Discipline Out The Window?

It’s a tough market out there. Although the VIX at 19.61 doesn’t reflect any real fear, for intraday traders the whipsaws in index-correlated names have been extreme. Moreover, most traders and investors are psychologically unprepared for a down market; especially one that moves so quickly over the ledge.

I mostly coach futures traders, where leverage is around 10:1 and volatility, therefore, really matters. I’ve noticed over the last few weeks that many traders have moved to the sidelines because they can’t handle the sudden swings. I don’t blame them at all.

But if you have a tenacious personality you might be in the fray and struggling to stay on the right side of the market. That’s the most important thing right now, because the swings are sudden and exaggerated in both directions.

If you don’t have a method specifically designed for this type of market dynamic, you might be tempted to make one up on the fly. Improvisation, however, is the mother of entanglement, which is a confused state of mind that happens when you find yourself suddenly wrong footed and underwater.

In this situation you might be tempted to hit the reverse button on your order entry window. I would caution you about the stop-and-reverse tactic, however, because unless your sense of timing is excellent, you are most likely going to be wrong twice. This is a great way to exceed your daily loss limit in a matter of minutes.

Similarly, you might get caught in a serial bottom-picking scenario, where you mistakenly go long because you are certain the market has gone so darn far that a snap back must be about to occur.

Once these sorts of intuitive trading behaviors happen, you are in a precarious situation where the potential loss on an open position can suddenly be psychologically “too big to take.” This will immediately cause you to think up ways to avoid taking that loss, which include all the other mistakes that desperate traders make in the heat of the moment:

• doing nothing (hoping for the turnaround that never comes);

• bargaining (an agreement with the market gods that you will accept a breakeven result);

• doubling and tripling down; and

• rationalizing the short-term trade into a longer-term ‘investment’ so that the loss remains unrealized.

If you are noticing any of these behaviors in your own trading, you are not alone. I had a conversation with a Registered Investment Advisor the other day who had recently lost 6 figures doing just this sort of thing. And he’s a professional. No one is really immune to moments of self-deception when the price waves get too large. If you want a quick and easy way to increase your own discipline so you don’t become your own worst enemy, this might help:

http://www.daytradingpsychology.com/increasing-trader-discipline/

www.daytradingpsychology.com (Assistance for private traders.)

www.trader-analytics.com (Peak performance consulting to RIAs, hedge funds and banks.)