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When the Market's in the Mood, But You're Not


How to get past the negativity.


Professor Smita,

It's been quite frustrating missing a major part of this rally. I became so used to being negative, and it's difficult indeed to change one's thinking. Yes, of course - emotion is the enemy of good trading (especially when the Dow and the S&P 500 have been making the kind of moves they've been making).

But emotion kept me out in the first place. How is one supposed to deal with a changed thought process as the moods of the markets change?

-Minyan Brian

Dear Minyan Brian,

What an excellent question! I've been talking to a few Minyans who did very well last year, but felt so confident -- even in this uncertain economic environment -- that they found it difficult to change with the changing price action. So they're feeling frustrated even though they're still ahead of the market.

Some thoughts on this: Personally, I have a defined goal in my trading. I realize that I quote this article very often, and it's not meant to discuss any particular goal - it's just meant to stimulate thoughts of setting your own goals. After all, if you don't know where you want to go, how are you going to get there? (And you can find me saying this all the time, too!)

Given that money management is a lifelong marathon and not a sprint, it should take the pressure off for missing a few moves here and there! If there's anything that the market regularly offers, it's an abundance of opportunities.

We've all been out of sync with the market at times. Everyone is guilty of trading with a particular belief, and the justifying trading stance on that belief. Once our trading stance has been rewarded in the past, holding onto the belief seems even more rewarding!

On that thought, here's an excerpt from a previous buzz of mine; I just tweaked it a little to suit this note.

"The first quirk is what I already touched upon earlier; we fall in love with our beliefs. The second is that we focus on what we may lose (the fact that our stance has rewarded us in the past), rather than what we'll gain, and our natural aversion to loss makes this more difficult. Finally, we assume that other people (market) will see the transaction from the same perspective as we do.

"All this prevents us from changing our beliefs, when the position moves in the unintended direction. And not taking that initial first step can be devastating, because once that golden moment of objective assessment is gone, one might be left only with a series of rationalizations culminating in 'deer syndrome' (I coined this term during the last bear market in a note to Don Worden of Telechart; a friendly reminder-to-self about what happens when deer are transfixed by the headlights of an approaching car!)."

Being aware of your emotions helps you work around them; awareness helps to not compound one lapse in judgment into a cascading series of mistakes.

I usually try to break away from the gravitational pull of my own beliefs by taking a small position. It's like trying a bite of a new dish; you try it hesitatingly at first, and once it suits you, you try more. Similarly, a small position can break the ice and help with turning a firm stance around.

So, wait for more opportunities. A clear mind can help spot when they're here.

Good luck in your trading

Professor Sadana

In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.

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