“I was stuck in a position, but I responded flexibly and managed to get out safely.”
It is a rather common line among so-called trading gurus, almost as if they were speaking on behalf of every trader who has ever been trapped in a losing position for a looong time.
Whether they actually got out or not is beside the point. I think this statement is, with a fairly high probability, nonsense, and an admission of incompetence, in three different ways.
First, “I was stuck in a position.”
That means the position moved against them in a way they had not planned for. Either their market perspective was wrong, and/or they entered without a proper stop-loss, thinking, “Surely it won’t go that far.”
If the trade had actually been planned, you would not be “stuck” and then improvise your way out. You would simply say, “I stopped out according to plan.” (And even that is incredibly easy to fake… but I’ll save that discussion for later.)
If the loss was anticipated and accounted for within the trading system, then it wasn't being “stuck” in the first place.
Second, “I responded flexibly.”
Most of the time, this means doing something that was not planned. Taking a large position in the opposite direction. Averaging down aggressively. Changing the position in a way that was not part of the original plan.
Of course, if such responses were part of the trading system from the beginning, then that is a different story. But in that case, they were planned actions too. If it was part of the plan, you would say “I followed the plan,” not “I responded flexibly.”
Taken literally, the statement often amounts to:
“I encountered a situation I had not planned for, and then I did something I had not planned to do.”
Third, “I got out safely.”
That means they ultimately avoided a loss. Good for them. But there is something worth paying attention to here.
Does the guru also post when they responded “flexibly” but eventually failed to get out and took a (huge) loss, as we ordinary traders almost always do?
Most likely not. At least, I have never, really, never ever, seen such a post.
Someone who wants to show off a good result will tell you, “I responded flexibly and got out safely.” Someone who genuinely wants to teach, and who is confident enough in their method to expose its failures, should also be willing to say:
“I responded flexibly, but ultimately took a loss.”
They would show the loss so that their subscribers and followers could learn from it.
So what do I consider valid flexibility in trading?
I would define it in rather narrow terms: choosing among trading strategies according to the current market perspective. In other words, I would reserve the term “flexible response” for responding to changes in the market regime.
This is still strictly rule-based. It does not mean abandoning the rules and improvising according to whatever happens. It means making a choice within the rules based on the current market conditions.
This is exactly what I meant by conditional prediction in my earlier post on predictability and Black Swans.
Condition = market perspective
Prediction = trade using the selected strategy
This is how a trading system can be made more realistic.
We want to lower the waves and keep moving forward. But surely we should at least know whether the tide is coming in or going out.
As a Korean saying goes, row while the tide is coming in. It applies to trading as well.
You shouldn't keep rowing when the water isn't coming in. You should run.
From a probabilistic perspective, if the underlying distribution has changed but you continue taking the same actions, you should not expect to get the results you want. You may end up accepting unnecessarily large drawdowns, making little or no progress for a long time, and only start making money again when the regime finally changes.
One model that fits this situation particularly well is the Hidden Markov Model (HMM).
An HMM assumes that the outcomes we observe are generated by an underlying hidden state that is difficult to observe directly, with the probability distribution of the observations depending on that hidden state. It is no coincidence that many quantitative traders study HMMs and similar models to infer market regimes.
In reality, market conditions are extremely difficult to observe directly. Identifying the current state of the market is therefore a major challenge for many quantitative traders.
There is a common saying in quantitative trading:
It is much harder to know when not to enter than to know when to enter.
It is also incredibly difficult to determine whether your edge is still alive in the current market, or whether it has already died.
That is a large part of what a trader actually has to do.
So even if we cannot perfectly identify the exact state of the market, determining whether this is a time to take a long or short position, or to remain flat, is one of the first judgments a trader needs to make.
So, by now, we know that good trading requires a trading strategy with an edge.
Now we have added another requirement:
You need to identify the current market perspective and choose the appropriate trading strategy accordingly.
That is why understanding the market perspective is the second vertex of the Trading Triangle.
From the next post, I will start talking about trading psychology.
I actually consider psychology the most important part, which is why I wanted to discuss it last, after trading strategies. But to properly discuss trading strategies, we first need to discuss psychology.
The mind, like the market, changes constantly.
But unlike market conditions, the mind is not something you should respond to with a different strategy every time it changes. What matters is noticing those changes quickly and minimizing the damage they can cause.
It is not a matter of responding one way when your mind is in one state and another way when it is in another. There is ultimately only one mindset in which you can trade properly.
So trading psychology is less about responding to your mind and more about managing it.
From the next post onward, I will look at things such as FOMO and impulsive trading through a probabilistic lens.
This article is educational content about trading and does not constitute investment advice or a recommendation to trade any specific instrument or strategy.