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Four Steps to Maintain Discipline in Volatile Markets

InvestorEducation / Learn to Trade Feb 22, 2008 - 08:08 PM GMT

By: Nazy_Massoud

InvestorEducation

Best Financial Markets Analysis ArticleHave you told yourself, “I know exactly what is wrong and how to fix it, but I can't?”

Have you ever blamed yourself for not having enough discipline to follow your plans?

If so, you are not alone. People think that if you don't have self-discipline, you don't have control. They forget about the fear that creeps in.


If you look at the markets, listen to the news and notice that the Dow Jones has dropped 1,000 points in a span of 8 to 10 days, it is normal to feel fear. You are glued to CNBC, Bloomberg or any other news source, listening to the bad news piling up. They bring in one expert after another with contrasting points of view. You are looking at different securities with good potential, yet their prices are falling down. Nothing makes sense and it is confusing.

You are looking at the screen and wondering what is happening. You are frozen to your screen and cannot move. You think, “Is this really happening? Is this another crash? Am I going to lose all of my money again? What did I do wrong this time?”

Does this sound familiar? What can you do in these situations?

Some get really panicky and start having knee-jerk reaction to the markets. They are not sure why they are selling or buying. The only thing they know is that the value of their portfolio is going down and they cannot sleep. As each day goes by, their stress increases more and more and they do not know what to do or think. Before they know it, their portfolio is substantially down.

So what differentiates the traders who make money in the volatile markets from the other traders? The difference is that they recognize their fears and are willing to do what most traders won't.

You might have heard that Courage is not the lack of fear. It is acting in spite of it.

So what can you do to prevent this?

1.  Realize that it is not about you.

The markets do not care what positions you have and how much money you have invested. It is about your comfort zone and your exposure to the markets.

Mark Twain said, “Don't go around saying the world owes you a living. The world owes you nothing. It was here first.

Your success is not about what is happening in the markets. It is about your reaction to these markets.

2. Take your emotions out of your trading.

Think about a football game. If a player gets injured, it creates an uncertainty in the game. The rest of the team has no time to sit around feeling sorry for themselves. They have to adjust their game plan to see how they can win.

If you think of markets as a football game and volatilities as the unpredictability of it, it is up to you to adjust your game plan and still win.

So how do you deal with your emotions? Before making any decisions, use the pause method .

Have you ever been in situations where you wanted to think about a solution, yet nothing came to you? For instance, you wanted to remember a name, but no matter how hard you thought about it, you could not remember it?

Then as soon as you left that situation or started talking about something else, the name popped up in your mind?

Well, trading is like that. If you start looking at your screen and listening to the news, you feel frozen. No answer comes to you. But when you use the pause method, you can look at things more objectively.

So what do I mean by the “ pause method ?

  • Take a break
  • Get away from your screen
  • Turn off your TV
  • Do not listen to the news for a several minutes…
  • Get out of your office

By doing this, your mind will be ready to come up with better answers.

3.  Look at your portfolio objectively.

How do you do that? One way is to assume it is not your money and it belongs to a close friend of yours.

Usually when it comes to looking at situations objectively, we are much better when we give advice to others, since we do not have our emotions involved.

A client of mine was telling me that it is much easier for him to tell others what trades they should get into and much harder for himself to pull the trigger on the same trades. So just assume you are giving advice to a close friend or an apprentice.

Before giving advice, you want to find out:

  • What is in their portfolio?
  • Why they get into that position?
  • Is the change in their portfolio due to market conditions, a change in fundamentals or both?
  • What was their horizon?
  • What is their risk tolerance – Is the money used for paying bills right now or for the future?
  • Can they comfortably sleep or they are under a lot of stress?

After answering all the above questions, what advice would you give to your close friend?

4.  Do not fight the market - work with it.

You may have heard the saying, “Do not see the market as you want to see it. See it as it is.” It is always easier to swim with the current than against the current.

In this case, find the rhythm of the market and work with it rather than fight with it. If you cannot find the rhythm, it's okay to be on the sidelines for a while. However, remember that you have to be in the game in order to win the game.

In summary, the 4 steps to maintaining discipline in volatile markets are:

  1. Realize that it is not about you.
  2. Take your emotions out of your trading.
  3. Look at your portfolio objectively.
  4. Do not fight the market and work with it.

Remember, Courage is not the lack of fear. It is acting in spite of it.

To Making Success Your Habit™,

By Nazy Massoud

PS. For more Mental Edge tips and reports on how to have more profitable trades, go to www.MentalEdgeTrading.com .

Copyright © 2008 Nazy Massoud

ABOUT THE AUTHOR : Nazy Massoud, a Wall Street Insider, shows traders, investors and hedge fund managers how to develop the mental edge to execute trades more profitably. For more tips and a FREE report on "The 3 Biggest Psychological Triggers That Can Make or Break a Trader," go to www.MentalEdgeTrading.com .

Nazy Massoud Archive

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