Great question, it’s something I have given a lot of thought to. Basically what we are looking for is a means to make parameters dynamic so that they are representative of the conditions they are running in.
I have tried (and continue to try) many methods and have applied them to stops, limits, my manual trailing stop levels, entry conditions etc. I always split the long and short trades with separate stops etc. for each. A couple of examples of things I have tried:
Market sentiment, Bullish or Bearish based on some simple criteria, using hard coded stop values etc. but different values (as discovered through backtesting) based on current market sentiment. Could be just more curve fitting but logically it makes sense (to me at least) that e.g a limit should be set to be less for a long trade in a bearish market.
Volatility. In some strategies I took the mean of the last 3 day ranges divided it by a constant to create a multiplier and applied that to stops etc. Works ok (in backtesting at least) on index futures.
Market condition. Love to use this but I don’t know how to determine the various markets conditions, probably just me but even identifying a trend seems problematic.
Look forward to hearing what other methods are being used.
