- Reasons
- You think that the price is going down, so you sell at $X. Price drops below $X, you feel good that you sold out earlier, then you shift your attention to other things. Now and then you check the price again, and saw that it kept going lower, so you still feel good. Then after a while you start to notice that the price is inching back to $X, so you start to think ‘hmm.. look’s like it’s going back up, maybe I shouldn’t have sold. Let’s monitor this for a while, see what happens’. Your ‘Fear of Missing Out’ and your ‘Fear of Future Regret’ is starting to grow.
- All the while, you had no concrete action plan on how you would handle this, you have not decided at what price or point you would go back in, or would you cut this position out entirely. Without a trading plan decided beforehand, you are bound to react to your emotions.
- Soon, the price moves above $X, and keeps moving up. Finally, you can’t take it anymore, you re-enter your position at a price higher than $X. That helped to ‘quieten’ your ‘Fear of Missing Out’.
- Then as it usually happens, price goes back down again, drops below $X and goes down further. Either your fear of taking a loss kicks in and you stick with a losing position, or you sell out at a loss.
- Solutions
- You have to decide beforehand, even before you exit the position, how you would handle the position. To do that, you need to be clear on the reason why you are selling in the first place.
- If you are selling because you think that the uptrend has changed to a downtrend, or the uptrend is broken, you would need to have specific criteria that you look for to know whether the uptrend has resumed. If the criteria has not been met, even if the price goes above $X, you will not re-enter your position.
- If you are selling because you think the uptrend is still intact but there will be a short momentum reversal, you need to get out and get back in very quickly, usually just catching 1-2 ticks more. This type of play where you react to momentum is highly discouraged. The risk-reward is bad, the skill level, reaction speed, concentration required are extremely high, and it makes you susceptible to falling into the trap of ignoring the bigger market structure.
- You have to realize that you are playing into the hands of the usual fighting that goes between bulls and bears when you keep reacting to the swings, which will naturally make you buy high and sell low.
- In conclusion, you need to be very clear of reason that you are selling. In that way, you would be clear of when, if ever, you would re-enter the position.
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rssNOW is all that matters when it comes to executing that next trade
Lao-Tzu was an ancient Chinese philosopher and writer who coined the following phrase:
‘If you are depressed you are living in the past.
If you are anxious you are living in the future.
If you are at peace you are living in the present’
In relation to trading, living in the past may relate to a bad trade you made. Maybe you risked too much and took a heavy loss. Or perhaps you made an impulse trade centred on FOMO which ended badly.
If you replay negative experiences over and over, it can lead to depressing thoughts. And an inability to move forward, clean the slate and inability to execute the next trade. It can also lead to revenge trading and the urge to make up for past losses quickly.
On the flip side if you are living in the future, anxiety can set in. You end up worrying about your future trades and the money side of things. The bills you have to pay. A list of endless hypotheticals start entering your mind.
Yet when it comes to trading, or anything else in life, living in the NOW is crucial. Learning from the past and planning for the future are ok. Yet executing and focusing on what you are doing right now is most important.
We need to remember as well that the market doesn’t care about our past losses. Nor does it care about our future bills. So although worrying about these things is natural, it’s not going to help us succeed with our next trade. In fact it will likely create unwanted blockages towards future success.
Being and working in the present though eliminates negative thoughts and reduces anxiety. It means you are working afresh from a blank slate. With that next trade being completely independent of any other you have recently made.
Doing the right thing right now is what is important. Not the mistake you made last time. That is ‘old news’ and no longer matters. So focus purely on what is in front of you. Plan the trade, trade the plan and refuse to be tempted by impulse or micromanagement. Two actions that are often influenced by past actions combined with future expectations.
Trade in the NOW and affirm to yourself that the NOW is all that matters when it comes to executing that next trade.