April 2013OPENING POSITION
April 2013When you make a profit on your trades, do you ever think about why or how you made that profit, or do you get overcome with joy and ready to move on to the next trade, hoping to have a similar situation? If you are leaning toward the latter, whether or not you admit to it, you are experiencing the emotions usually associated with greed. What if you had a losing trade? Do you think about why or how you experienced that loss, or do you get into a melancholy state of mind and not forgive yourself for that loss?
Our emotions, just like the markets, move in cycles from highs to lows. As I write this, the markets have been in a rally mode, with the Dow Jones Industrial Average (DJIA) breaking its 14,000 level and the Standard & Poor’s 500 breaking 1525. Why the markets are rallying when economic fundamentals are weak remains to be seen, but one thing is clear: markets are driven by impulse. Because your emotions are driven by impulse, you get taken for a ride. How often have you created a trading plan and still decided to take a trade that didn’t adhere to that plan? How often have you deleted your stops out of fear of taking another loss in your books? And how often have you cursed yourself for not exercising the stop the way you originally intended? There is no end to the emotions you go through while trading. Maybe there are a handful of traders who can trade without emotions, but I’m a long way from there.
To avoid falling into those emotional traps, you should have a trading plan. But how do you start? Often, I find that we get caught up on the minute details of what we are trading. As the global markets get more connected, it becomes necessary to have a broader view of the markets and create trading plans with reference to what is going on globally.
As you go through this issue, you’ll appreciate and understand the importance of how global politics, economics, and sociology play roles in the way markets behave. When you revise your trading plan or perhaps create one for the first time, try not to lose sight of markets that you don’t trade. If you trade equities, look at the currency markets, commodities, global indexes, bond markets, sentiment indicators, and so forth. As I write this, we’re going through a period where the markets look toppy. But they are not quite there. When will they? Hopefully not before you read this issue!
Jayanthi Gopalakrishnan, Editor