Strategic Adjustments That Pay Off Big

04/03/2012 1:00 pm EST

Focus: STRATEGIES

Jeff White

Founder, TheStockBandit.com

The markets change constantly, and so should a trader’s plan, explains Jeff White, who identifies routine adjustments traders can make to stay safe and profitable in changing conditions.

Our guest today is Jeff White of TheStockBandit.com. We’re talking about how traders adapt to the markets and find good opportunities. So, Jeff, first of all, what do you mean by traders “adapting?” Why do they have to adapt to the markets?

Well, the market is constantly changing, Tim, as you know. It seems like there is always going to be some room for an element of surprise, so no matter how prepared a trader might think he is, he still needs the ability to adapt, shift, and maneuver his game plan when conditions change.

Does that mean I shouldn’t come into the market every morning with a bias about whether I should be long or short and just let the market tell me?

Having a bias is okay. I think what’s important is to have some contingency plans and the flexibility as a trader to fall back on some other plans in case your original plan is altered.

We see this a lot. Obviously, the stock market requires it, but we see it in sports and we see it in business.

If you think about a quarterback approaching a line of scrimmage, he’s got a plan that he’s already called for his team. It’s a plan that he’s confident in, and yet, as he starts to read that defense, his plan may need to change.

His original plan may no longer be valid, and so it’s important that he has something to fall back on. We refer to that as “calling an audible,” which really implies shooting from the hip, but as a trader, you ought to know what that contingency plan is so that you shift accordingly.

Alright, so what does it mean? Do I have a written plan about my trading, and how do I practice this?

You do have a written plan; you’ve got your favorite strategies. I think you also become more equipped as a trader.

You’re constantly learning and understanding the market. You’ve become a student of the market, and you understand that in a momentum-type of market, you can trade those breakouts, and in a little steadier trend, you can buy the pullbacks, and in a trading range, you’ve got to be equipped and prepared to trade reversals because that’s really the only game in town.

How about position size? Is there something about adapting the position size as well as what I’m trading?

Absolutely. It’s important that when you’re confident and you’re doing well as a trader, that’s when you’re trading your largest size. As things become a little bit more foggy for you and you’re struggling a little bit, it’s time to back down your size and become much more selective with which trades you need to take.

That’s going to keep you in the game. It’s going to allow you to keep seeing opportunities, and in case you’re wrong going forward, it slows down the pace of your losses.

It gives you time to come up with a different strategy. It also allows a little time for the market to maybe shift and start rewarding a different type of style as well.

Now, I think traders think they’re adapting by switching markets all of the time; going from E-minis to stocks to options. Is that adapting, or should I not do that and instead be sticking to one market?

I think its best, at least initially, to stick with one market. Become familiar with one market, but have different styles of trading in that market.

See related: Make One Market Your Specialty

For me, I’m equipped to trade different types of plays—breakouts, pullbacks, reversals—and I’m also equipped to trade different time frames in that same market. I might be daytrading, I might be swing trading, I might be taking multi-month positions, and those don’t all have to correspond with each other.

It’s just allowing me to put capital at work on different time frames and utilizing different strategies based on what’s working best right now.

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