"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
.
Subscribe to:
Post Comments (Atom)
Posts
2 comments:
This is an excellent observation. I believe this also accounts for the psychological phenomenon that causes the bullish candlestick reversal signal called the hammer.
In addition to what you trade and how big, your traits determine when you bail out. If enough people can't take the heat and give up, we get the sort of climactic selling that creates the hammer. And of course once there's no one left to sell, the market goes up.
Brett,
This is a great post. I evaluated my trading today and found that I was stopped out of a position due to higher than normal volatility. Initially, I wanted to beat myself up over this, but as I evaluated the trade closer, I realized that everything about the trade was fine except the stop was not wide enough, given the high volatility day that we experienced. I learned something today and your post just reinforced it. I've added a rule that will adjust to volatility levels.
Post a Comment