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Feeling the Flexibility of Trading


The biggest hurdle for most traders lies in their own personal character.


Good morning traders. We arise today to find the futures indicating a higher open, which may seem a bit odd considering it was a mere 15 hours ago when it looked as if the stock world was clearly ending. All eyes will be on the financials to see if yesterday's drop in stocks like Citigroup (C) and Bank of America (BAC) was the start of more pain or just a shake to weed out more doubters. I am particularly interested in watching Goldman Sachs (GS), which broke through a key resistance level yesterday and while it's indicated to open higher, looks incredibly vulnerable for a thrust lower. I suspect that earnings from Lehman Brothers (LEH) tomorrow will pave the way for this and other financial related stocks.

As I glanced at the television my mind immediately began darting through various scenarios that could play out, however the small trading voice we'll call 'Charlie the Chartist' chimed in saying, 'let the charts be your guide.' It is this soft voice that always keeps things in perspective and allows me to drown out the outside noise. I can expound on this another time, however, it wasn't long after Charlie chimed in that I immediately thought just how lucky I am to be able to remain incredibly flexible.

Despite how much I talk about this trait, I still don't believe traders truly grasp the importance of pure, unbiased flexibility when it comes to stock trading. As I have thought about this over the years, I have come to the conclusion that the biggest hurdle for most traders lies in their own personal character. In the trading world we call changing one's mind in an instant flexibility, however in just about everything else, this is labeled as being unstable or even immature.

The irony is that these traits are typically not found in an individual who has financial means to trade stocks and is why those who have been successful in other areas of their professional life often struggle when attempting to excel in trading. Pure flexibility also challenges one's own opinions while the humility it takes to admit being wrong and changing sides is always in direct correlation to ones longer-term success. This too is contradictory to what is viewed as being successful in the real world, as those who remain focused, determined and resolved to see their ideas come to fruition are often rewarded handsomely. Unfortunately, it is often just the opposite in the financial markets and as we are reminded by Keynes 'markets can remain irrational much longer than one can remain solvent.'

Readers should make no mistake however, that flexibility isn't simply taking the other side when a specific trade or thesis has been proven incorrect. Rather, it also lies in that very important middle ground where traders steps back and accept the fact that the odds are not in their favor to do anything, accepting the idea that patience and cash may be the best trade.

While I can continue to expound on the importance of flexibility, my true task is in relaying how one can go about improving theirs and unfortunately, I have yet to quantify this very well. The only thing I would recommend is that a trader pursues audible reinforcement, a tactic often used by motivational speakers or psychologists. Of course these professionals will tell you to get up each day and repeat just how wonderful you are, where I would suggest adding another sentence saying, 'I have no idea what the market is going to do, I am OK with that, and will play whatever comes my way.' Over time, this may start to sink in and you will in fact not only start to believe it, but pursue it as well. Furthermore, just about the only test I can relay, which will tell you where you are in this process is to monitor your conversation with others. Whenever asked about the market do you emphatically discuss your thesis and future ideas or do you resolve to admit that you have no idea but will play whatever comes? Ironically, the later may not make you a hit at the cocktail party but it will make you money.

Truly understanding and adopting flexibility is very hard for any trader and only comes with practice. If you desire to be as fluid as the market, you will remove the false belief that one should understand each and every move resolving to play it as it comes. This will be your first step on the road to a successful career in trading.

On another note, domestic retail continues to look very poor here and I am eyeing some of my favorites to build on the short side. I have been patient with a short in Guess (GES) and would like to add soon in addition to Coach (COH) which yesterday broke a bearish wedge on an uptick in volume. The debate is on about the health of the consumer however these charts are already telling us which side wins.
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Position in GS, GES, COH

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