Keeping Perspective While Trading

10/26/2009 10:54 am EST

Focus: STRATEGIES

Nick Perry

Equity Options Trader, Schaeffer's Investment Research

Last month, I discussed the advantages of having a support network. It can help you weather the bad times and help you keep a level head during the good ones. Today, I want to get back to the task of revisiting some older comments from the archives. If my notes are correct, this was first published nearly three years ago.

Keeping Emotional Responses in Perspective

Not too long ago, I sat down to do some quick math. By my (admittedly rough) guesstimate, I had logged somewhere north of 6000 hours of hardcore, real-time market watching. As I reflected on that, I found that there were few other activities I do that could compare to that much time. And this market time included events such as:

  • October 1997, when they halted the market when it tripped the old downside breakers (I still remember the cheer my colleague uttered: "Woo hoo, we did it!"—and then the silence as everyone pondered what she meant.)
  • The absolute insanity of the bubble run up where stocks doubled before your eyes (Oh how wonderful it was!)
  • The agonizingly drawn out decline throughout 2001 and 2002 that was characterized by a slow erosion (and face-ripping rallies if you were short)
  • January 3, 2001, when the Fed made a surprise announcement that it was lowering the federal funds rate by 50 basis, points sending the SPX up 60-something points, nearly five percent (and being net short before the announcement)
  • Watching sideways trthe most experienced trader on the block. I have seen just a fraction of what Bernie has seen in his yeaading ranges that were incredibly, maddeningly tough to trade, yet dull to watch (To the point that I tried to gather up support to offer up our office intern as a human sacrifice to whatever market force would end that pain!)

My point is not to imply I am rs and years of experience. I also know that some of you may have logged more hours in the market than me.

I only want to point out that I have been paid to sit and watch the market, which has afforded me an experience that many do not get. I also have a support structure that has allowed me to keep my sanity (what little I had to begin with) and learn to deal with the ever-changing environment.

My reason for pointing this out is that I am still amazed at how I can find myself pulled into the heat of the moment and lose perspective. Once you catch the "market bug," you can find watching the action almost hypnotic. And this can lead to poor decision making and "deer-in-the-headlights" inaction. It is very easy to get caught in the moment and make decisions based on an emotional response to what you are seeing.

If you have ever done this, you know what I mean. After things have calmed down, you look back at the decision and aren't sure why exactly you made it. Of course, in my experience, the decision was usually a poor one. I wanted to point this out as something to be aware of.

The interesting aspect to trading is how certain things don't seem to change. When I think back to the craziness last fall, I can still remember fighting just to make myself blink. The action was so intense that it was tough not to get drawn in.

With the benefit of hindsight, we now know that March 6 was the low point for the S&P 500 (SPX). Just for fun, I went back to see my closing comments on that day.  It was titled,  “Another Rough Week as the Dow Jones Industrial Average Drops 435 Points.” I would like to think that years of experience have helped me to think past the intraday noise. Of course, my comments about a “bear-market snapback rally” show that I completely underestimated the potential for the market to turn.

In future posts, I will share some of the thought processes and techniques that have helped me.

By Nick Perry of Schaeffer’s Trading Floor Blog

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