The Harsh Realities Of Caving Into Emotional Trading
2022.05.08 14:06
Wow, what an emotional trading day and week. What John said Wednesday in the member’s comments could not be more accurate for most people.
Luckily we safely navigated the turmoil and FOMO brought on by FED announcements on Wednesday, May 4.
- We knew it would be choppy and that trades should only last hours to a day, and you must actively manage positions.
- Earlier this week, I mentioned the only things I liked were Invesco DB US Dollar Index Bullish Fund (NYSE:UUP), United States Natural Gas Fund, LP (NYSE:UNG), and ProShares Short VIX Short-Term Futures ETF (NYSE:SVXY).
So far, UUP is flat; given the recent market sell-off, that’s a win. UNG is up 15%, and SVXY rallied 7.2% Thursday/Friday. These were not official trades, but I gave trading tips and updated you each day and how to handle them if you were to trade them. Get in, make money, get out. - Wednesday’s Fed rally sparked FOMO buying, indexes hit resistance, became overbought, and had a cycle high. Friday, investors bumped shares with the panic volume indicator on the downside, spiking over 31 Thursday afternoon. Temporarily.
Invesco QQQ Trust (NASDAQ:QQQ)
QQQ Chart
Overall, not much safety during panic selling like this, and it’s the reason why I don’t believe in holding stocks in a downtrend or bear market. I get pushback all the time about holding cash, but the answer as to why I do is simple.
Why You Want To Hold Cash Vs Own Stocks
All I have to do is ask:
Would you rather own stocks because you like owning stocks and lose 25-60% of your money if we enter a bear market?
OR
Would you rather have a ton of cash waiting for you to buy your favorite stocks at a much lower price, earn more dividends, and make bigger returns at some time in the near future?
Simple answer….or is it?
That last part, may throw a kink into some of your answers. It’s like that test they do with kids where they offer one cookie now or wait five minutes, and we will give you four. Most people take one cookie, unfortunately, and it defies my question and logic = frustrating!
This leads to the most frustrating part of what I do. I have watched trader after trader make the same mistakes for the past 20 years. They go through the cycle of thinking the markets are amazing, to having a big winning stock trade that hooked them, to emotional FOMO-based trading, to the eventual closing of their trading account.
They get crushed both financially and mentally. No matter what I do to help, most are driven by their emotions, which by the way, is the most powerful decision-making force we as humans struggle to control.
The reality is most traders would rather trade and hold stocks no matter what direction the stock market is going, and here’s why:
- They think they should (lack understanding of risk and position management).
- FOMO, they fear missing out on potential gains and don’t want to be left behind.
- They crave the risk/excitement (the rush of trading is like gambling, it is addicting).
- They cannot contain their emotions and struggle with exiting both winning and losing Trades.
How do I know these things?
Simple, I used to think and trade that way. And it was days like WEDNESDAY when I blew up one of my trading accounts trading ES mini futures. In one day, I lost everything I had!
Facing The Reality Of Emotional Trading
Thursday afternoon I relayed this story to my readers so that they might fully understand why I spend so much time educating people about cash being a wise position when the markets are in the state they are in right now.
You either had a very stressful day and lost a lot of money, or your thought Thursday was incredible to watch and/or trade because you understand market movements, risks, how to trade it, and know there will be a lot more time and price action to earn consistent oversized returns later in a favorable market condition.
I share my analysis, thoughts, and experience with you to help prepare you mentally and emotionally with your portfolio for days like this.
And for the record none of the price action, this week, was anything out of the norm. Wild, sure, but this is typical price action in a bear market.
