Friday, February 05, 2010

Volatility of Markets and Moods

"Any invariant set of rules for stops, targets, and position sizing--in other words, rules that don't take market volatility into account and adjust accordingly--will produce wildly different results as market volatility shifts. For that reason, the market's changes in volatility can create emotional volatility. We become reactive to markets, because we don't adjust to what those markets are doing.

Personality research suggests that each of us, based on our traits, possess different levels of financial risk tolerance. Our risk appetites are expressed in how we size positions, but also in the markets we trade. When markets move from low to high volatility, they become threatening for risk-averse traders. The volatility of markets contributes to volatility of mood because the potential risks and rewards of any given trade change meaningfully."

The Daily Trading Coach
p. 62