Wednesday, November 19, 2014

SPX, INDU Updates -- and Trader Psychology: How to Overcome "Fear of Missing Out"

At the end of this update, we're going to discuss a bit about trader psychology -- but first, the charts.  Last update maintained no material change in the near-term outlook from Friday, and that outlook ultimately proved to be correct:

In the bigger picture view, SPX is now in the vicinity of long-term resistance:

INDU is starting to look a bit tired, and needs to break out, and cleanly away, past the recent high to negate that look:

In conclusion, the rally has reached an inflection point in the form of long-term resistance.  Another small wave up isn't out of the question, and would, in fact, fit the micro pattern in SPX a bit better (though INDU is clearly questionable) -- however, on a larger basis, the risk/reward equation may finally be on the verge of tilting toward the bears.   Hopefully, bears have been patient enough to wait for this moment -- patience, after all, is a key virtue of successful trading.  Of course, patience doesn't always pay off -- after, all, not every inflection point will generate a reversal (or else they'd be called "reversal points"!).  Inflection points are simply zones where reversals become higher-probability.

However, despite the fact that patience doesn't always pay off, impatience does the reverse, and almost always loses capital.  Bears who have been impatient during this rally can probably vouch for the veracity of that statement -- and learn from it and consider it the cost of tuition.  The market can be a harsh teacher.  

In my experience, impatience is usually the result of anxiety.  Anxiety in trading usually results from fear of missing out on a move.  And fear of missing out is actually the result of an internal imbalance, because it is, at its root, a symptom of desperation.  We'll come back to this thought in a moment.

When I was a boy, my father used to tell me:  

Most people overestimate what they can accomplish in a year, but underestimate what they could accomplish in a decade. 

I believe this wisdom applies to trading in a very significant way.  If you can truly take the long view (and believe me, I know that's easier said than done!) on your trading, then you realize that over a decade there will be hundreds -- even thousands -- of potentially profitable moves.  And that knowledge makes it easier to accept that you're going to miss some of them.  At least, if you're a good trader, you'll miss some of them.  Bad traders will probably have a stake in every one of those moves (until they lose everything, anyway).


Because not every move is predictable.  Not every trade offers good risk/reward.  Not every market is tradeable.  Part of being a good trader is learning to come to terms with that, and being strong enough to say: "I'm not taking this trade, because it's garbage." 

This may be easier to truly drive home if we analogize it into terms other than trading.  Imagine you were a home-builder who built only custom homes.  As a home-builder, your livelihood doesn't depend simply on finding clients; it depends on finding qualified clients.  If you start building custom homes for every random person who walks in off the street and slaps $20 on the table, then you'll quickly find yourself bankrupt.  A key part of your success comes from your ability to properly qualify your clients -- so you have a lengthy set of criteria which determine whether you'll accept someone's business or not.  And you always determine this well-before you start building.

As a home-builder, you simply cannot afford to act purely out of anxiety over the future, because if you build houses for everyone who asks, then your capital will soon be entirely tied up.  And, of course, after those homes are completed, you'll find that many of your clients aren't paying off -- so you're not recouping your investment.  This could have been prevented by qualifying in advance and not building out of a sense of desperation.  Trading is no different.

Good traders will not have a stake in every move the market makes, because they are not entering random or long-shot trades based on anxiety and fear of missing out.  They are entering trades based on signals, patterns, risk/reward ratio, etc..  In other words, they are qualifying their trades in some meaningful way, just as a home-builder must qualify his clients.  And, ultimately, for the exact same reasons.

So, to go back to our talk of decades:  There are thousands of profitable moves coming.  Some of them will be tradeable; some of them will not.  Put analogically:  There are thousands of people lining up to buy one of your custom homes.  Some of them can afford your homes, some of them cannot.

Qualify them before you invest even one cent of your precious capital.

Dump the "fear of missing out," which stems from anxiety and desperation.  It's completely counter-productive and -- given the sheer unimaginable scope of pending future opportunity -- it's unrealistic anyway.  Trade safe.


  1. Wonderful piece Jason!!
    It is spot on for how I feel.

  2. Great perspective on trader psychology :)

  3. Great analogies. Thx for the post