Thursday, December 31, 2015

Markets are Living, Breathing Organisms. You Must Adapt.

As we head into a new year and prepare to leave the old one behind, it's natural to reflect on the challenges and opportunities we'll encounter on the road ahead.

Looking back on 2015, it was a tough year in the stock market for retail and professional investors. In fact, hedge fund returns were so poor that many funds have simply shut down or converted to family offices.

So who did well in this challenging market environment? As the Journal points out, "A Bold Few Traders Earned Billions Flouting Rivals", and conventional wisdom. By steering clear of consensus bets on oil, energy stocks, junk bonds, Apple shares, and currencies, a few skilled hedge fund managers were able to structure their own winning trades and prosper as their rivals faltered. 

Which brings us to our lesson on trading and the ever-changing nature of capital markets. Here's what S&P futures trader and "Market Wizard", Marty Schwartz told aspiring traders at Amherst College:  

"Markets are living, breathing organisms. You have to adjust with them and continually change your methods." - Marty Schwartz

So does that mean we throw out all our rules and disciplines, or abandon risk management safeguards when market conditions change and leave us baffled? No, but we can recognize the need to adapt to changing patterns or trends and learn to position ourselves for success in new market environments.

How important is this skill of adaptability? Well, the head traders at SMB Capital (Steve Spencer and Mike Bellafiore) have identified this trait as a key pillar of trading success, as well as the "#1 Trading Frustration" that most traders, new and old, face.  

Looking ahead, we don't know if the markets will change due to shifts in technology (HFT and "algos"), broadened participation (new entrants and market participants), abrupt rule changes or shifts in regulation, changing correlations, or shifts in price trends (range-bound markets may turn down or trend higher). 

What we do know is that change is inevitable and constant. While human nature seems to remain largely unchanged over time, we must learn to adapt to the shifting tides that occur within our lifetimes. How will you adapt to coming trends and market changes in the new year ahead? Will you make the necessary adjustments to your trading plan, or will you be left behind?

"In times of profound change, the learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists." - Eric Hoffer

Related posts:

1. Marty Schwartz Talks Trading at Amherst (VIDEO).

2. Ray Dalio: Lessons from Hedge Fund Market Wizards.

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