The Stock Surfer

That painful leg started on Wednesday when the lows were broken and continued Thursday. Here's a chart showing the break--remember, past support (the red line) now becomes future resistance.

One might say selling was a bad move, that I'm selling near the lows. That view may turn out to be correct--I've certainly been wrong many times and will be wrong many times more. But the same argument against selling could have been made (and in fact was made) about the "lows" in March, July, and October. We are lower now than at all those previous lows. Discipline in this market has saved me from huge losses. Eventually, one of the short term lows will turn out to be THE low, but the only way to have capital left to take advantage of THE low is to protect capital in the meantime, which brings us back to discipline and risk management.

Psychologically, I find it interesting that when it comes to the markets, people are advised to be completely unemotional. While I agree that emotions can cloud judgment, I would also note that if we are aware of our emotions they can clue us in to important actions. In other areas of life, the emotion of fear often spurs prudent action. When we are afraid for our safety, we seek protection.

In early October I told my wife I was really worried about the market, that I had a gut feeling that something was seriously wrong. She took notice because I rarely express fear like that, I'm usually quite happy-go-lucky (despite the bearishness on this blog). Well, the market crashed the following week, and although I was heavy in cash I was not completely out as I should have been. I rationalized, I listened to the "don't panic" conventional wisdom, and ignored my fears. I'm NOT saying we should be quick to panic, but I am saying that panic can be underrated. Sometimes we should listen to our emotions and try to evaluate them rather than dismiss them out of hand. They are there for a reason.

Here's a 1-year chart of various good times to panic.

Notice how small the early drops look compared to the more recent drops. But I do remember January being quite scary as volatility started to ramp. I also remember the conventional wisdom crowd in January advising everyone not to panic. I remember doing a lot of selling in January. It felt terrible and I felt like a foolish chicken. I don't feel so foolish anymore.

Don't get me wrong, I don't mean to endorse panic as a strategy for making money. It isn't. If anything it's a last gasp at self-protection. I also don't mean to make light of panic selling because I know people have lost a lot in this market, and it feels terrible. What I do mean to do is spur you, reader, to think about your emotions in trading. Emotions can be dismissed, managed, or acted upon, but the point is that we all have them and we all need to learn what to do with them.