Reacting to Losses
So we have a string of losers… we follow our strategy perfectly, take positions in good quality names in sound consolidation patters. We have 5 positions open. One by one we get stopped out. We have a 10% draw down. How do you react to this? Do you feel mad, feel like ripping the face off your monitors? Want to make the money back!? It is at this critical moment that you have a very important choice to make.
You can get over aggressive, take on a gamble trade to try win the money back. You will most lilekly trade something not in your strategy at this point. You may also trade at the wrong time in the market. You feel mad, and have a loss. Your trading on emotion. However the market does not know you feel this way.. the market will just do what it was always going to do… most likley you will lose again. Say screw this and walk away from the machines. That is one scenario.
The second is you take a step back from the machine. You do your numbers, which are showing your batting average for this current time is down in the low 30′s. Your numbers are telling you to scale back. 2 things can be wrong here. “The market is hostile, or your selection criteria is wrong”. The exact steps to do now are almost counter intuitive. You must at this point SCALE DOWN YOUR TRADING SIZE. If you are getting stopped out of everything, the market could be at the start of a new correction. IF YOU SEE A PROMISING SET-UP. Take it with small size to test out the waters again! If you are wrong again, you are only wrong on a small position which will keep your profits intact!
The exact same approach goes for getting back into the market after a bear market/correction. The waters must be tested with small position size. Use the current volatile environment we are in right now. Would you want to be walking into 2-3% gap downs fully invested? This is how you sleep at night. Make your trading much easier. Test the waters with small positions, when those positions show you some decent gains… you can then step up the size and get more aggressive.
Your wrong a lot of the time
The big question is: Do you want to be right? Or do you want to make money? FULLY accept this part of trading. You are wrong a lot of the time. When you can fully accept this, many conflicts quickly dissolve. You no longer say, DAMN should have held it, or damn I should of sold it. You will no longer be afraid of making decisions in the stock market.