You must adapt to changing stock market conditions and how I almost killed my swing trading career

An underrated but critical attribute of successful swing traders is the ability to adapt to market conditions.  In the trading game, nothing lasts forever.  The stock market is an organic beast that constantly changes conditions, and those that can keep up with the changes win. Markets trend, markets chop, markets dip and dive with parabolic breakouts and breakout failures.  As a swing trader, you need to have a zen-like oneness with the market and adapt to changing conditions.  My hero Bruce Lee famously said:

“You must be shapeless, formless, like water. When you pour water in a cup, it becomes the cup. When you pour water in a bottle, it becomes the bottle. When you pour water in a teapot, it becomes the teapot. Water can drip and it can crash. Become like water my friend.”

What does water do?  It ADAPTS.  Liquid adjusts to the conditions around it.  That is what you must do as a trader.

Back in the day, early on in my trading career, I thought I was the "ish" as a trader.  Everything I did worked and I made a lot of money in a very short time.  I had -- count em -- two breakout setups and traded them religiously.  I had no methodology.  Market conditions meant little; I did not even look at SPY or QQQ.  I didn't understand the intricacies of price and volume, along with support and resistance as they related to breakout trading.  Still I made money.  How much?  We don't need the details, but enough for a 22 year old recently broke law student to live it up in a luxury high rise in a big city.

Here are a few of the breakout setups I swing trade over at BullsonWallstreet

Part 1: The breakout pullback setup

Part 2: The breakout-remount setup

Part 3: The breakaway gap setup

You know what's coming.  It is inevitable.  The market winds changed.  There wasn't a big crash. No, that would be too easy. Instead Mr. Market subtly changed direction.  Where markets trended, they now went sideways and consolidated in a back and forth CHOP!  This doesn't sound as gruesome as a big crash does.  However, I would rather have a big crash.  With a crash you take your lumps, but you know exactly what's in front of you.  Chop is a different beast.  It tricks you by wearing the mask of a breakout or breakdown, but is something else all together.  If you don't adapt quickly enough, it will slowly kill you.

That my friends, is where we are now.  CHOP!  Not only do we chop, we chop in a continuous, slow rising uptrend.  Do you see the problem with this?  The problem is we all use stops and our stops are getting hit in the midst of the slow rising uptrend's CHOP.

We must combat the chop by adapting our trade management strategy.  Until we get a defined trend, we must be willing to take profits quicker than usual.  Now this goes against my trading style.  I like to ride trends.  My overall strategy is to take lots of small losses, hit big winners and completely ignore win rate.  However, I know when I must change things up, and this is that time.

For now my gameplan is, until otherwise informed, that I will take quicker profits, sometimes even ignoring my hard 2 to 1 risk ratio rule and look for a higher win rate.  In my Trade Report Swing Trade account, I already did that with my recent Facebook (FB), TGTX and Gold Miner (NUGT) trades, and will likely use this strategy with my SPY short as well.

If you would like to learn more about how I trade, receive my nightly focus list with market analysis,setups and trade alerts, sign up for a 14 day free trial at BullsonWallStreet.com.  

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Strategic Flexibility is a Key to Trading Success

Your strategy has to be flexible enough to change when the environment changes. The mistake most people make is they keep the same strategy all the time. They say, “Damn, the market didn’t behave the way I thought it would.” Why should it? Life and the markets just don’twork that way.-Mark Weinstein

With the third quarter in the rear view mirror, I am keeping this quote on a post it that is stuck smack dab in the middle of my desk. What worked last quarter might now work this quarter. Keep an eye on sector action and note what new sectors are breaking out. Are extended groups like commodities and China stalling or continuing to run? What are the big whigs buying? What's being accumulated?

This past quarter, I ditched my normal breakout-pullback strategy and took a ride on some of the momentum stocks. This might not work in the fourt quarter. I'll keep my bag of trading tricks near by in case the market dictates a need for change. As I told a reader last month who was befuddled that I was ditching my pullback strategy:

I don't have *a* strategy. I have many strategies in my arsenal, and employ them as market conditions dictate. I do not have one rigid form. Rather, I strive to be like water. As Bruce Lee would say, water is formless. It adapts to it's surroundings. Be like water.

A Reader Criticizes My Non-Technical Impulsive Trading

A reader seemed disappointed with Friday's "not-so-technical" trades. In that post, I said I was annoyed and pissed off by a market making non-sensical knee jerk moves. To take advantage of an emerging pattern (market is up one day and down the next), I went long the indexes on extreme weakness. I noted that I was taking emotion out of my trade decision, ditching my normal setups in favor of the short term pattern. The trade is short-term in nature with very tight stops. A reader responded:

Annoyed? Pissed off? Then you go ahead and you say you won't let the emotions get in way.

Judging by these non-technical trades, I would say you are trading on "tilt" here.

These are the worst trades I have seen you put up yet, totally against your strategy and many other sound trading principles.

While you may get lucky and these may turn out profitable for you, there is nothing more dangerous to a trader's account/career than starting to do impulsive, on-the-whim trades.

Let me address the two main points from this commentary:

1) I am letting my emotions get in the way of my trading by making impulsive trades

I don't know how to get rid of my emotions. I am a passionate person. It would be unhealthy to deny what I'm feeling. While I acknowledged my feelings, I did not let them cloud my trading decision. I based my trade on a current pattern, not emotions. I waited for the sentiment readings I watch to turn in my favor before entering. I placed a tight stop and used half the position size I normally use. This makes for a low risk trade.

2) I have ditched my strategy in favor of "on the whim" trades

I showed above that this trade, while unconventional compared to most of my trades, was not impulsive.

I don't have *a* strategy. I have many strategies in my arsenal, and employ them as market conditions dictate. I do not have one rigid form. Rather, I strive to be like water. As Bruce Lee would say, water is formless. It adapts to it's surroundings.

Be like water.

Note: The blog is experiencing an uptrend in commentary, both positive and negative. I enjoy constructive criticism and differing opinions, so don't be shy if you are in disagreement with my analysis.

Quality, Trading and Bruce Lee

My dad used to tell me never to do anything "half-assed." Bruce Lee put it more eloquently:

I have found, after much soul searching, that deep down what I honestly value more than anything else is quality; doing one's best in the manner of the responsibility and craftsmanship of a number one.

The reason I bring up this quote is because of the "half-assed" nature of my recent VLO trade. I spotted the divergences, resistance levels and low risk entry, so I decided to jump right in. While it was low risk, and I still feel the stock is going to fall, I don't consider it a quality trade because there were a plethora of better setups out there that I ignored. Furthermore, when stalking divergence trades, one of my rules is that I always wait for confirmation of the divergence. So the small loss isn't what bugs me, it's the fact that it was a crummy trade.