Working against yourself

So I got an email from someone saying, “Hey, Mike, you know the things that I’m looking at and my screens – they’re not working, nothing’s working, I’m looking at the name. So I’m wondering should I switch to options?” And my answer is no, now’s not the time to start trading a new asset class with a new strategy because your screens for your normal trading, aren’t working out.” Now, if you want an education, by all means study a new asset class, study a new trading style, for sure. But if the market is communicating with you and saying now is not the time, then take solace in sitting on your hands. Because as a speculator, you have one thing that big 40 Act companies and other large institutional investors don’t have the opportunity to do…and that’s the right to not participate.

Being able to sit on your hands is a great advantage is especially if you’re a long, only player trading a certain capitalization or you know, a certain whether it’s growth or value, international domestic, doesn’t matter to me. If what you’re screening for and what’s worked in the past, isn’t working right now, then now is not the time to force the issue. The universe is communicating with you very, very clearly. All you have to do is listen. Now you might feel like you’re missing out on opportunity, but I can assure you that that’s not the case because the opportunity that you’re missing out on might very well be not inducing a drawdown or a further drawdown by you exercising your right to not participate. You know, everyone thinks that, well, I have to sit on my hands. I’m missing opportunity.

Well there’s opportunities to make. There are opportunities to make and there are opportunities to lose. So which one do you think you’re, you’re missing out on? Most people don’t like FOMO is that there’s some gain that you’re missing out on or there’s some economic utility that you feel you should be getting that you’re not getting. So my whole take on all of that is sit on your hands, take it easy, wait for the market dynamic to change. And if you want to study something else, no problem. I wouldn’t put any money to work on it because it seems to me that you’re looking to fill an emotional need. Not necessarily a financial one, because everything moves and ebbs and flows. What works today might not work in October in several months. And what works in October might no longer work anymore. And the things that you worked from January through whatever this is – early September will come back to working again. You know, the trick is to be able to endure those periods of time because there’s a financial drawdown, but there’s also an emotional draw down. And of course you want to make money.

Of course you want to focus on playing superior defense, but there are times like this when you might find for your particular style that it’s time to sit out. Doesn’t mean you’re a loser. It doesn’t mean you’re not trying to act like a pro. It doesn’t mean anything about you as a person. Your job is to manage risk and with that to play superior defense. So anything that goes against that is you fulfilling some kind of an emotional need. Not a financial one. And again, I agree that there are two different outcomes to a particular trade, financial and emotional. You don’t want to find yourself in a spot where you’re putting on trades because you feel like you have to, because that’s when you start losing money and then you look back and trust me, I’ve been there and you’re like, why did I put that trade on?

Maybe you’ve already been in those circumstances, but you could easily avoid doing any of that by thinking ahead of time saying “I don’t want to have those regrets. I don’t want to do something for the sake of being active.” And then two months out into the future, look back and say, huh, I invited a 5, 10, 15% draw down to my account because I couldn’t just sit still. And I’ll argue that this is something that the majority of you suffer from is that you feel like you always have to be active. A good example of that is the weekly and the daily charts are down, but you’re going to downtime it to find something that’s working. There’s, there’s an up trend in like a 1, 3, 5, 20 minute bar. So even though those numbers and those levels are not statistically significant because you’re still in a protracted down trend, you have to find a way to see some kind of an uptrend.

That to me is forcing the issue. And when you force the issue, just like in relationships, it doesn’t typically work out. And if nothing else happens, it doesn’t put you in a good light.

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