Getting even just doesn’t work.
You’ve just opened your position and – wham – the market drops. As though it knew you had bought and was having a laugh at your expense.
It feels personal.
And now you don’t just want to make money. You want your money back.
Revenge trading, I called it in my books. I know it well.
No Crime, but Punishment
Before I came to my senses with ITM, my immediate reaction was to try to punish the market. I was going to make it sorry it had lost my money. Very sorry. And it was going to give me all my money back, along with a nice apology.
It never happened, of course.
The market didn’t know I existed. But that didn’t stop me taking it personally – or placing another trade just to show it who was boss.
You can probably guess who was boss.
Can I Avoid the Drop?
One of the questions I get asked most is about timing your entry:
There have been three up days – should I wait for a down day? Should I wait for a pullback? Should I wait for the next golden cross?
I understand. Few things are as annoying as opening a position and immediately finding yourself underwater. You haven’t even had time to enjoy owning it.
The ITM rules are clear: if a golden cross is in force, it is OK to enter.
That doesn’t mean the market won’t hand you a loss.
Losses: part of being a trader
We would all like an entry that goes straight into profit and stays there. Unfortunately, the market doesn’t offer that service.
What matters is what we do next.
Perhaps you close the position and go make a coffee. Perhaps you stare at the screen as though you could change the chart through willpower alone.
And then comes the dangerous thought:
How can I get it back?
The Break-Even Trap
Once we are down, a trade that offers a chance to get back to even becomes oddly attractive. Even a bad one. We stop asking, “Is this a good trade?” and start asking, “Will this get my money back?”
Those are very different questions.
A trade we would normally reject suddenly looks reasonable. A bigger position? Some cheap OTM options perhaps? A covered call? Just this once?
We aren’t assessing the opportunity anymore. We are trying to erase what just happened.
A Bad Morning, a Worse Afternoon
Research on professional traders has found this pattern too. Traders who lost money in the morning took more risk in the afternoon than those who had made money.
A bad morning meant bigger bets after lunch. In one study, the traders who did this most lost more than twice as much as the other traders.
But other studies found different results. Sometimes losses made people more cautious. So what explained the difference?
One study checked whether the loss had actually been realised – or was still sitting there on paper.
Hope Is Expensive
Economist Alex Imas looked at whether the loss had actually been realised, or was still sitting there on paper. He found that people avoided risk after a realised loss, but took greater risks after a paper loss.
That is an uncomfortable distinction.
Once a loss is realised, it is done. While the position is still open, there is hope. Perhaps it will recover. Perhaps another trade will make up the difference. Perhaps a bigger bet will get us back to even.
And hope is expensive.
What About Us?
As ITM traders, we can be sitting on paper drawdowns or even losses while we wait for an OUT signal. Following The Plan doesn’t make us immune to wanting those losses back.
Anyone who hasn’t felt the temptation? I certainly have.
If I have just rolled and my new positions are underwater, I am more likely to have a flutter on some OTM options. Not a lot of capital, but enough to feel that I am doing something. Somehow, in my head, I am punishing the market and getting my “losses” back.
Does it work?
Occasionally. Not very often. And even when it does, it encourages me to try again.
A successful bad habit is still a bad habit.
And When I’m Winning?
If I am sitting on a nice profit, I am far less likely to be tempted. Except, of course, during a long sideways stretch. Then it isn’t revenge I am after. It’s excitement. Release from boredom. Surely there must be something I could trade?
Success rate? About the same. Not great.
Apparently, I can find more than one excuse to do something unhelpful with my money.
We Are Human
Recognising that we have the same failings as everyone else is an advantage.
If we know what we are likely to do – and how it usually turns out – we have a better chance of catching ourselves before we do it. That is why trader behaviour fascinates me. Behind the companies, institutions and trading screens are people making decisions. Understanding how people behave tells us a great deal about what not to do.
I learned much of this the long way. The expensive way.
The market won’t tell you how to beat it. But it happily gives you lessons in how not to.
Take the Decision Away
If you catch yourself watching a five-minute chart, desperate to recover a loss, that’s a danger sign.
The answer isn’t to be braver or more disciplined. (Good luck with that at 3 p.m. on a red day.) It’s to take the decision away from yourself. The ITM Plan has rules for getting out, set before you get in. While the rules say stay, you stay. When they say close, you close.
You don’t add a side bet because you are annoyed. You don’t increase your position because the market owes you. And after an exit, you wait for the next signal – not the next twenty minutes.
The market owes us nothing. No refund. No apology.
A loss is a wave.
Chasing it is how you miss the tide.
King Canute knew he couldn’t command the tide. The market won’t take orders from us either.
To the markets . . .
A decent enough week. Not spectacular – but some new highs. Let’s take a look:
SPY Charts
Well, after a new high on Tuesday the rest of the week just dithered along. No new highs. But we are bumping up against the top of the trading channel, let’s hope we break through this week.
Longer term, the uptrend is still in place.
SPYG Charts
SPYG also made a new high on Tuesdayand seems to have broken out of its trading channel. (and about time too!)
Longer term all looking OK.
QQQ Charts
Same pattern for QQQ, who also seems to have broken out of the trading range.
Longer term, right at the top of the trading channel.
VIX Chart (Volatility)
Still low volatility.
ITMeter
The week ahead
Inflation, consumer spending and bank earnings take the spotlight this week. We get consumer inflation on Wednesday, producer inflation and retail sales on Thursday, and industrial production on Friday. The big banks launch the third-quarter earnings season, with ASML and TSMC adding a look at chip demand.
Monday 12 October
Announcements: Columbus Day holiday. U.S. stock markets remain open; the bond market is closed.
Earnings: No major announcements.
Tuesday 13 October
Announcements: September NFIB Small Business Optimism Index.
Earnings: JPMorgan Chase, Goldman Sachs, Citigroup, Wells Fargo, Johnson & Johnson, UnitedHealth Group and Domino’s Pizza.
Wednesday 14 October
Announcements: September Consumer Price Index, including core inflation; the Fed’s Beige Book on economic conditions.
Earnings: Bank of America, Morgan Stanley, BlackRock and ASML.
Thursday 15 October
Announcements: September Producer Price Index, September retail sales and weekly jobless claims.
Earnings: TSMC, Charles Schwab, U.S. Bancorp, BNY Mellon, PNC, Prologis, Alcoa and J.B. Hunt.
Friday 16 October
Announcements: September industrial production and capacity utilization; September import and export prices.
Earnings: Travelers, Truist, Regions Financial, Citizens Financial Group and M&T Bank.
Wednesday’s inflation report and Thursday’s retail sales are the two releases I’ll be watching most closely. One shows what is happening to prices; the other shows whether consumers are still spending. Alongside the bank results, they could give the market plenty to react to- but headlines don’t change The ITM Plan.
The futures . . .
. . . seem quite jolly at the moment – still 12 hours to market open
Next week . .
It’s out! Finally. The ITM Plan replaces all the earlier ITM books, bringing the bull and bear strategies together in one book – the one I wish I’d had years ago to save me from years of pain!
AskITM has been trained on it too, so you don’t have to buy a copy. (Although I’d still love it if you did!).
It is available here in the ITM Bookstore or on Amazon if you prefer a hard copy.
Hoping for a great week!
Heather
Trade the tide – not the waves
2 Responses
Terrific commentary today!
Thank you Rick! So very much appreciated.
I often wonder whether I am hitting the mark or not – so it is lovely to hear that it helped!
Thank you!
x
h