Way of the turtle

Different Types of Markets
There is another reason you might choose to exclude certain mar-
kets from your trading. Although I don’t believe that one should
exclude certain markets because they have not been as profitable
as others when tested in a simulation, I do believe that there are
some fundamental differences between certain classes of markets
that warrant the exclusion of an entire class from trading with a par-
ticular class of systems.
Some traders believe that various individual markets are differ-
ent and should be treated as such. I think the reality is more com-
plicated. I believe that there are actually three classes of markets
that behave distinctly differently but that within those classes the
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differences between markets are attributable largely to random
events. The major classes of markets are as follows: 
1. Fundamentals-driven markets. These are markets such as
currencies and interest rates in which the trading is not the
primary force behind the movement; larger macroeconomic
events and forces drive the price. As time goes on this seems
to be less and less true, but I would argue that the Federal
Reserve or a country-specific equivalent and a country’s
monetary policy still influence prices more than do
speculators in the currency and interest rate markets. These
markets have the greatest liquidity with the cleanest trends
and are the easiest for trend followers to trade. 
2. Speculator-driven markets. These are markets such as
stocks and futures such as coffee, gold, silver, and crude 
oil in which speculators influence the markets more than
governments or large hedgers do. The prices are 
perception-driven. These markets are harder for trend
followers to trade. 
3. Aggregated derivative markets. These are markets in which
the driving force is speculation, but that speculation is
diluted because the traded instruments are derivative of
other markets that are themselves aggregations of individual
component stocks. A good example is the e-mini S&P
futures contract. It moves up and down, but its range is
constrained by the underlying S&P 500 index. The S&P
index in turn moves only indirectly because of speculators.
Since an index aggregates the purely speculative moves of
many stocks, there is an averaging out and a dilution of
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momentum. These markets are the hardest ones for trend
followers to trade. 
My proposition is this: Markets in any of these classes trade the
same way. You should trade them or not according to liquidity and
class only. As a Turtle I decided not to trade class 3 at all, whereas
many of the Turtles chose to trade that class of markets. I felt our
systems were not good for derivative aggregated markets. It is not
that you can’t trade them, just that they just cannot be traded as well
with a medium-term breakout trend-following system like the one
we traded; so, I never traded the S&P as a Turtle. 
Markets in each of the classes behave similarly. Although you
certainly will see periods, perhaps years or decades, of differences,
you will find that over the long run this is simply the reflection of
trader memory and the relative rarity and random nature of under-
lying fundamental causes for large trends.