If you enjoy the power of modern motor vehicles, it is tempting to put the pedal to the metal on occasion because the human nervous system is finely attuned to speed and momentum. It feels good.

I vividly remember a recent test drive in a Tesla Model S, which delivers about 1000ft/lbs. of torque at the wheels at zero RPM. It was a brain tickler. 

In trading, however, we go a step further and read meaning into momentum.  We move from “sensation” to “significance.” That’s a problem and it can cost you.

Flash Crash
If you were trading on Tuesday January 21 you were probably blindsided by a sudden downward acceleration that started in the S&P futures around 11 am Eastern Time. The S&P fell about 8 points in just a couple of minutes. The avalanche was triggered by more than 6000 futures contracts hitting the bid in less than 1 second.

Markets tend to fall about twice as fast as they rise, but this was “flash crash” behavior. Did it cause you to anticipate more downside? (That’s Recency Bias.) Did you manufacture reasons/justifications for this behavior in your mind? (That’s Confirmation Bias.)

It would be normal if your thinking were altered, but a sudden shift to the dark side could result in a serious tactical error. Within a few hours the damage was repaired and the S&P 500 closed the day in the green.

Slow Crash
Tuesday’s action may have reminded you of  the more subdued waterfall decline that happened about a week ago (1/13). The selling lasted all afternoon on that Monday, but the very next day the S&P rebounded and fully recovered before the closing bell.

Don’t Get Fooled Again
What do you make of all this? Theories about causes abound, but the most important thing is to be aware of how market momentum can fool you at any time on any scale.

It is easy to attribute/manufacture meaning where there is none. One can quickly mistake the end of something for a beginning, especially if you are biased. Check your trading for these tendencies and if you notice them, focus on finding neutrality in the eye of the storm.

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Learn more about Dr. Kenneth Reid —a day trading coach here.