Adapt or Get Stopped Out

One thing I have learned from experienced traders  who have been in the game for years is that you need to learn to adapt. Just like in the wild, if you don’t adapt, you will get wiped out. Just this year, there has been 3 different trading environments in which I had to adapt to.

  1. Up to June, the market was mostly in a grind up buy the dip mode. Intraday volatility, if not in the correct stocks, was very limited. I had to make a lot of my plays based on relative weakness and strength.
  2. From July to about October, we saw heavy volatility and heavy volume. I had to adapt my size and timeframe.
  3. From October on, while volatility decreased (but not gone away), I have had to adapt to the gappy and news-driven market. I try to use the gaps to my advantage (mean reversion,trend day,etc). On the other hand, the fact that we see some type of rumor or denial at least once everyday, I’ve began to use a lot more hard stops. So that way, if I am short and a rumor comes out, my stop will quickly hit, faster than what I can react to.
One thing I have noticed though for the past 3 weeks, is that the obvious or easy trade DOES NOT WORK. For example, lets say there is a solid bear flag setting up within a down trend, you will likely see some “shaking of the trees” before it goes lower. I need to adapt to this or I’ll continue to get stopped out of trades that I got wicked from.
Below is an example from today (among many I can bring up).


The Trade
The market had been weak all day and I had been watching for the Euro to break its downtrend to make a trade with size to the long side (also $TLT was forming a wide intraday Head and Shoulders Pattern). As the euro broke its downtrend, I started stalking a long position. I missed the initial entry but I waited for a pullback. I got long near 123.50. I had a tight stop of 8-10 cents. I knew my reward was likely to be ~124 as I tweeted out:



That trade would give me my 1:5 risk/reward ratio that I always seek. A perfect trade. But of course, the market was not going to make it easy and the obvious trade was not going to work. After my long entry, I took off a very quick small scalp at .60 to cover some small risk. However, I was NOT going to sell anything until 124 or if it hit my stop. As it came back to .50, it quickly spiked down hard and I got stopped out. Immediately the market was rebid and spiked higher. HFT shenanigans.
(h/t to @HFTalert for picture/chart)

I have no problem with this as this is part of the market, but it is something I need to adapt to. I should have probably had 1/3rd of my position at my original stop and managed the other 1/3rd with a manual stop (the wick was really fast, barely held below, likely would have not hit out).
I have noticed this type of action really pick up lately (past 3-4 weeks). A stock (or market) is at a great level, however, it pushes through that level to “shake the trees” and hit some stops before it turns around. It’s something I am going to try to adapt to this week. Going to use wider stops and position my entries at better prices.
$SPY – 1 min chart


Tags: $SPY, $EURUSD, $TLT, $ES_F 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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