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Last week I was like most traders around the world. As the markets fell, I was biting my nails, drinking gallons of coffee and waiting anxiously for the next leg down. Each morning I would wake up and check the markets on my phone before doing anything else.
But as last week’s violent market downturn fades into memory, I feel calm enough to reflect on what happened. I want to think about what happened and how I responded to it.
Losing trades aren’t for losers
There were times last week that I felt like a loser.
Loser is a horrible word. Nobody wants to be a loser. I lost my job, I’m losing my religion, my football team lost…
However much we try to distance ourselves. It is so hard to separate our true selves from our performance at trading. We feel good when we have a winning trade and sad when we have a losing trade. There is no easy way to deal with this, but there are a few things we can do to improve it.
We can try to reframe our attitude. Every time we make a trade, assume that the money we have risked has gone forever. This way every losing trade is a neutral experience and every winning trade is positive.
We can accept that randomness is a huge factor. Sometimes, through no great skill, we will get big wins. Other times we will make the right moves but still get a big loss. Over time, like a good poker player, we trust that we have the odds on our side.
Finally, take the attitude that we never care about a loser because we are confident in our ability to win on the next one.
We don’t learn anything when things are going well
This is not strictly true. During the good times, we should be raking in the profits and watching our account balance tick upwards. We learn the discipline of doing the right thing consistently.
But when things are not going well, and the markets turn ugly. We see all our carefully gathered profits going down the plug hole. Now we are confronted with our demons. We wish we hadn’t got out of bed. We wonder if we are cut out to be a trader.
This is the time when we find out whether we can open a new trade after five consecutive losers. We find out how badly we are affected by drawdown. Most importantly, we learn whether we can actually trade our strategies.
I can’t see the future!
This was a something of a surprise to me. I often assume that I have psychic abilities when it comes to predicting the market. I can just look at a chart and know what is going to happen.
Unfortunately, despite all the time spent staring at charts and analyzing price action, the evidence suggests that I cannot see the future.
I might think I know what the market is going to do. Often I am right, and I congratulate myself for being a smart person. However many times I am wrong. Sometimes I am too optimistic, often I am too pessimistic, and occasionally I am spectacularly misguided.
This is a tough one for me to accept but at least knowing that I cannot see the future frees me up to trust my strategies. To make decisions based on the analysis that I have done.
Modern-day markets move FAST
Wow, if I needed a reminder that prices can really shift. In one day last week, the Dow Jones had a range of almost 1600 points. In just over a week it fell more than 11% before recovering.
And the markets are global too. This movement is happening 24 hours a day. Stock indices can gap up or down 2 or 3% before we have got out of bed.
There is not much that we can do about this. The only thing we can do is be prepared.
Analysis, Analysis, Analysis
Last week. I spent more time reading and watching Bloomberg, the FT and CNBC than I had in the month before. Often seeking out articles that would back up my current positioning. Then I would stare at my charts trying to make sense of it all.
But all this frenetic activity did not help to improve either my trading or my state of mind. The best way for me to deal with things was to forget about the current situation. I immersed myself in my backtesting and analysis. This forces me to concentrate and take the long view. I could remember why I was trading,
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If in doubt stay out
The only way to make consistent profits is to trade consistently. This means taking all the trades that your system tells you to. It also means closing trades when your system tells you to.
However, we are not robots. Our emotions can take a battering. Sometimes the only thing to do is close everything and sleep well. The markets will still be there in the morning.