The one great certainty of the market is that it will go through cycles of ups and downs. Typically the downside action will occur more abruptly and cause much consternation as months of hard won gains are given back in a matter of days. This is not only economically painful but produces an emotional impact that can impair our confidence and trading.
The sharp drop in the Russell 2000 ETF (IWM) and many individual stocks that started on November 8 is a particularly good example of how quickly the market can shift. In this case, it was made much worse as it was mostly hidden by strength in the indexes and a few larger capitalization stocks.
Everyone that trades stocks is going to suffer setbacks, but those that go on to flourish and prosper deal with the problem and quickly develop the intellectual and emotional mindset to confront it.
These 5 Steps Will Help Put You Back on Track1. Shake It Off. In almost all situations, a sharp drop in an account is a function of inaction and inertia. Sometimes the failure to act is part of a well thought out strategy, but market conditions simply do not cooperate. In other cases, inertia sets in as the market shifts, and we aren't quite sure how to deal with it.
It doesn't matter what caused the drop in your account. The key issue is that you need to regain control of the situation and feel empowered. You are not at the mercy of the market beast. You can control the situation if you are willing to act and deal with the stocks on your screen
2. Mark to Market. The first step to take is to forget the unrealized losses that you are holding but to treat each stock that you own as if you just bought it. What happened in the past doesn't matter. What matters now will determine the future, and you can control how you deal with that. Look at your favorite stocks and determine where you would set stops or buy more. Treat each stock like it is a brand new buy and make your decisions about it based on how it acts going forward.
3. Force Yourself to Make Decisions. Sometimes the best course of action is to simply clear the decks. Sell everything and start with a clean slate. That can be very emotionally freeing, and it will change the way you view the market. Selling stocks into a sharp pullback isn't always the best course of action, so an alternative is to force yourself to make a decision. Either buy more of a stock or sell it. There is no middle ground. Either dump it or embrace it. This forces you to reevaluate each stock in the context of the current market. There is no shame in changing your mind and dumping those that you have lost confidence in.
4. Embrace the Power of Selling. It is never too late to sell a stock since you can always buy it back in the blink of an eye. One of the most powerful tools traders possess is the sell button, but we have to overcome our reluctance to use it at times. It can be very tough to dump a stock that we thought was a great pick, but once you sell and then realize you can buy it back whenever you want, it is a great relief, and you will feel empowered. Get used to using that sell button. You have no better friend in a tough market
5. Look for New Ideas. While market selloffs are painful, they also are the source of the next great set of opportunities. Typically when there is a broad market selloff, it is very broad, and almost everything is sold without regard to its individual merits. Eventually, the panic phase of a selloff ends, and market players start sorting through the wreckage, looking for those stocks that were unfairly punished. As conditions improve, the environment will favor stock picking, and those that do the work will be well rewarded. Quite often, the best stocks after a correction will be very different than those that were best before the correction, so it is important to keep an open mind and to look for new emerging sectors and themes.
The reason that the stock market can be so rewarding is because it can be so challenging. There is no way to avoid the cycles of the market, so rather than try to avoid them, it is necessary to embrace them and to find strategies to deal with them. The faster we make the necessary adjustments, the better we will be able to take advantage of the next great opportunity that always comes.