Sunday, August 10, 2014

Plasticity and Adaptability: Making Innovation a Habit

Some of the best traders I've known, like the best fighters in the Bruce Lee quote, employ a variety of skills to adapt to markets.  Sometimes they are short-term, opportunistic, and tactical; other times they are longer-term, thematic, and strategic.  They first seek to understand the market environment and opportunity set, then deploy the skills and strategies best suited for that environment.  This adaptability requires an ability to not become identified with any particular asset class or strategy.  Once we identify with any particular approach to markets, we fall into the trap of needing markets to fit our framework rather than the reverse.

In other fields of business, flexibility is essential to success.  A marketing professional knows that different strategies must be employed to reach Millenials vs. Baby Boomers.  Some demographic groups will care about brand name and image; others will emphasize value and price.  The successful marketer constructs multifaceted campaigns to reach segmented groups of consumers.  If the marketer were to become identified with a single strategy and expect all people to respond to that, the results would be mixed at best.   

My recent research has focused on the presence of aperiodic cycles in the stock market.  These are cycles that occur, not in chronological time, but in event time.  Imagine market cycles that can occur over periods from minutes to hours to days to months, depending on the unfolding of critical events.  A successful trader of such cycles would be neither a daytrader, nor an investor.  As Bruce Lee's insight suggests, that successful trader would be all of them--and none of them.  It is not a small challenge when the market's flexibility exceeds our own!

Check out Richard Peterson's excellent article on adaptability, where he uses the Turtle System to make important points about the need for openness--not fixed, rigid rules--when trading markets.  Research suggests that "plasticity"--the combination of openness and extraversion--is highly associated with creativity.  Interestingly, plasticity and stability (including conscientiousness) tend to be inversely correlated.  People who are highly disciplined and process driven may be the least open-minded and flexible.  What it takes to succeed in any one trading approach is, in some ways, the opposite of what's needed at times when it's necessary to change trading approaches.

A higher-order integration, of course, is to turn creativity into a robust, repeatable process.  If you have a structured methodology for generating, testing, and utilizing fresh inputs to your decision-making, then you have turned fluid adaptability into a reliable routine.  Innovation, too, can become a habit.

Further Reading:   Conflict and Creativity in Trading Performance