How do you handle it when you find yourself on the wrong side of the market? How do you deal with plunges and unexplained rises that put your positions at risk? Do you find yourself making grave errors and mistakes due to some blip or abnormal market beat?
As an options trader, I know these are difficult predicaments. We try as best as we can to keep the emotions out of our decision process, but we are human. When money is on the line, there is just no escaping the fear and greed. With that in mind, let’s figure out some ways we can bypass some of the bad outcomes that result when fear takes over.
Markets move with tremendous speed. Trying to find our “happy place” in trading is akin to entering a freeway with traffic screaming by at breakneck speed. Further, we have to deal with changes in direction that are quite sudden. We need quick reflexes, agility and keen eyesight, or we’ll be trampled.
This past week saw some of that speed when the markets nosedived on Thursday and Friday. A change in character? Just a correction, nothing to be seriously worried about? As always, we’ll have to see how things develop, but certainly there was some damage done on Friday.
After Thursday’s loss and hold of support the market seemed to want to go higher on Friday. That was not the case, however, after some surprising news hit over debt troubles in emerging market countries. (The timing of this latest news is quite interesting. The US had just finished a remarkable year in 2013, and these troubles were already known.)
The futures reversed sharply overnight as “risk off” mode became evident. The market drop was swift all day long, trampling bulls in its wake. With potential negative news over the weekend, who wants to hold anything for long? That’s a change in behavior – but it might only be temporary.
So, how did I react during the sell off? Was I trying to catch downside trades? Pick up cheap stuff? As a trend trader, that’s not my style.
Was there a short term trend? Definitely, but for the most part, bearish trades have been akin to picking up nickels in front of a steamroller. Shaken but not stirred would be my answer (as I had long call and short put spreads working).
It’s understood that this market has not had a big correction for a long time, and I really could not tell you if this is the start of something bigger. The charts/technicals are my guide, and from my viewpoint, this looks to be another buying chance (much like the four to five chances we had previously).
When you’re on the wrong side of the market results, it’s not easy to stay calm. If you find yourself there, take a deep breath, allow yourself time to figure out your rhythm, and move at your own pace.