This week we posted some fascinating behavioural research on our blog, quantifying the impact, playing with your stop loss has on your trading performance. You can read the post in full on the site.
In summary people don’t like to accept losing money. To avoid it they will lie, cheat and steal, and oh yes, they will also move their stops. Our research suggests that people who actively avoid their losses land up losing 4 times more than people who don’t move their stops.
[tell me if you think having a trailing stop market alert is something you would like us to add to our feature list, please only comment once you have read the research]
To Trade you Need to Be Emotionally Tough
Let me begin by saying everything I say below is not intended to be insensitive to the incredible suffering and anxiety we are all experiencing albeit at different degrees of intensity through the Covid-19 crisis.
“One of the great mistakes is to judge policies and programs by their intentions rather than their results. We all know a famous road that is paved with good intentions.” –Milton Friedman
I have strong views on government bailouts and why in the long run they do a lot more harm than the short lasting “sugar highs” we have become increasingly dependent on. When the Fed tried to reduce the amount of “sugar” in the system back in 2018 the markets had a fit. With the corona virus shutdown we have now entered a whole new level of sugar dependency. The level of government involvement in the economy going forward is going to be epic with an increase in inequality (the rich get richer) and sub par growth. Ok enough, I promised myself I would stay away from economic theory and talk trading.
We have all heard of the video conferencing technology called Zoom, it has become so much part of our everyday language. What most people don’t know is that Zoom Communications (the one we all use) and Zoom Technologies are two completely separate listed companies on the American Stock Markets. Shares in Zoom Tech went from 1 cent to $6, if you caught that wave despite buying the wrong stock, who cares.
The stock market doesn’t have feelings, if you sell for more than you bought then you register a profit, that is all that counts when you trade. Last week I alluded to the concept of making money off other peoples misery. If you have a view that the markets are going a certain way that is your position and the consequences that come from your position are irrelevant to your trading. It doesn’t mean you need to be insensitive or gloat, it simply means you have to divorce your emotions from what can be an outcome of your trading position.
The Dress in the picture above became a viral sensation in 2015 over an argument between mother and daughter when the mother of the bride wanted to buy the dress for her daughter and sent her a picture asking what she thought and they could not agree on the colour of the dress. They decided to ask their friends on social media and from there things just exploded. I am not sure what colour you see but the official colour is blue and black, I see white and gold and nothing anyone can say to me can convince me otherwise.
There is a reason for this, which I have learned from neuroscientist Dr Hannah Critchlow in her amazing book, The Science of Fate. You see our evolutionary brains have learned to take short cuts to avoid wasting brain energy that we would have to consume to process every single, view, smell, thought, etc… By the way in case you weren’t aware the brain uses a huge amount of our calorie intake, so instead it takes shortcuts based on experience.
You see, because we all have our own history we bring different, context, prior experience and expectation. This my friends is what is happening in the stock market right now. We had an incredibly sharp drop of about 35% which has now bounced 30% off its lows in even less time as the market tries to decide what the future holds.
I can spend pages telling you why things are already so bad on the economic front and about to get a whole lot worse and this will inevitably lead to the markets correcting at some time in the future – time unknown. But that is just my perception of reality.
So let me share some personal thoughts as a macro trader who has “skin in the game”. As you know I became vocally short the US markets in late 2019. I was early, as usual. I managed to catch what I believe to be the first part of this major stock market correction. I took a good chunk of the profits off the table a little early and waited patiently for the bounce. When we got the bounce I started selling and I have continued to add to my short positions getting fully loaded by Friday the 10th April. Since then I have been suffering, amazed at the extent of the bounce, but not surprised. This is what I live for, call me a big wave rider, so I am embracing the fight between the bulls and bears, this is what trading is all about. I believe this is the biggest fight of all time. You have the Herculean efforts by the Central Banks, Governments, Big Business, Investors and Speculators fighting debt fueled Deflationary and Business Cycle Forces and a few speculators like me, who are trying to hop and stay on this tidal wave.
Over the weekend I read David Goggin’s book called, Can’t Hurt Me. It is a truly inspirational read, the guy is a complete nut job Navy Seal and Ultra Endurance athlete. He demonstrates through his tough life story a philosophy towards life that requires one to be brutally honest about ones flaws and a mindset that embraces pain and suffering, as with it comes achievement and personal growth. This is from a guy who has completed ultra marathons with broken legs and feet.
I have traded successfully through the Dotcom bubble, the GFC and I am confident that I can trade through the Corona Virus Greater Recession/Depression. Each time has been tough, with the periods between each crisis even tougher as one has to learn how to survive through the lean periods with slim pickings as the bulk of the profits are made in crisis periods. To quote Goggin’s, I have calloused the mind, I am prepared for the market taking its time but I remain steadfast that the constant doses of economic reality that will hit the global economy over the next few months and years will leave no room for doubt like we saw with the perception of the the dress. Instead each new economic reality will act as a further nail in the debt fueled bubble and I believe the stock market will awaken to the real world through the weight of their burden.
I want to end with a word of caution.
We are heading towards the stage of opening the economies of the world. Some countries have already opened themselves up and others are planning to do so in coming weeks and months. There are only 2 ways to kill this virus. One is to find a cure, but this is likely to take at least another year, despite all the positive press about Gilead’s early trials. The second way is to rob the virus of a host from which it can mutate. This requires no new transmission in a month and then the virus dies. As we flatten and lower the curve we are going to go into a more normal way of life and unfortunately we are going to give the virus more hosts to breed from and I fear the dreaded 2nd wave is going to be more ugly and severe on us if we don’t obey strict social distancing behaviour. We have seen it play out already in Singapore and Japan where second waves have come into the picture with force. Unfortunately the future remains bleak from my lens.
Let us all do our bit to help kill this virus – stay safe.