The schizophrenic stock market is making a lot of people anxious. Indeed, I almost put my therapist in therapy last week!
As someone who has traded financial markets for more than 20 years, here are a few often hard learned lessons.
Respect the price action but never defer to it.
Our eyes are valuable tools when making financial decisions but if we react to the price action, stocks would be "better" up and "worse" down and that's a losing proposition.
Discipline trumps conviction.
No matter how strongly you feel about any stock, you should defer to the principles of discipline when trading. Always attempt to define your risk and never believe you're smarter than the market.
Opportunities are made up easier than losses.
It's not necessary to play every day; it's only necessary to have a high winning percentage. Sometimes the ability not to trade is as important as trading ability.
Emotion is the enemy.
Emotional decisions have a way of biting you in the ass. If you're personally attached to a position, your decision-making process will be flawed. Take a deep breath before risking your hard earned coin.
Zig when others Zag.
Sell hope, buy despair and take the other side of emotional disconnects (in the context of defined risk).
Adapt your style to the market.
Different investment approaches are warranted at different junctures and applying the right methodology is half the battle. Identify your time horizon and employ a risk profile that allows the market to work for you.
Maximize your reward relative to your risk.
If you're patient and pick your spots, edges will emerge that provide an advantageous risk/reward profile.
Perception is reality in the marketplace.
Identifying the prevalent psychology is a necessary process when trading. It's not "what is," it's what's perceived to be that dictates supply and demand.
When unsure, trade "in between."
Your risk profile should always be an extension of your thought process. If you're unsure, trade smaller until you identify a comfort zone; when in doubt, sit it out.
Don't let your bad trades turn into investments.
Rationalization has no place in the investment process. If you put a position on for a catalyst and it passes, take the risk off — win, lose or draw. Good investors know how to make money; great investors know how to take a loss.