Friday, May 31, 2019

How to Handle Trading Setbacks

In the most recent blog post, we took a look at the yellow caution signals in the market.  My concern was that these were very similar to the signals we saw late in 2018.  In both cases, we saw waning breadth; in both cases we saw oversold levels that normally, historically lead to bounces fail to produce meaningful rallies.  When a historical edge doesn't play out, that often represents important information:  something idiosyncratic is at work in the present market.  In the case of the recent market, the dynamics of trade wars are one of those idiosyncratic factors.  Continuing lack of resolution and, indeed, escalation of the conflicts has led to a significant pullback in stocks.

I am hearing from a number of traders and investors who have drawn down during this period or who are frustrated over having underperformed the seeming opportunity set.  I've also heard from traders who have pretty much been on the sidelines during this time, unable to deal with the headline risk and increased volatility.  What I hear specifically is self-blame, feelings of hopelessness and discouragement, and fears of losing (more) money.

Those are not good mindsets for trading.

The tricky part of handling trading setbacks is that it is precisely the traders who take trading most seriously who are most vulnerable when things go wrong.  It's wonderful to make trading your passion when things go well, but it can feel pretty dark when all turns south.

I encourage readers to check out the most recent Forbes article dealing with the principle of diversification in markets and how that idea applies to our lives.

There will always be setbacks and disappointments in trading.  At best, it's a probabilistic endeavor.  The great baseball hitters fail to get on base more often than they get on base.  Even if they have a wonderful 50/50 on-base percentage, it's inevitable that they'll have games during the year where they fail to get to first base.

Diversification in markets means that we have investments that can perform well while others draw down.  Stocks have fallen considerably during May, but investment grade bonds have performed well as safe havens.  That balance keeps us in the game:  financially and emotionally.  In life, diversification means that we have activities and involvements that pay off, even when markets cannot give us hoped-for returns.

A great way to handle trading setbacks is to double down on our relationships and interests and spend meaningful time (time with meaning) away from markets.  The best way to sustain passion in one area of life is to have other things that renew you in times of disappointment.  Yes, we have to learn from our trading mistakes and turn that learning into goals and plans going forward.  Often, however, that can't occur until we've renewed our energy by immersing ourselves in the activities that bring us happiness and fulfillment.

Further Reading: