How Market Moods Affect Your Trading
06/17/2014 8:00 am EST
Markets go up. 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 abysmal lows, says Frank Kollar of FibTimer.com.
Why do market trends have such power over emotions?
Moods and Decisions
They don't need to, but many new market timers have difficulty keeping an objective mindset. 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.
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.
Disappointment and Despair
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. Using bear funds does level the playing field, but there is a psychological issue as well. It is difficult to know how to handle falling prices.
For example, humans tend to be risk averse. When one is in a long (bullish) position and the markets suddenly turn, it's hard to accept losses, and even harder to execute a sell signal to protect capital before more damage is done.
Denial and avoidance set in. At that point, a market timer with a losing position panics, hopes that things will turn around, and waits for events that are unlikely to happen.
Usually market prices continue to fall, heavy losses are incurred, and as expected, disappointment and despair set in.
Think of the Big Picture
It's critical to your survival 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 will likely see many small losses as a market timer and that you should "expect" to see the markets turn against you.
Second, it's important to manage risk. Assume that the markets are likely to go against you occasionally. Don't risk too much on a single trade. Diversity has a place in market timing as well as all trading. Most of FibTimer's strategies have diversity built into them. Be sure to follow them, as they were designed to be followed.
Think of the big picture: The long-term profits across a series of trades are all that matters, not the result of a single trade.
Third, follow a timing strategy with discipline. Trading by the seat of your pants is not the way to realize a profit. It is, however, the way to ruin.
Don't allow your mood to fluctuate with the ups and downs of the market. By trading in a disciplined manner, you can cultivate an unemotional, logical mindset that isn't overly influenced by market moods.
Armed with the right mindset and a disciplined timing strategy, you will be able to realize the huge profits that winning market timers achieve over time.
By Frank Kollar of FibTimer.com