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Are You Trading the Market, or Is the Market Trading You?
12/31/2009 12:01 am EST
Markets go up and markets go down. It shouldn't matter much, but many new market timers find that their own personal mood fluctuates with the markets, moving from extreme euphoria as the markets soar to new heights to deep despair when the markets plunge to new lows.
Why do market trends have such power over emotions?
They don't need to, but many new timers have difficulty cultivating an objective mind set. They allow fear and greed to influence their trading decisions.
They tend to follow the masses, and when they go with the crowd, they soon find that market trends not only influence their moods, but their account balance as well.
Following the Crowd
There's a strong tendency to follow the crowd. There is a feeling of safety in numbers. When you see a steady upward trend, you feel secure. Everyone is buying. They are all doing the same thing.
When other people offer confirmation of your decisions, you feel safe and assured.
In a bull market, it isn't so bad to follow the crowd. When it's a strong bull market, the crowd is often right, and it makes sense to follow them.
However, when the market turns around, feelings of safety and security can turn instantly into fear and panic. Why? An obvious reason is that many new market timers don't have the ability or financial resources to sell short, and take advantage of a bear market. But there's a psychological issue as well.
It is difficult to know how to handle falling stock market prices. For example, humans tend to be risk averse. When one is going long and the markets suddenly turn, it's hard to accept losses, and sell off a losing position before more damage is done.
Denial and avoidance set in. At that point, a trader with a losing position panics, hopes that things will turn around, and waits for events that are unlikely to happen.
Usually, the price continues to fall, heavy losses are incurred, and as expected, disappointment and despair set in.
Emotions and Decision Making
It's crucial for your success as a market timer to stay calm and objective. Don't let your emotions interfere with your decision making.
How do you stay detached and relaxed? First, it's important to accept the fact that you'll likely see losses as a timer and that you should expect to see the markets turn against you. Small losses are an unavoidable part of dealing with the stock market. The trick is just to keep them small.
Follow a proven trading strategy and stick with the plan. Don't allow your moods to fluctuate with the ups and downs of the markets. By trading in a disciplined, methodical manner, you can cultivate an objective, logical mindset that isn't overly influenced by market moods.
Armed with the right mind set, a disciplined trading approach, and a trading strategy, you will be able to realize—over time—the profits of successful market timers.
By Frank Kollar of FibTimer.com
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