August 3, 2011- Volatility Killed the Cat and How To Combat Trading Stress

If I want to scare myself, I’d read the headlines I see from my emails and twitter feeds and use the following bits and pieces to rationalize my selling decisions:

1.) $AUDUSD just tumbled 300 big pips overnight.  What took eleven days to go up steadily, just flushed down in one single day.  US markets all closed more than 2% lower and safe haven flows only supported one asset class- gold.

The battle lines drawn between bulls and bears have already showed which side won- in the short term- those belong to the bear camp.

This reminds me of what Ivanhoff once said “It is not untypical for a momentum stock to lose in a week what it gained in 2 months.”

2.) Toyota just reported its earnings slid 99% (WSJ) – Yes you got that right.  99%!  And all this talk about the USDJPY intervention for its 77.00 strength.  I’m asking, how low can you go right?  I don’t really like speculation, but I looked at the TM chart, just to see how the futures are reacting based on this news.  Chart looks to form a rising wedge (I don’t like how it looks).  What a way to make me even sadder. Nikkei 225 closed down 215 points or more than 2% in sympathy with all the global markets.

3.) HSI futures had dropped 1000 points from 22,900 to 22,100 in just 2 days from August 1 to 3.  You don’t read headlines like that anymore though.  I wish the past two days never happened, but it already did.  There are only two components to a successful trade- direction and timing.  Closed all my longs in Asian equities.  All stops got hit.  The worst part is, you really can’t even get out.  Liquidity and volatility of 10% are normal these days.  No matter how small your positions are, you’ll get hit with your stops.

4.) Philippine traders don’t really feel much of the pain that the whole world feels.  The mining companies still managed to make gains.  Perhaps, you can say it’s all gold related, so my mind tells me to just hold some stakes.  All the rest are sold.  Everything’s all based in probabilities anyway.    Penny stocks still rose, and market sentiment is just bullish for the third liners.  Was it William O Neill who once said that when the third liners rise, it’s usually a signal that the bull market has ended?  When every stock that just made a 20% rise, remains to rise with only a conceptual story to back it up, I would always question, just how much risk the whole market is taking.  I’m merely a trader, my life is not in the hands of these opinions, and for reality sake, any market operation can last for as long as the market tries to push penny stocks to a public willing to digest them.  I’m not stupid to say sell.  It’s just like crying wolf when Nasdaq tech stocks were rallying without revenues to back it up.  Play the market behavior, and don’t even try to check the market noise.

5.) Barry Ritholz published this article “There’s something happpening here”.  I think it’s well worth a look.  Here are the best ones I’ve loved from it.

I think it’s time we stop, children, what’s that sound
Everybody look what’s going down

There’s battle lines being drawn
Nobody’s right if everybody’s wrong
Young people speaking their minds
Getting so much resistance from behind

Life — and investing — is all about probabilities. We don’t know what is going to happen in the future — certainly not with any degree of confidence. What we can surely assess is a range of possibilities as to what might happen; we can also assign a range of probabilities to various outcomes.

This bull cycle, after a screaming move higher, is starting to look tired. 

That is our policy choices: Inept cluelessness on one side, and hapless fantasy-based lunacy on the other.

6.) In this crazy markets, the way I keep my sanity is by reading and watching a lot.  I do not stress my life thinking about things I cannot control.  Mr. Charles Kirk writes “How to Maintain an Optimal State“.  Instead of frowning over my losses, which I know I can make back (I believe in my trading system, and I know I just have to be patient for opportunities), I focus on positive things – I get paid to read, watch movies, write and trade ONLY if the conditions are right.

Doing this will help sustain calm under pressure which is important.

Charles Kirk’s Advice on Combating these stressful markets:

1.) Increase the time and effort of your workouts. This will also help you get to sleep faster and burn out excess energy, frustration and emotion. Nothing will impact your judgment or increase your vulnerability to emotional market swings than being stressed out or overworked.

2.) Go to sleep one hour earlier especially when feeling stressed. Also, if you can take an entire day away from the trading desk during the weekend, I recommend you do so to clear and rest your mind.

3.) Work on improving your eating habits.   Everyone is different here, but in general when stress increases, poor eating habits also increase and that will work against you and maintaining an optimal state.

4.) Build a wall between your work and personal life so you can get the break you deserve.

Good and efficient routines take weeks, if not years, to develop into automatic routines but in my experience are well worth it. By taking small but consistent steps now to improving your work routine, will work wonders for you in the long-run.

Let me end this long post with my favorite trader, Jesse Livermore.  In these harsh and tiring markets, we need to have a plan how to combat it and participating in the market is not always a solution.

Because speculators without a plan are like a general without a strategy, and therefore without an actionable battle plan. Speculators without a single clear plan can only act and react, act and react, to the slings and arrows of stock market misfortune, until they are finally defeated.  – Jesse Livermore

Having a solid game plan is by no means a cure all, however it is no doubt a fundamental of successful trading/ investing.

– I shall go run to the gym and give strong efforts on my readings –

-The Faceless Trader