If you are in the business of trading, you will experience times when it feels like you can't do anything right and will never make money again. Nothing seems to go your way, and the harder you try, the worse it gets.
There is the temptation to throw in the towel, declare that you were not cut out to be a trader, and give up. But it is essential to understand that this is a very normal cycle for most traders. Everyone goes through this. One of the greatest traders of all time, Jesse Livermore, went bankrupt three times.
Traders who have been in the business for a long time recognize this pattern, and they immediately look for ways to recover their mojo and get back in sync with the market action. It is extremely important to recognize the problem quickly and to start finding ways to deal with it.
Most often at the heart of the difficulty is that traders tend to be analytical thinkers who want to use pattern recognition, hard numbers, and cold facts. It works most of the time, but there are times when what moves the market are emotions or other factors that we fail to understand. At certain times, we will not be in sync with the market drivers or even really know what they are.
Recently, the severe rotational action of the market has been a source of much cognitive confusion for many market participants. All the great trades that were working stopped working, but the indices don't even reflect what is going on.
When this happens, there is often an inclination to take refuge in predictions about what will happen. We declare that this is a bear market and things are sure to go even lower, or we tell ourselves that this time it is different and the market is sure to go much higher. We want to find some logic to use to understand the market even when there isn't any.
Instead of embracing the action and going with the flow, we stop thinking strategically and rely more on hopeful predictions. We end up forcing trades because we are so anxious for success, and they don't work because we are not reading the market correctly.
It is important to understand the distinction between predicting what will happen next and being ready for what happens next. Most market players seem to think that it is prediction that will determine their success. The truth is that it is their planning that will determine how well they do. We have to stay as objective as possible when considering the market. It is important to 'stay in the moment' and deal with what is in front of us right now. Stop thinking about the future and don't dwell on the past.
Currently, many market participants are predicting that things will become worse and that they should maintain a negative viewpoint. Maybe. When I try too hard to embrace a particular view of the market, I find that I end up fighting anything that doesn't fit the narrative I have created. What I want to do is have a plan for whatever happens. I'm quite positive that the market will do something very unexpected in the months ahead. My bias is always to be bullish, but I know that I have to make sure I make timing the top priority, or otherwise, I'd just be a long-term buy-and-hold investor.
I want to find core stocks that I like and track them closely rather than own them in large size. If the short-term trades in those names are not working, I'll reduce positions and move to the sidelines and wait. The biggest mistake that many traders make is that they maintain very large positions in favorite names during corrective periods because they are certain they will come back. Maybe they will, but the better strategy in most cases is to reduce holdings and then rebuy them at a later point when market conditions have shifted.
When you feel out of sync with the market, the best thing you can do is go to very heavy cash levels. Unfortunately, many traders do just the opposite. They freeze and stay heavily long. I have written this often, but it is extremely important that when you have a bad run, the best thing you can do is break the inertia and sell something. Give yourself a metaphorical kick in the butt and shake things up.
This is an extremely tough trading market right now, and I hear a tremendous amount of gloom and despair. It is understandable, but it is extremely important to recognize this is just part of the normal cycle of the market over the long run. Conditions will change, and you will regain your mojo as long as you keep working on understanding the character of the market. Find what is working, understand why it is working, and then trade it. When you do that, then you will be in sync with the market.