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Adapting Your Trading Rules for Any Market Condition

Learning to modify your rules based on market conditions is an important skill to learn to be a successful and profitable trader. Almost every strategy works better with certain market conditions and realizing this and making adjustments to your strategy can make you far more profitable.

You might be taught a strategy that works extremely well in a bullish market, but doesn’t perform as well if the market is bearish or sideways. This does not automatically mean you shouldn’t use the strategy, you just need to make some adjustments to your trading strategy. This is why you shouldn’t total write off a strategy that has stopped working, sometimes the person teaching doesn’t even realize this, so let’s go through a couple of simple strategies I use all the time to illustrate what I mean and help you think about when and how to modify some of your strategies to help make you a better trader who is more profitable and mechanical!

Covered Calls

I’ve talked about selling covered calls to reduce cost basis. Check out the article for all my “secrets”. I also frequently sell covered calls on a weekly basis for income generation. You might see someone teaching a strategy of rolling covered calls on a weekly basis for income and they teach you that as soon as your current covered call reaches 90% recapture, close that and sell your next covered call immediately at a 20 or 30 delta.

This is an excellent strategy if your covered call is expiring due to theta decay, meaning the stock is still bullish and your call no longer has any time value left. But if your call reaches 90% recapture due to a large decline in the stock price, going out and immediately selling the 20 or 30 delta covered call is not going to be as profitable or advisable as it would if the stock were in an uptrend and your call was near zero DTE.

Here are some factors that I consider when selling weekly covered calls:

  • The direction and trend of the stock price. Is it bullish, bearish, or sideways?

  • The volatility of the stock and the option. Is it high, low, or average?

  • Will my shares still be profitable if I get called away, or do I need to sell a call further out of the money.

  • Where are the moving averages compared to the current trading price of the stock?

Depending on these factors, I  might modify myr strategy by:

  • Choosing a different strike price or perhaps a different expiration date for the covered call

  • Waiting for a better entry point to sell the covered call

  • Rolling the covered call up or down, or choosing a delta further away from the money.

  • Closing covered call early during bounces in bearish markets.

  • Hedging your covered call with another option or a stop loss on the shares

Selling Puts

My most favorite strategy is selling puts. Multiple articles here about this. We know that selling puts on down days brings in more premium, but it’s also important to consider the overall market conditions including Vix (which measures volatility) VIX can be used to gauge fear in the market.

If you have a general rule to sell puts each time a stock has a pullback of more than 5% and you don’t check if the stock is 5% off of an all time high (ATH )or 5% away from support or resistance, you are actually setting up two very different trades following the same ‘rule’. If you don't pay attention to VIX, selling puts can have more risk at certain times. It doesn't mean your strategy is bad, it just means it's not exactly the same strategy all things considered!

Here are some factors that you should consider when selling puts:

  • The direction and trend of the stock price. Is it bullish, bearish, or sideways?

  • The volatility of the stock and the option. Is it high, low, or average?

  • Where is SPY and the relevant indexes for the stock your are selling puts on. Are they at all time highs? Maybe they are making new lows?

  • The delta of the option. Is it in the money, out of the money, or at the money?

  • The support and resistance levels of the stock.

Depending on these factors, you might want to modify your strategy by:

  • Choosing to not sell puts at all time highs

  • Waiting for support as a better entry point or resistance as a better exit point for your put

  • Rolling your put up or down, based on the how the stock is trading

  • Closing your put early in bearish markets or looking for a bigger profit target in bullish market.

The point of today’s post is to remind you that sure, have a simple set of rules that are easy to execute, but understand why a strategy is working (or not working) right now, and take the overall market conditions, the market cycle and volatility into account when you review your strategies.

Nothing works all the time, but you can make small changes to your strategy to make your trades more profitable and get a better success rate. It’s very rare any strategy works exactly the same and has exactly the same rules.

I hope you enjoyed this post and learned something new. If you did, please share it with your friends. And if you want to learn more about trading strategies and how to apply them in different market conditions, join our discord! Subscribe for our weekly newsletter. It's all free!

Happy Trading Good Kids!

Disclaimer: this is NOT financial advice. I’m basically just some dude on the internet who’s been trading a while, and I use the stock market as my primary source of income. None of this is financial advice it’s purely educational!


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