The market is currently struggling with a crisis unlike anything that has been seen before. While there have been some major collapses due to the Great Depression in the 1920s, the internet bubble in 2000, the 9/11 terror attack in 2001, and the subprime crisis in 2008-9, there has been nothing like the coronavirus which has impacted almost everyone to a not insignificant degree in the matter of just a few weeks.
An event of this magnitude produces very strong reactions and if you don't recognize the emotions that you are feeling when you consider this action then you are very likely to make mistakes in the way you handle your investing and trading.
Here are some key emotions to consider in the current market.
- Fear. Fear is the most dominant emotion right now and is largely a function of uncertainty. While there are efforts being made by the Fed and the Federal Government to provide some financial relief, there continues to be a tremendous amount of fear because there is no clarity at all about the ultimate impact of the coronavirus at this point. It is almost a certainty that there will be a recessionary period but its depth and duration is a mystery at this point.
Until there is greater certainty, fear will be the primary emotion and will continue to pressure the market.
If you are feeling fear, your ability to deal with the market will be impaired. The best way to deal with it is to make some small sales. They need not be anything significant but it will help you regain your sense of control. Fear is due to the feeling of not having control and that is what needs to be addressed. When you realize you always have the power to hit the exit button, it changes the way you view the market.
- Hope. When the market is falling apart there will be constant hope that the worst is over. Every bounce will produce a sigh of relief and the feeling that maybe the pain will come to an end. All it takes are some upticks and suddenly we see the market much differently even though the big picture has not changed.
Check yourself when you are feeling hopeful and try to define exactly why. Is it based on something factual or is just a function of being under so much negative pressure for so long.
- Despair. When our hopes don't develop the way we'd like it often leads to despair. Bear markets often end with a whimper when people just finally give up because they are worn out after a long struggle. If you fight the market for too long there is a good chance you will just give up. Accept the fact that the market may struggle for a while and don't' fight it. That will give you the emotional power to deal with it more effectively.
- Regret. No matter how good of a trader you might be, you will not negotiate the market action with great precision. You may get lucky at times and catch a move but you aren't going to navigate this volatility very well. You are going to buy dips too early or too late and some of your sales will be at the absolute wrong time.
That is the nature of the market and why you should focus on a strategy that allows for a high level of leeway while still controlling risk. Come up with a plan that doesn't require you to be perfect but still helps you to avoid losses from growing too large. If you are aggressive at reacting, it isn't that hard to do.
- Positive thinking. Above all else, maintain a positive mindset. That doesn't mean ignoring the reality of what is happening but being ready to act aggressively when the time is right. I know - without a doubt - this period of action will lead to some great trading. I just have to be patient, protect capital and wait.
What emotions are you feeling right now? Are they influencing your decision making, and if they are, then what is your strategy for dealing with the market if it doesn't do what you fear or hope?
My feeling right now is that the worst is probably not over but even if we are close, it is going to take a while for the market to find its footing. I'm not going to be too trusting of countertrend bounces unless there is some major change in the news flow. I'm not fearful of more downside and not overly hopeful for a bounce. I'm ready to trade as conditions develop.