Over my almost two decades in markets, one of the key distinctions that I have witnessed time and time again – which separates those that win and those that lose, in the markets – is trading psychology.
As we see the uneasiness that has come from the vast array of negative influences out there (China slowing, Iron ore prices falling, unemployment rising, the threat of terrorism on our shores, “Scotland’s vote” etc) have taken effect, many have already run for the hills, presumably to their bunker full of canned food!
Half full or half empty?
During my career I have been very fortunate to be surrounded by positive and professional people – I guess it helps when it is your firm! In seeing the glass half full, when things get a bit nervous or twitchy in the market, we look for the positive – the opportunity – the light side.
Part of this comes down to mindset (no not sitting around meditating and chanting for money to flow to you like rivers of water) but by looking at things from the opportunistic, not fearful side of the coin. Seeing the market as it is, not good or bad.
Being scared to squeeze the trigger
When things cut up rough, some people are paralysed with fear and as a result do nothing. They watch what they thought would happen, happen and then say told you so or ouch, why did that happen to me? The great thing about markets is that there are opposing views – neither is necessarily right, but they provide the opportunity to trade.
Just this week, I was speaking at an event where the prophet of doom, rear vision mirror “expert” was beating his chest having said the market was likely to correct. I wonder whether he made money from it, as there are a lot of hindsight experts out there!
Financial uncertainty blows a cold wind – like winter and as my good friend, Tony Robbins says, winter is the best season of the year, when you know how to ski!
So a pull back of a few hundred points in the market is financial winter for those people playing “buy and hold” and they wait nervously for whatever comes next.
Or being to stubborn to change
By contrast, our clients that traded our XJO (ASX200 Index) short (taken via a bear call spread) made a cheeky 47% ish from this pullback – we closed out last Friday. And yep, I know our compliance police will want me to tell you that trading involves risk, and past performance is no guarantee of future performance, which I also told the audience at the event.
Sadly, I wonder if they were told of the risks of blindly having a buy and hold portfolio and hoping it goes up. After all, the past few weeks, they have seen their portfolio valuations decline. As I spoke, more of being more nimble and trading the market like you play Chess, not draughts/checkers, it was interesting watching as those with arms folded and closed to the idea embarrassingly hung heads in shame, feeling left behind, again.
I know it can be hard, so how can it be made easier?
Being able to master the psychology of trading and investing is tough – we put out the most incredible trading psychology program a few years ago – it has been a cracker of a product, helping those who have got involved massively. However, this is not about a pitch for that product.
So how can you remove the emotion from trading?
An easier to apply solution to the problem of emotional decision making is the use of non-emotional trading strategies. Ones that you take all the trades, manage the risk all the time and don’t rely on our daily swings in emotion, optimism and fears.
A year or two ago, we offered a select group of our clients a product that did exactly this, where traders could learn how to automate their strategies, test them and be confident in their application. On Monday, I am very pleased to announce the architect of that program joins our Analytical Research and Strategy team full time and will be guiding many of you in this area, particularly for Futures and Forex.
The great thing about this is that your emotions are managed out of the decision making on each trade – in other words, the biggest variable from your strategy has been taken care of! Instead, the strategy executes the same way each and every trade, providing a passive and manageable strategy for just about anyone.
If you would like to connect and get some information on this type of trading and investing click here.
Meantime, many of our emotions will be clouding our football opinions this weekend so good luck to all teams involved – may need to get a new battery for the Foxtel remote!