Trading anxiety seems to be hitting new highs once again, leading me to ask if there’s no shortage of things market players will worry about. It’s amazing how long a “wall of worry” has been up, even though the market isn’t showing it. Instead, we are seeing high complacency among traders and investors (which may not be a good thing over the long haul).
Personally, I believe that the current trading anxiety is way overblown. Just look at market activity: it has continually overcome cautious behavior, which is an ideal condition for a strong rally. With that said, I can understand anxiety about the future – and our worries reflect that:
When will the Fed raise rates? How long will the rate hike last? Is the Fed really upset over market valuations?
How about bonds? Will yields continue to rise? What is the message here?
Oil prices and other commodities have risen lately. The dollar has cracked lower. How is that going to affect the economy?
And we haven’t even started to talk about overseas economies. China is probably slowing more than anyone would like to admit. The Europeans are entwined in a very dicey game of QE. How will these scenarios shake out?
It stinks that many of these worries are out of our control. We are only left with a response, and hopefully it’s not too late if/when the stuff hits the fan.
So, what is the cure for trading anxiety?
Listen to the market
The market will do its thing and respond to events accordingly.
Remember that the stock market is a great discounting mechanism
Market prices today move on economic expectations that are about six to eight months out. Today’s market is reacting to the economy at the beginning of 2016! Keeping the time frame context in perspective is important to understand the current levels of sentiment and worry. When the market reacts to current news, its moves are usually short-lived (unless the news greatly impacts the future).
Estimating damage to the market is tricky at best
We cannot begin to quantify the damage of major events to the markets. The massive drop from the financial crisis in 2008/09 is still fresh in everyone’s mind, and nobody would like to replay that disaster. Interestingly, I recently read an article that was published in the 1950’s in which some “survivors” of the Great Depression were interviewed. Their chief concern back then was another depression, yet they were living in a time marked by good economic expansion, low interest rates and the first stock market pop higher post-Depression.
Buy protection when trading
Our best remedy to wiping out worry is simple: Buy protection or insurance. In options trading, we can do this by layering a small amount of put options (buying) as protection against any events we cannot foresee. If we own stocks and are in a very low volatility environment (like what we’re experiencing today), then buying this protection is rather inexpensive. But remember: insurance need NOT pay off (think about your homeowner’s, health or auto insurance policies – they’re great to have if you need them, but hopefully, you don’t need them).
From where I sit, options traders are scared of losing before they ever get comfortable with a trade. What puzzles me most is the need to pull money off the table too soon! Instead of thinking about winning, they are worrying about losing. If you get off the train far too early, you will end up paying for it, not only in your account but in your mind, too.
How many times have you said to yourself, “If I had only stayed with that trade a bit longer!” Even the greatest investor of all time, Warren Buffet, said
“The stock market remains an exceptionally efficient mechanism for the transfer of wealth from the impatient to the patient.”
So: Can you be patient and let your trades work for you?
