Trading Rule – “Don’t try to get even with the market”

REMEMBER THE OLD APHORISM, “REVENGE IS SWEET BUT ITS RESULTS ARE BITTER”. YES, THAT APPLIES TO TRADING IN THE MARKETS TOO. BUT HOW DO YOU EVEN TAKE REVENGE ON THE MARKETS. IT IS CALLED TRYING TO GET EVEN WITH THE MARKETS. THERE ARE VARIOUS WAYS IN WHICH TRADERS TRY TO GET EVEN WITH THE MARKET. SOME TRADERS TRY TO GET EVEN WITH THE MARKET BY TAKING A CONTRARIAN VIEW. OTHER TRADERS TRY TO AVERAGE THEIR POSITIONS TO GET BACK AT THE MARKETS. STILL, OTHERS SIMPLY OVERTRADE IN THE MARKET TO TRY AND REDUCE THEIR LOSSES. ALL THE THREE ACTUALLY RISK LOSING MONEY IN TRYING TO AVENGE MARKETS

WHY YOU CANNOT GET EVEN WITH THE MARKETS?

One of the arguments in favour of long-term investing is that you cannot reasonably predict the market movements in the short term. The big problem is that either we believe that we are right or we believe that the market is wrong. Remember, the market is what it is and as a trader, it is your job to adjust your trading strategy to the vagaries of the market. The market, ultimately, represents the collective wisdom of millions of traders and investors and so it is rarely wrong. When you try to get even with the market, you are singularly fighting against the collective wisdom of the markets. More often than not, you are likely to find yourself on the wrong side. Secondly, as a trader, you also benefit by staying on the same side of the momentum. By trading against the momentum, not only are you taking a huge risk but you are also reducing your probability of success in trading.

WHAT ARE THE RISKS OF TRYING TO AVENGE THE MARKET?

How do you typically avenge the market? You either try to dump all your positions in the market or your reverse your longs to shorts or you end up overtrading or you could end up averaging your positions in the hope that you are eventually right. It rarely happens. Firstly, each trading decision should be thorough and you must implement the decision only if you are convinced that it is the best under the circumstances. Secondly, when you average in the hope that the stock will move in your favour you are taking more risk on the trade that proved you wrong once. Remember, hope is a good breakfast but a bad supper. Never be in a situation when you are forced to go to bed just with hope for support. There is a big risk in overtrading. Of course, you do enrich the broker but you end up reducing your own profits. Above all, when you start trading aggressively to avenge the market, you lose the basic thread of your trading rule book and the result will be a chaotic trading strategy. Lastly, when you form a view then you must not modify that view purely on impulse.

“Always remember that the stock markets can be irrational much longer than all the traders in the market can be solvent” – John Maynard Keynes

6 REASONS YOU LOSE WHEN YOU TRY TO GET BACK AT THE MARKETS

  1. Most of us start trading with our trading rule books in place. When we try to get back at the markets, we end up taking irrational decision in the market. Taking irrational decisions is never a recipe for success in market trading. You need to measure your payoffs and take calibrated trading decisions if you want to be successful. When you get down to avenging the market, you are more likely to take decision based on pure emotions rather than based on dispassionate analysis.
  2. Eventually we all trade in the markets with finite capital. Be it a small trader or a large trader, the capital is finite although the risk appetite may differ. Therefore, the entire rationale behind trading has to be to minimize your capital loss. Obviously, you cannot control your capital loss if you are going to take trading decisions based on emotions rather than based on evaluation.
  3. Market is an average of a few informed investors and many uninformed investors. It is the few informed investors that actually tend to influence the direction of the market. When the market goes against you it is time for you to understand that there are more informed traders who have a different point of view. By trying to avenge the market you are losing on that all-important insight.
  4. The market is a great signalling mechanism. The best of the stock rallies and crashes have been preceded by clear signals sent out by the markets. As a trader, it is your job to read these signals, learn from these signals and actually use them to modify your trading strategy. Trying to avenge the market actually defeats the very purpose of these signals.
  5. When you try to avenge the market, you normally tend to overtrade since you believe that you can outsmart the market by quickly trading in an out. The market has a knack of getting back at you when you least expect. Trading profits are what you make over a period of time not at a point of time. When you go wrong, always wait for the right opportunities rather than trying to outsmart the market.
  6. Getting back at the markets eats up more capital and that has two implications. In the process you are forced to forego some of the juicier trading opportunities just because you are short of capital. Secondly, this impacts your return on trading capital (ROTC) as it either increases your trading costs or increases your capital outlay.

BE HUMBLE AND LISTEN TO THE TUNE OF THE MARKET…

The first thing that a trader needs to learn is that the market normally sings a tune that we are not willing to hear. The fact still remains that the markets can tell us the truth and that is what matters. When we try to outsmart the market or seek revenge on the market, we are actually missing out on these cues. As a trader, you are the loser in the process!

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