Friday, September 23, 2016

SPX and NYA Updates, and the Hidden Psychological Pressures That Can Destroy Our Trades

We're going to get right into the charts, but a bit later in this article, I'll share some thoughts regarding certain hidden psychological pressures that can absolutely devastate our trading ability.

Yesterday saw SPX capture my near-term breakout target, and that target has, so far, stalled the rally:

Near-term, a decline south of 2172 appears likely:

Looking at things in a more bullish light, bears do have to continue to respect the successful back-test of support, which I discussed last Monday:

From an intermediate perspective, one thing is clear:  If SPX can sustain a breakout over the all-time-high, then bears may need to stand aside and wait for greener pastures.  Could a breakout be a head-fake and whipsaw directly?  Absolutely.  But there are good opportunities, and there are "got lucky" opportunities (defined as: "any trade we enter based on hope and not discipline.").  If we risk too much capital on the "got lucky" opportunities, we may hit some winners here and there, but we'll ultimately lose more than we win.  And then we'll have minimal capital left over to take advantage of  high-probability opportunities where the market is all but screaming its next move in advance.

An old adage in trading is "you can't go broke taking a profit" -- to which I'd add another seemingly-obvious statement:  "You can't go broke protecting your capital."  Always remember that you don't need to be in a trade.  Over-trading leads to more over-trading, and it can quickly spiral out of control, due to human nature.  It can start with just few "hope" trades that turn into losers.  Taking "hope" trades already shows your emotions were in the wrong place -- and losing pushes your emotions even further out of whack.  Think of it this way:  If you were lacking discipline when you had MORE capital, your discipline will be even worse when you're trying to regain that lost capital and get back to even. 

Before you know it, you're throwing money around the market like a madman, chasing every move as if your life depended on it.  And then one day you wake up and your money is gone.  Wait, how did that happen so fast?  And you scratch your head and look back at your insanity, and wonder who the heck was trading that money -- couldn't have been YOU, right?  After all, you're not that irrational.  Are you?

Yes, you are.  We all have that in us, unfortunately.  Fortunes have been lost this way, and will be lost again.  And it all starts with a few, seemingly innocuous, temptations to abandon discipline. 

If any of this resonates, and you've been trading without discipline for even a short time (like almost all vices, it usually starts small -- it's the "I'll just have one cigarette" syndrome; before you know it, you're chain-smoking two packs a day), then my advice is:  Put the computer down.  Back away slowly.  And go get your head right before it's too late. 

"But I can't," you say, "I've got to get my money back first!"  Right there, that thinking tells you something extremely important:  It tells you that you haven't accepted your losses at an emotional level yet.  And if you haven't emotionally accepted your losses, you are NOT thinking clearly.  You're not operating from a rational framework, or from any basis in reality.  Your decision-making process has been sabotaged by your emotions; and we simply cannot trade well in such a frame of mind.

I speak from personal experience, of course.  I imagine most traders have been there, at one time or another (although I also imagine that not all will admit it openly).

I got off on a tangent here, but my point, and my advice, is two-fold: 

1.  Learn how to accept a loss.  I mean REALLY accept it.  Let it go, and move on to the next trade with a clean slate.  I believe this is more important than is usually talked about, because unaccepted losses create psychological pressures that operate outside our sphere of awareness, and that makes those psychological forces exceptionally dangerous to us.  We can't fight what we can't see.  Essentially, when we don't "accept" a loss, we are denying reality.  The resultant unconscious psychological pressure comes from trying to reconcile the reality that we pretend exists with reality as it actually is -- and we thus begin seeking ways to reconcile the two realities and bring them into alignment.  Obviously, this means we begin trying to manipulate actual reality to come into line with our pretend reality (never the other way around -- if we preferred objective reality, we'd have no reason to pretend it was otherwise in the first place!). 

So, denial of even the smallest loss causes us to lose at least some amount of touch with reality; and how can we possibly make rational decisions when we're not operating from a basis in reality?  Worse, the hidden agenda in denial causes us to attempt to impose our subjective wills upon an entity that does not change one iota in respond to willpower (that entity being the market). 

So, without being consciously aware of what we're doing, we begin operating from a framework that guarantees our destruction.  The unseen and irrational internal pressures of denial cause us to do things such as hold onto our losers too long, and to jump compulsively into high-risk trades.  Before we know it, the small losses turn into big losses.  And if you couldn't emotionally accept the small loss, how on earth are you going to come to terms with a bigger loss?  Obviously, you probably won't.  So, in the long run, the emotional fallout of denial will actually turn small losses into total losses when taken to its logical conclusion -- which the market will always force us to do, eventually.  At that point, finally, when the money's all gone, there is no room left for denial.  Reality forces its way through in the end.  The moral being:  We are always, inevitably, left with no choice but to accept our losses, one way or another.  Why not accept them early, and come to terms with them while the losses are still manageable?  Denying you have a broken arm doesn't make the broken arm go away, it just delays the amount of time it takes you to see a doctor -- and the consequences of that delay can be severe.

2.  The preceding death spiral starts with a few small undisciplined trades.  If not corrected IMMEDIATELY, lack of discipline begets more lack of discipline.  Like that "just one cigarette" after you've quit... it leads to another, then another... until finally, you completely lose sight of what you were trying to accomplish.  You no longer fight the urge.  And when you no longer even bother fighting the individual wars, can losing the entire battle be far behind?

Anyway, in conclusion, I don't think the importance of learning the skill of emotional acceptance in trading is discussed often enough.  In my opinion, it may be one of the most important distinctions between a winning trading career and a losing trading career.  Trade safe.      

No comments:

Post a Comment