Did anyone get the license plate on that truck? That is an old cliche, however; for many weeks I have been fielding emails and calls with a similar theme. Many traders, plainly, have not believed the stock market could get this far without a significant correction. The same goes for investors, raising cash, as the market rallied to all-time highs, wondering why such a large percentage of their investments are in low-yielding instruments; while the stock market soared some 14% since January. Truthfully, I did the same thing.
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While many market participants express their dismay over the relentless advance, worrying about too much cash, many are getting bloodied by short-side positions that never give a moments respite. I do know the feeling, myself, in past market extremes, saying (praying), “please please, just let me out and I promise I’ll never do this again.”
It’s normal course for short-term traders to want to “fade.” the market moves, assuming regular cyclicality and “reversion to the mean” trading will bring market retracements. That style, of course, can be deadly in momentum markets. So, in this environment, traders who have been caught are asking questions about the red flags to watch for, so in the future, they can avoid their present mess.
While my focus is on the technical and psychological aspects of trading, in this article, I want to stick with the emotional aspects that keep us (active traders) in losing positions too long. And I’ll include some tips to watch for that signal signs of trouble.
What happens to many traders, as positions sour and they lose money, is that emotions get stirred up. Often they don’t realize they are “hooked.” That’s a term that suggests that trading decisions are made based on data that first comes through emotional filters.
Here’s how it works. A trade goes bad, positioned against the trend, and losses mount. We wait, thinking, and make an intellectual decision that this trend has to end soon. “This market has gone too far.” So the trader might even add to the losing position. The losses get bigger and now emotions are triggered; often fear, shame or anger. The internal dialog now moves away from the market to us.” I messed this up again. I’ll never be successful at trading and meet my commitments. I lose at everything I touch! OMG, how do I tell …. what happened (you fill in the blank)? “
So now it’s all about us, as the trading results we’re suffering are personalized. As a result, trading decisions are now made based on undoing the negative self-beliefs that have come to the surface, often old messages that come from our youth. And we slip into old behaviors, like hiding, acting out in some way or numbing. Of course, that just exacerbates our market troubles as we fail to deal with the issue of the problem positions.
Now the trader is in a “lose-lose” situation. We lose if we close the position, because then it can’t come back and make us feel better; which we believe will undo the negative message. And we lose if we stay in the trade, because we’re at market risk and losses are likely way beyond our maximum loss rules. So the trader is stuck and often freezes.
At this point, there is really only one action to take. And it’s really what seems like the biggest personal risk. We need to close all positions and take a break away from the market. That’s the only way to get emotionally unhooked and back into your healthy intellectual process. It might only mean being out of the markets for a day or two. This action will free you from “oh my god, how do I get through this” to I see where I went wrong and I know the positive great truths about me that make me a successful person. Now I can and will move forward with new insights, staying on my designed plan.
RED FLAGS TO WATCH
Here are the red flags that trouble is starting and you’re emotionally hooked:
o You are trading outside of your plan, size of trades are larger than your predesigned maximum, and losses are beyond your max-loss rule.
o You’re hiding or numbing or keep things inside that you are fearful or ashamed of.
o You are at war with the market, “it’s them or me.” Your volume of trades has probably greatly increased and you feel angry.
o You have a lot of negative internal dialog, and feeling fear or shame.
If you are fighting market momentum and have one or several of the above issues coming up, you will be best served by closing positions now. It doesn’t matter if the market momentum ends and you would have made some money back. It’s about being sensible and getting back to your positive, clear-thinking, intellectual process. It’s likely, having done this much earlier would have you executing in the markets much better now.
For investors, the dynamic is really the same. Markets move steadily upward and fear comes in about missing the rally or getting in at a bad price and sitting through a correction and a bad loss. That’s the “lose-Lose”. The sensible action is to wait for a favorable entry, even with the apparent risk that the market will go without you. If you miss the continuing momentum, the “That’s fine and I’ll get ’em next time” attitude will keep you mentally healthy for the next opportunity.
That’s really the best route for any style market participant. I lost money or I missed the best trade. And I know I have the knowledge and ability to move forward from this point on. That’s the confidence in who you are that drives success.
