One of the great things about the stock market is that you can have a fresh start any time you want. It is quite easy to wipe the slate clean, forget the past, and act if you just started to trade today for the first time.
The start of a new quarter is always a good time to reset, let go of your baggage and start fresh. With the long holiday weekend upon us, it is a particularly good time to prepare mentally for the challenges that lie ahead.
Many new traders encountered the dark side of the market for the first time in recent months. This was an extremely forgiving market since the lows a year ago but starting in mid-February, some of the biggest winners fell apart and dropped into a bear market. Just look at the ARK Innovation ETF (ARKK) , which held some of the best-performing stocks in the market. It dropped 30% recently, and many 'hot stocks' have corrected even further.
Here is how to develop the right mindset for what lies ahead:
1. Let go of your baggage. What will drag you down more than anything else is when you focus on the stocks that you are holding that you have traded poorly. You failed to sell when you had a big gain and are now are sitting on a big loss. You don't want to sell because you still are confident in the fundamentals and the future, but it is downright depressing to just look at the situation that you blundered into.
The best move is to forget your cost basis. Forget the price you paid for the stock and forget that you didn't sell it at the right time. Pretend that you bought that stock today. Whatever the current price is, that is your new cost basis. Would you buy this stock right now at this price if you didn't already own it? Are you sure, or is that your reluctance to not admit you made a mistake? Dump it if it's a dog and move on but try to develop some objectivity about the stock instead of looking at its history. Everyone is holding some disappointing names but are they still holding them because of inertia, or do they still have the same potential that caused you to buy them initially?
2. Develop a new plan. Once you let go of the baggage of your cost basis and look at a stock as if you bought it today, what is your plan? Where would you set some stops? Where would you buy more? Where would you take some profits? It doesn't matter if you have a loss or profit from your original cost basis because that no longer matters.
3. Be more reactive. What tends to cause the most problems for traders is that they fail to react to changing conditions. We are encouraged by Wall Street experts to make forecasts and to try to predict the future, and as soon as we do that, then we have baggage or being right or wrong to deal with again. Sometimes we will be lucky, and things will work out but don't start believing that you have a clue about what the future holds, Be mentally ready to react.
4. Be open to a variety of market outcomes. I actively embrace my inability to predict the future. We could see a deep, ugly bear market or another euphoric celebration. I hope we have a good trading market, but I have no clue what will happen. By declaring that I don't know what will happen, I am in a better position to act as conditions change. I don't have to worry about being right or wrong because I never made any pompous prediction a month ago.
5. Look for new ideas. Another great thing about the market is that there is a new opportunity every day. You just have to look for it. They are easier to find in a 'good' market, but they are out there. If you stay optimistic about your ability to find the next winner and work hard at it, you will likely find that you make some lucky choices at times.
I'm excited about what lies ahead. Not because I think the market is going to fly higher but because I know that we can find some great stuff to trade. So let go of the baggage and get yourself in the right place mentally. It is going to be a great quarter.
