In times like these where stocks are continuing to look sick and some traders who trade exclusively in that market are struggling to find opportunities that work, I notice that many of the euphoric posts of a year ago have dwindled to a trickle. As this continues (and I’ve been around long enough to see some last a couple of years) the trader’s mental side can slip into a funk.
The trader starts wondering how long will this last? How many losses consecutively can I take and survive? Why didn’t I add a downside strategy when I should have to protect the portfolio? What do I need to tweak in my approach to start making profits again? Should I switch to shorter term time frames to catch brief upswings? Etc., etc., etc.
I have been through so many equity highs and drawdowns, I automatically do what I going to recommend below, but it can really help traders get back into balance. When on a drawdown, remember how you felt making new highs. The opposite is also true. When you feel full of yourself and want to go out and celebrate after a particularly great day, remember how you felt during your last drawdown. That should be useful in knocking you off of the euphoria you are experiencing.
Some of you may not have ever experienced a drawdown yet, especially traders new to the game. Sit back, analyze your strategy that is currently being used and ask yourself, “If I continue to run my strategy during a market where the S&P500 Index goes down by -50% over the next two years before getting back to new highs, what would I expect my returns to look like? That might be a sobering vision. However, you can do the opposite as well. If the stock market is fueled upward by inflationary pressures and ultimately hits new highs, what does my strategy’s results likely look like? They would probably be having a nice run. Always be thinking of the opposite of what is happening now and bring your mental state back to the middle. You really don’t want to be high or low.
Finally, for those that can’t even imaging what their strategy will do in down markets or up markets, you probably don’t have a strategy and you need to pull out some paper and start developing one right away! Hope this helps you enjoy the ride!
Well said, Tom 👍
Any plans on offering a software product? Blox began as a platform to fully test the famous turtle strategy. Perhaps Serenity Software could bring the Basso philosophy to an eager community... Just pondering... ; )