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You need to evolve to survive in this market

FOR the retail market participant, success in trading often means finding an edge. Whether that refers to a combination of technical indicators, a sound plan for reacting to event risk or identifying repeatable patterns, the conclusion is always the same. When they come across a system that works, they stick to it. However, narrowing one&rsquo;s field to a single strategy and/or asset may offer short-term gains, but it can eventually lead to long-term ruin.<br /><br />It is best to present this concept with an example. An acquaintance of mine had a very successful trading strategy that was surprisingly simple. Combining a few household technical indicators with prefab concepts of momentum over a specific list of stocks, he ran a backtest that offered impressive results. Then, the strategy was put into action in a live account; and the system performed for nearly six months.<br /><br />Eventually though, the strategy began to break down. A few losing trades in a row eventually led to a majority of his positions being stopped out. Why would a successful strategy break down? The first concern would be that he wasn&rsquo;t following his rules any more. However, considering it was an automated system, there was no chance of that. The change came from the market itself.<br /><br />Influenced by the economy, interest rates, wealth and countless other factors, the markets move in cycles. Trends, congestion, ranges, high and low volatility &ndash; most markets will evolve through these different stages over time. What is important to understand is that there are very few strategies that can remain profitable in all these different situations. This is where traders&rsquo; acumen comes into play. To be successful, they must be flexible enough to adapt their approach and perhaps even change markets to take advantage of opportunities as they arise.<br /><br />To survive and profit in the markets, adaptability is essential, but there is a general set of rules that are necessary regardless of the type of market one is trading in. First and foremost, money management is the foundation of a trader &ndash; not just a trade or strategy. Most of the indispensable rules are well known by all.<br /><br />Maintaining risk/reward ratios, managing exposure, limiting the risk of loss in any single trade, working with reasonable time frames and simply using stops are all commonly cited conventions.<br /><br />But it is also important to apply these efforts more broadly. Making a cutoff point for a drawdown on an entire system, measuring its total and average risk-to-reward and gauging exposure to a single market or fundamental driver are considerations a trader has to take into account.<br /><br />Another aspect of remaining flexible is having options. If a market doesn&rsquo;t present a trading opportunity, then one shouldn&rsquo;t be forced. Periods like this can occur every now and then, or even the majority of the time depending on the strategy.<br /><br />But it is possible to improve options by broadening one&rsquo;s horizons. Most retail traders reserve themselves to one market or even just a few securities within a market. With only limited time to analyse and scan for opportunities, traders naturally restrain themselves.<br /><br />However, when trading CFDs there is a natural global macro approach that allows for very different markets which share little correlation and thereby improves the chances for a viable setup. Monitoring macro fundamental themes is easier than keeping track of many stocks, sectors and commodities. If the US outlook is improving and investor appetite is feeding demand for more speculative assets, then investing in the American, benchmark equity indices makes sense.<br /><br />Regardless of whether a general approach is towards a small set of securities or the entire global financial market, it is vital to determine the underlying, fundamental drivers and conditions. Are interest rates high or low? This can affect general volatility and rates of return. Is growth trending higher or lower? Yield growth and capital gains will be influenced by this.<br /><br />One of the more significant highlights in today&rsquo;s markets is the intensity and direction of risk appetite. This common element has established unprecedented correlation between all asset classes.<br /><br />Today, it is clear that investor optimism is rising substantially &ndash; the trend can be spotted in a rally in stocks, commodities, bond yields, high-yielding currencies, along with a drop in the US dollar, Japanese yen, Treasuries, volatility and Libor rates. This all-encompassing catalyst will not hold forever, but for now it is one of the primary determinates for price action. When conditions evolve, so too should a trader.<br /><br />John Kicklighter is a currency strategist at CFD provider FXCM.