Trading and Emotions.
Last week was a bit of a roller coaster – well, to be precise, last Thursday was. A sudden drop that took your breath away, even when you were expecting it.
Trading and Emotions.
I knew before the market opened that it was going to be bad, so I mentally prepared by coaching myself in what I was going to do (i.e. observe, breathe, stay calm, not take any actions).
Well, as expected, the market dropped precipitously, and suddenly in one account alone I was down more in an hour than I used to make in an entire year of working! However, I went off to dinner, stayed cool. I checked when I came back, it was still awful so turned the PC off and went to bed. Calm, I thought. Unemotional. Steady.
Controlling Emotions
There are numerous studies that show the more that a traders can control his emotions then the more successful they are. Personally, I think that the terminology is not accurate. Let me explain. I don’t think that traders can control their emotions. The definition of an emotion is:
An emotion is a complex psychological state that involves three distinct components: a subjective experience, a physiological response, and a behavioral or expressive response.
Subjective experience? Physiological response? I would suggest that these are not controllable without producing a conditioned response with some Pavlov-type classical conditioning or Skinner-type operant conditioning. But the behavioural response? That’s what we can control. Not reacting and dumping all our positions just because we are afraid of losing our profits is totally within our control.
Why (some) trading systems work
In my opinion, it is because we take the emotion out of our decisions and actions. We decide beforehand what a good decision would be based on observable facts not in a sudden emotional in response to a market move. In other words, we control out behavioural response. But good luck with the physiological response!
So how did that work for me?
I love gadgets. I have a smart ring that tells me all sorts of things and also tracks my sleep.
The image at the top is what happened during my sleep that night.
The white bits mean I was awake, the dark blue mean I was deeply asleep. So even though I didn’t take any trading actions (behavioural), my body (physiological) and mind (psychological) were still emotional!
To the markets
I’m not sure what exactly caused last Thursday’s drop, but it wasn’t pleasant. My guess it was traders taking profits after a slew of headlines saying the market was poised for a drop.
Not everyone agreed, however, and the dip did not really carry through to Friday.
Let’s have a look at what actually happened.
SPY Charts
Thursday’s long red candle was actually a bearish engulfing pattern, in that it engulfed the whole of the previous day’s trading. Generally, this is a bearish sign – but look what happened on Friday: SPY made a new high. OK, only intraday, then dropped but still higher than the previous day.
It is helpful if we look at what actually happened during the trading day. Here is the 1 minute chart for the last 2 trading days. You can see where the trading day ends by the large increase in volume at the close. The upset face shows the start of Thursday trading, the smiley face shows the start of Friday.
You can see that all was going well until the last hour – then boom! My reading is that everyone got cold feet and didn’t want to hold positions over the weekend so dumped them. Hence the frenzied drop in the last hour.
What will happen Monday? There are two possibilities. Either this is just a minor bear trap and the bull trend will stay intact, or it will retrace to test support at 550. We’ll have more clues nearer market open. On the weekly chart it barely registers:
SPYG Charts
SPYG is following a similar pattern to SPY, but did not make a new high after Wednesday. It has a higher percentage of technology stocks which suffered more on Thursday.
On the weekly chart you can see a slight flattening of the uptrend:
QQQ Charts
Technology stocks were out of favor last Thursday – everyone getting cold feet after the recent rally I imagine. Fear is powerful; fear of losing the profits you have made leads you to dump first and ask questions later. If everyone around you is also dumping then you lower your price, et voila! You have a big red candle. The QQQ charts are similar to the SPYG charts as they both have a high component of tech stocks.
The large red candle is marked and the following day did not make a new high. It is possible that it is going to test the 486 level for support. The 500 level is significant (simply because it is a very round number and will be featuring in many trader’s plans (‘take profits at 500’) On the weekly chart the blip is visible but not yet significant.
VIX Chart (Volatility)
The VIX chart is not showing a significant uptick.
ITMeter
The week ahead . . .
Well, the recent events have been . . . hmmmm, can’t think of a word that isn’t going to upset / offend at least some people. I’ll settle for momentous. What effect is it all going to have on the market? I suspect it will be more of a bullish influence than bearish. Investing.com also seems to think it will be positive. Others think the increased volatility will not be good for the markets.
I’ve just noticed that several are talking about ‘Trump Trades’. In other words, if Trump wins in November and implements his policies it will have an effect on the market. Some areas of the markets are going to go up and which will go down? I’ve already seen headlines saying ”short oil’.
So Trump Trades seemed to be a thing. It had a nice ring about it, so I took actions and have just registered the dot com. Now to work out what to do with it! (all ideas welcome)
Futures
At 5 hours to market open the futures are looking somewhat positive:
Who doesn’t like a good volcano?
I am leaving the Italian mainland and going to Sicily. I have long wanted to see Mt Etna and Mt Stromboli, and luckily both have been active recently, so I am hoping for some spectacular displays. So, it is ‘bye to this:
Fabulous vaulted ceilings, imagine the weight!
And hello to this:
Exciting!
Fingers crossed for a good week!
Heather
5 Responses
Fear of missing out… bought some NVDA for fear I was going to miss out on the spectacular moves up. Alas… remembering days when QVC was a stock worth trading. Anyway – how about writing a book on your aggressive trades.
R
Hi Randy, I’ve never actually lived in the US, so QVC was a mystery to me – I had to google it!. NVDA – It has gone off a bit recently, now around the same level as the start of June – so whether you are happy or not will depend on when you bought!
Re writing a book about aggressive trades – I only do these with small accounts where it doen’s matter too much if I blow them up – and after this week i’m not even game to look at a couple! I’ll do it on the weekend – and I wouldn’t want anyone to be following me and have their account blow up!
h
I saw this and somehow I missed lazy ITM versus Turbo ITM. Where’s this written up? Thanks, Bob
Hi Bob – sorry for the late reply.
Lazy ITM / Turbo ITM – that was way back in the first edition – I have since used more specific terms – so 50% strike (100% leverage) or 60$ strike. Also SPYG was not mentioned in the first book – but had to be developed for people with smaller accounts.
So the turbo equivalent is using a 60% strike / SPYG ITM for any spare cash/ and OTM options for 2% – 3% of portfolio.
Essentially, it is the same strategy, just with more choices – I hadn’t foreseen that so many people would be following ITM but all starting at different dates with different strikes!
Hope this helps
h
I was sad to hear your thoughts in a previous Blog about moving on from your books and possibly going to other challenges. If you feel you have given what you should have given and don’t have more you can give then go with your gut. In regard to going with your gut I am recommending to you the book, The Tao Jones Averages by Bennett W. Goodspeed, if you have not read it before. I have read it more than once and possibly should have personally read it more or at least refreshed myself more often with reviewing It’s message(s). If it helps you I will be pleased and if you have read it and have no interest in a reread fine. Indeed this is a market now that may require more right brain input which I am sure is not what you do with your investment and or trading system. But it can still be valuable in clarifying where you might go or travel in the Future.