When The Market Turns Against You

Four Stages Of Trader Grief

I thought this might be a good time to delve deeply into what to do, or what it is possible to do, when the market turns against you. You may wonder why I choose now to write an article like this and I will be straight up with you. It’s because I just lost my ass on a couple of trades when the market turned against me. It is a fact of life that all traders must face. The market will sooner or later turn against you. There are many reasons but complacency is top on my list right now. I personally grew complacent with the market, and specifically with the S&P 500. It had been trending and giving technical signals for over two years and I failed to recognize the warning signs. The short term signals were lining up for yet another chance to buy calls on the market and I was ready to go. I brushed aside mounting global issues, ignored long term indicators and traded the way I wanted the market go. And I lost quite a few trades. There are quite a few things that I could have done in this situation. It’s kind of like dealing with grief, there are stages to how a trader reacts. The best see it through and move on, the worst wash out of the market. Following you will find a look at what they are. . .

Freak The Heck Out!

It would have been easy to freak the heck out. I mean really, my analysis had failed, my trades turned against me and I lost a bit of my capital. I could have gotten really upset, thrown things around my office, smashed pictures, tossed vases and thrown a general temper tantrum. It is very tempting and would have felt good at the time but really accomplishes nothing. Of course, freaking out can also provide a learning opportunity, if you can see past the haze of losses to the real prize…experience. Why are you freaking out? Is it because you made a bad trade or is it because you just lost money you can’t afford to lose? This is a fundamental difference in “freak outs”. The first freak out I would say is healthy. If you freak out because you made a bad trade, or you were mistaken in your analysis, or you overlooked an important factor that is good. For me it inspires a need to know why, to understand and to grow as a trader. The second kind of freak out is not healthy and a symptom of an underlying sickness. If you are freaking out because you just lost money you can’t afford to lose then you are engaging in high risk behavior that needs to be adjusted. Attitude and behavior are the key to long term success.

Give It All Up!

The next phase is the desire to give it all up. Just throw up your hands, tell the market to flip off and move on the next part of your life. It would be easy, just stop doing it, but if you are like me you won’t be able to. This doesn’t mean that you shouldn’t give it up, if trading is not for you. Trading is full of risks, and risks equal worry, and this worry can be a burden not all are capable of dealing with. It’s OK if you decide that trading is not for you, but don’t just give it up because the market turns against you. It’s not uncommon to stumble and fall, especially if you are a newbie or have only been trading a short while. Giving it up may seem like the thing to do at the time, just remember, you can always come back.

Take A Step Back

The next phase of the progression is to take a step back. By now some traders have washed out of the market because they used money they really didn’t have. Others have dropped out for one reason or another. Those that quite for a time, but come back to the market, can be said to have taken a step back. It’s OK, I do it all the time and it’s what I am doing now. I am taking a step back, reevaluating my positions, checking the long term technicals and waiting for the next great entry. It takes a mature trader to do this, some will be tempted to jump right back and the odds are they will get washed out by the same forces that put them in this position to begin with. If the market isn’t acting the way you think it should then step back, wait, watch, learn and then get back in.

Get Back On The Bull

When you get knocked down the best thing to do is to get right back up. This doesn’t mean to jump right back into the market but it does mean that you shouldn’t freak out, you shouldn’t give it up, you should take a step back and get ready to jump back on the bull. It is OK to lose tune with the market, to be out of synch with its movements, you just can’t let it ruin you. I didn’t. Learn from your mistakes and move on. In the end you will be a better trader, and a better person.