Monday, July 7, 2008

Are you fighting Trading Reality?

I found it somewhat amusing to notice the really bullish tinge that we're hearing from some of the "experts" right now. Lehman Brothers and UBS are saying that the S&P is going to go up 18 percent in the second half of the year. Also I keep seeing reports on how the U.S. dollar is at a high with the Euro - for the past week.

To me these reactions to the market mark a state of denial. As many of us know from personal experience (or anecdote) living in denial in the markets is a dangerous state of mind. We all have this amazing capacity in our minds to deny what is right in front of us - what any 4 year old can see. We are in a "long bullish" trade (at least that's how Lehman's and UBS's money is talking) and we are telling ourselves that yes we are currently in a tough spot (ok we're down like 50% in this trade) and that things HAVE to get better. We'll that's not true - it CAN and if it can it WILL get worse - taking all your money with it. The mistake is not getting into the original trade, the mistake is compounding the error by denying that we were wrong and the market is right. The market is always right.

You've probably heard all of this before, you may have even made the same mistake before and vowed never to do it again. But again any of us may slip into this mistake - even the most experienced of traders. So what can we do about it? In my opinion carefully tracking the statistics of your trades and having a drop dead point (i.e. intelligent stop loss and daily/weekly/monthly/yearly stop limits) is the only way. Of course the only way to have confidence in your drop dead point is to test it. And we are doing that - right Lehman?

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