was the perfect angle for food porn. They’d obviously gone to a lot of effort to get the highest quality photo that they could for this promotion.

However, there were a few problems with the setting that didn’t quite fit…

All is not right

The lamington itself was sitting on a really nice-looking plate.

Perhaps a fine china plate.

On the plate they also had some expensive looking silverware.

Highly polished.

Impressive.

And then under the silverware they had a nice, white, freshly pressed, linen serviette. The type of serviette you would see in a fine dining restaurant. In fact, the whole photo looked like something out of a fine dining restaurant.

So here we are, this humble little lamington, trying to be presented as some type of gourmet treat, which it really isn’t.

Out of place

The photo just looked wrong.

The lamington looked out of place.

The environment didn’t match and it didn’t really work.

This kind of thing can also happen in trading. Some traders have a strategy that they try to present it in all markets conditions. Environments where the strategy isn’t well suited.

They may try to trade breakout strategies in a range-bound market…

They may trade long only mean reversion strategies in a trending bear market…

Or perhaps they’re trading strategies that excel in high volatility, and trading them in a low vol environment may not work…

Just like the humble lamington not really being suited to some environments, (like fine dining!), so to are trading strategies.

If you want to get dressed up in a tuxedo, and eat your lamington with the finest silverware you can find, that’s not really going to hurt anyone. You’ll look a little strange and people may point and laugh but that’s about it.

However, if you try trading a strategy in an environment where it’s not really well suited, that can cause a lot of pain so you may want to consider the best type of market conditions for your strategies, where do they really perform the best, and take that into consideration when you’re trading.

So, how do you do that?

Does that strategy belong here?

Well, luckily for us, there is a podcast episode all about that.

Episode 63 focuses on Market Regimes.

In that episode Alan Clement shares loads of techniques to measuring market conditions and how we can adapt our trading to suit the market environment so you definitely should go and check that. That was episode 63, available on bettersystemtrader.com/63.

Anyway, all this talk of lamingtons has made me hungry so I’m off to eat one.

I can assure you, my knife and fork will be left in the cupboard.

Happy Australia Day.