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Flexible Trading is Successful Trading

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The key is to have the foundational principals in place, then possess the skill and flexibility to adapt to any environment.

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One may think after studying the art of trading and learning the foundational principals, it would then only be a matter of execution. In theory this is true however there are times when variations of the basic tenets must be made if a trader wants to succeed in the ever changing market landscape.

In basketball a player shooting a free throw has ample time to prepare and execute the perfect shot. Other than outside noise, there is no immediate distraction. The free throw is dependent on execution and concentration. This is not the case on an offense or a fast break, as shots may need to be altered and it becomes much harder to execute perfect mechanics. Trading is very similar in that when the game is actually going on, there are times when a trader's style must be adjusted to compensate for the environment.

The most predominant variations are typically trading size and time frame. Where the market is acting well and trending higher, it is often a detriment to sell stocks too quickly and essential to maximize the appropriate size which is determined by your total portfolio value and your overall risk tolerance. This changes dramatically however, when the markets are not acting well, trending lower or simply in a state of flux. Trading with your normal size becomes incredibly dangerous and it is very important to cut this dramatically. It is also important to adopt a much shorter time frame, always willing to reduce your inventory at the drop of a hat, and avoid taking home too much exposure each and every night.

Many traders run into the mistake of not adjusting when the market changes and continue to act and trade as if things were in their favor. In a better market, I would have no problem at all letting a stock like China Medical (CMED) run higher with a full position after its recent strong break. However, just about every day, I have slowly sold into strength, reducing my position significantly. I may very well regret not holding size in the stock but I feel much safer selling into strength and avoiding being whipped around should the stock lose its bid and drop quickly.

On the other hand, a stock like Research In Motion (RIMM) which has bounced close to ten points since its bottom on January 9th, I played with very a short time frame, choosing to step in near the close on Wednesday and sell all but a small piece less than 24 hours later, Thursday afternoon. Like CMED, RIMM could be on its way right back up to $140.00, however I feel much more comfortable stepping in and stepping out, booking my gains quickly and avoid giving them back.

Recently I have added such names as Shengdatech (SDTH), China Mobile (CHL) and Green Mountain Coffee (GMCR) with the same strategy. While these stocks look to be setting up for a move higher, I will play them with limited size and a very short time frame. I am willing to try them, but am not willing to marry them.

There are many traders who do not embrace such volatility or change in their style, which is just fine. Hopefully, they are able to simply sit idle and do nothing rather than impose their longer term strategy on a market that is clearly not kind to such a style. It has been my experience that many choose this route because it is simply not in their make-up to change, or others have simply never been taught how to handle different market conditions. Traders who desire to learn ultimate flexibility should aggressively learn adaptability and study how to read and change trading styles as the market changes.

This is one of the reasons I have decided to kick off a Trading Boot Camp in February to teach traders not only the foundational principals, but the variations of trading as well.

Many desire to put trading in a box, quantifying each and every move. Traders try to say 'If a stock does this, I will do that.' When in reality trading is much more art than science. The key is to have the foundational principals in place, then possess the skill and flexibility to adapt to any environment. If you are willing to do that, you can be incredibly successful regardless of what Mr. Market sends your way. However, if you are not willing to change, consider stepping out completely and waiting until the environment returns to suit your style.

Whichever you decided to do, always remember that trading is a marathon not a sprint and it is capital preservation that will keep you in the game trading for another day.
Positions in CMED, RIMM, SDTH, CHL, GMCR

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