The Pay-Out / Pay-Back Cycle: Excerpt from Bo Yoder's Book; Optimize Your Trading Edge
In his book, Bo Yoder's writes:
"For every style of trading there will be a "perfect" market environment. When the market is aligned to the strategy that you are trading, every trade will work itself out smoothly, losses will be far and few between, and you will feel on top of the world as you watch your profits accumulate! Sooner or later the market environment will shift, if ever so slightly, and losses will once again begin to appear. This constant cycle from "zero" to "hero" and back to "zero" is why I believe speculation as a business has such a high failure rate."
This is a subject that you will hear all top traders talk about!
I think this is one of the many keys to trading survival! The trader's ability to adapt very quickly to an ever changing market environment!
For example: Traders who flourish in a momentum/trending market, will take overnight or swing positions in highly shorted and/or 'MoMo' stocks, ride them out for big squeezes and bank 'big money' . This strategy works great: you'll often hear traders say 'trading is so easy'.
Mistakes are quickly recovered and bad trading habits are rewarded for a lack of a better term.
Many traders will even feel unbeatable, but once this trading environment, that was so conducive for that particular style starts to fade, this same strategy will be responsible in taking back most of these traders' hard earned gains that they accumulated during trending/ Momentum markets simply because they failed to recognize a market shift.
As the markets ebb and flow from trending to choppy to corrective , TRADING STYLES also NEED TO ADJUST IN ORDER TO NOT ONLY KEEP YOUR GAINS, but also SURVIVE.
As traders we want to survive and be very good at this game, it is vital that we analyze and recognize quickly what type of market we are in. It's not about being "bearish" or "bullish" its about being a "chameleon" and by that I mean, willing to ADAPT to the constantly changing market environments and never stubbornly holding on to one bias blindly. We need to be ahead of the 8 ball and rarely behind. The quicker you recognize the shift, the more money you will keep and make down the road.
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