Last week I wrote an article on why Bull Markets can be dangerous. Simply put, they often lull us into complacency and tempt us to ignore standard risk controls. Then, when volatility increases, we are not prepared for the rug to move and the walls to shake.
There’s a principle in Complexity Theory that says: More is different. It means that in complex dynamic systems, arithmetic increases in a single parameter can produce qualitative (as well as exponential) changes in the stability of a system.
For example, if your heart rate increases just a few BPM beyond a certain level, the circulatory system reaches criticality and cardiac arrest ensues. Virtually every episode of House shows an example of this.
The market has a heartbeat, as well. I trade futures every day. On Tuesday, we had several 20-point runs in the Nasdaq futures over a period of 30 minutes. One 30 minute bar was down, another was sideways and another was up.
Cognitive Arrest
Such intraday volatility can shake the psychological foundations of active traders and may lead to instances of “Cognitive Arrest.” What does that look like?
There are four main varieties: you may feel like a deer in the headlights (the freeze response), or may find yourself fighting, fleeing or folding (capitulating).
You need to monitor your own behavior and mental state during such volatile periods. Otherwise, if you continue to act, your actions will almost certainly be counter-productive.
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To find out whether you are at risk of “Cognitive Arrest” you can take my free Risk Profile by filling out a short form. Afterwards, you may also contact me for a free 15 minute Consultation to discuss your results. Traders tend to isolate because our profession is so unlike other careers. If that’s true for you, you might benefit from a chat with another trader who understands trading psychology. And there’s never any obligation. Daytradingpsychology.com
