May 17, 2006 at 10:15 am | | Comments 5

The Chameleon Trader

(This is Part 6 of the Great Expectations Series for traders. Be sure to read Parts 1-5 in case you missed them!)

In the wild, adaptation is the key to survival. No, I haven’t lived on the plains of the Serengeti or in the Amazon Rainforest, but I do watch Animal Planet and the Discovery Channel! Almost every program showcases a particular species which seems to fit perfectly into its environment, and by now you ought to be seeing where I’m headed with this.

Throughout this series, we’ve reviewed numerous elements which combine to form your expectations, but they’re all worthless if you’re unable to survive out there.

Successful trading requires adaptation. The market is wild, often running on pure emotion and very little logic. There will be times when you can do no wrong, but there will also be times when every trade feels like a struggle. Being willing to change, expecting change, and learning how to change will be the keys to your survival.

Your adaptation will be needed in a few areas: your method, your position sizing, and your personal spending. Let’s take a closer look at each one.

The trading method you employ starting out should be viewed as a bridge or stepping stone. The market IS going to change and your own needs will change, so get used to the idea of adaptation and progression. Whether the market shifts from wide-ranging days with high volume to an environment of narrow trading ranges and limited activity, you can be sure it won’t stay the same for long. Furthermore, the kinds of trades you tend to make will show you varying degrees of success over time (again dependent upon conditions). If you’ve got a sound method which is working right now, then by all means keep using it. Just know that at some point it may be less effective, and if you’re keeping tabs on what’s working and what isn’t, you’ll be one step closer to making the leap from your current method to your next method when the time comes.

Your position sizing should be varied as you endure stretches of profits and losses. Your account will swell at times, and on other occasions it will shrink. Knowing this ahead of time shouldn’t scare you, but rather help you prepare for how to respond when it happens. The idea is to press things when you’re right and back away when you’re wrong. So, when you have a great month, for example, it is likely you’ll want to increase your trading size to go along with your larger account balance (unless you wire out all profits at the end of the month, which I do not). Notice I did not say increase your risk, as that’s a completely different subject. The objective is to keep your risk level proportional to your account size, which will mean naturally larger positions as your profitability expands your account balance.

Finally, stay aware of your personal spending habits. That might catch some of you off guard, and although it is rarely mentioned, I still think it’s incredibly important. A good week or month or year can easily lead to excessive spending with the surplus of cash on hand. There is nothing wrong with this at face value, but it’s all relative to how much of your profits you’re spending. What you want to avoid is the pressure you will face if you’re required to take on more trading risk in order to support your spending habits. Living well within your means (especially early in your trading career) will build a great foundation which you can always build on. It’s easy to increase your personal spending, but it’s very difficult to decrease it once you’ve grown accustomed to a certain lifestyle or level of comfort. Strive for a balance with your trading AND your spending. Creating big monetary needs early on in your trading career (or right after one outstanding stretch which may be hard to reproduce) will likely only lead to more pressure on your trading, which is NOT a good thing! Always keep that in mind. There will be some rough stretches of road in trading which aren’t fun, but they are far easier to navigate when the financial pressure is diminished.

In the end, you’re not a complete trader until you are willing and able to adapt. The best-capitalized trader with a sound method and excellent discipline will at some point encounter a changing market, and only his ability to change his approach will allow him to continue growing and succeeding as a trader.

The next post will be the final installment in the Great Expectations series, and we’ll review what we’ve learned and hopefully you’ll have some more feedback and thoughts on topics we’ve covered up to this point.

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Jeff White
President, The Stock Bandit, Inc.

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