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Adaptability And Discipline


Whenever we talk about stock market trading discipline, everyone seems to understand that we are referring to trade decisions. We know that good discipline is required to pull the trigger and exit a trade with a loss. It really should not be difficult. After all, we know our position has not been working and is not likely to get better any time soon.

Making this logical decision is generally considered as demonstrating good trading discipline. That doesn’t feel right to me. It takes common sense to get out of a bad trade. Does it truly show good discipline?

 

Consider this: When it comes time to make a new trade, is that an important opportunity to demonstrate good discipline? Or does discipline not apply to brand new positions?

  • The technical trader who patiently waits for the correct setup and can ignore situations that are almost, but not quite, good enough shows discipline
  • The swing trader who waits for a buy/sell signal and who does not jump the gun demonstrates that discipline

 

What about the non-directional premium seller? Does that trader require good discipline when entering trades, or only when managing risk?

The iron condor trader who considers more than “okay, it is time for my weekly (or monthly) trade” has discipline.

 

Robert Seawight posted an appropriate piece of trading advice in the Above the Market blog. It supplies his opinion on the question raised:

“adaptability is important from an investing standpoint. We need to be agnostic as to approach and ideology and simply focus on what works and adjust as things change. Our points of view and opinions, no matter how strongly held, should always be tentative and subject to change due to new or better evidence.”

 

When I get lazy (or overconfident) and enter a new trade because the calendar tells me that the time is right (for me that is often when the 91-day options are first listed for trading), I am taking action that is exactly the opposite of this sage advice.

 

20121114222915_adaptabilityvscompromise.jpg

 

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I chose the iron condor as my primary strategy because I like the way it works and feel comfortable owning the position. I am comfortable with positive theta and negative gamma. I am confident that I can act with discipline when necessary. That package allows me to feel good about my choice. But, is it the most efficient method for selecting trades? Surely not. There is nothing agnostic about that approach. I have a definite bias that favors the iron condor.

 

Traders who stay on top of the market can benefit when they can observe something special. Perhaps it is the start (or end) of a trend. Premium sellers should act differently when the market is trending. For example, the iron condor trader can trade with a market bias, selecting a bias that favors the trend. When a trend ends, that’s the time to revert back to the market neutral iron condor. The problem? It is not easy to determine when a trend has begun or ended.

 

Intelligence and good discipline tells us not to fight the trend. Doing something as simple as that demonstrates excellent discipline.

 

The point is that there are times to avoid your favorite strategy if it feels out of sync with the market. If you sense a bullish or bearish trend, you don’t have to follow that trend. However, have the commons sense to make some change to your usual trade methodology to avoid going against what you see. If that means reducing size, or sitting on the sidelines, or trading with a market bias, then do it. Show the discipline to stop depending on a consistent strategy when you see see or feel that it is not going to work. I am not telling any trader to suddenly believe he/she is a market prognosticator. However, if you have a short losing string, cut size. If you are getting hurt by a rising (or falling) market, make new trades with a small bias, or with a stage I adjustment already built in (i.e., trade an off-ratio iron condor, pretending that the new trade has already been adjusted once. Example: Instead of 10 x 10, trade 10 on one side and only 8 on the other.)

 

If unwilling to accept that choice become a market observer until you are ready to enter a new position with confidence.

 

It takes good discipline to wait for the right situation before making a new trade. Many times we can enter our orders, as usual. But the key to remember is that this is not always the right time.

 

 

Related articles:

 

Are You EMOTIONALLY Ready To Lose?
Why Retail Investors Lose Money In The Stock Market
Are You Ready For The Learning Curve?
Can you double your account every six months?
Are You Following "Tharp Think" Rules?

 

 

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