The Myth That Can Be Your Downfall
02/02/2012 4:30 pm EST
Trading for fear of missing a big move should be the last thing traders worry about, says Joe Fahmy, who instead advocates patience and catching portions of confirmed market moves.
One of the things that can really hurt your trading account is forcing a trade when you are fearful of missing out. Our guest today is Joe Fahmy to talk about that and how to avoid that fear.
So Joe, we’re all afraid of missing the big move in the stock market, but sometimes that can lead to problems.
Yeah, I always say the fear of missing out is the downfall of most traders. I will even say it again: the fear of missing out is a downfall because everyone is worried that they are going to miss out.
Let’s say you have a move from January 1 until April 1. Your goal isn’t to get in on January 1 and get out on April 1; you don’t need to get the bottom and you don’t need to get the top.
You wait for a confirmed uptrend—and I look at volume in the market, whether it is follow through, accumulation, whatever terminology you want to use; making sure the big institutions are putting money to work and accumulating the market.
Once you get that confirmation and you have a good uptrend for six weeks, 12 weeks, even up to three to six months, you don’t need to worry about missing the beginning of the move because once it is confirmed, it usually means that it is going to go on for a little while.
And catching that absolute bottom is so rare that doing it is probably luck, so you probably shouldn’t worry about doing that.
No, that is the last thing you should worry about. Everybody says “Oh, I’m going to miss out, I’m going to miss out,” and I hear that all the time and I say “You’re not going anywhere!”
I have a friend that has been trading for 50 years and he has done very, very well and can retire, but he can still trade. So let’s say you make ten million dollars tomorrow, guess what? You are going to be trading the next day.
So I always tell people there is no rush; just be patient, wait for your pitch, so to speak, and to use a poker analogy, wait for the premium cards to give yourself a high-probability situation. That way you can take advantage of the uptrend, and to use my January 1 to April 1 analogy, even if you get February and March—just two of those four months—it’s okay, there are still plenty of opportunities during those uptrends.
Now I know that you are comfortable being in cash and not trading at all. Did it take a while to get to that point? Did you once say, “Well, maybe if I’m not long, I’ll just be short; I should be trading something.” How did you get to this point?
It took me a while. It was a learning experience because I have been trading for 16 years. The first 12, I would make money when the market is going up and give a whole bunch back in the downtrends, and I did post analysis of my work and I realized, “Wait a minute, I shouldn’t be trading.”
I knew there weren’t good times to be trading, but it was that fear of “Oh, the bottom might come,” or again, the fear of missing out affected me.
It’s kind of like when you are young and your mother says not to put your hand on the stove; I was putting my hand on the stove and getting burned, so now I don’t do that anymore. I’m just not going to trade during those times.
So maybe a trade journal and seeing that you are losing money at times when you shouldn’t be trading at all is a good way to figure it out.
Absolutely, that is a very good point. A trade journal and doing post analysis of your work.
When you study historical traders, the old school guys from the 20s and 30s, they are the ones that tell you the less you are in the market is actually the better, versus the traditional people who tell you to always be in the market.
You want to pick your spot, so to speak, when it is healthy.