Welcome to this week’s edition of MarketPulse, Australia’s most insightful look into the markets and trading! Given the nasty swings we’ve had in the market recently – and the fact that we have just entered the notorious “Sell in May and go away” period – we thought we’d discuss the need for traders to occasionally take a break to regroup, rethink, and most importantly – to recuperate.

Volatility is up, clarity is down

This year in particular has been absolutely gruelling for traders. Mid-East governments being both (relatively) peacefully and violently challenged, a Japanese earthquake, accompanying tsunami and nuclear meltdowns, a soaring Australian dollar, continued concerns about European and US debt, local natural disasters and a spike in inflation…I could go on!!!

The easy days of ‘rise upon rise’ during the Bull market pre-2007 seem to be well and truly behind us. Now, each day sees brutal hand-to-hand combat between the Bulls and the Bears. Neither party seems to be able to land the decisive blow with sharp rallies being followed by equally sharp drops.

Volatility is up, clarity is down, and the market is behaving more irrationally than ever. Investors are jumping at shadows, gripped by alternate waves of optimism and pessimism – of fear and greed. And here we are, lowly traders just trying to pick our way through the mine field.

It’s exhausting and sometimes debilitating work.

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The 3 R’s

One can only maintain the concentration and discipline required to function properly under the conditions of the present market for so long. Each day, a little more emotional and psychological baggage builds up in the trunk of your psyche.

You start to see trades which aren’t really there, and miss other good trades through utter distraction. Potentially, you end up overtrading, or just as bad – start to doubt yourself and your system, and arrive at an emotional and psychological gridlock.

Of course, there is another alternative: any combination of the above costs you your trading capital, and you arrive at financial gridlock. If this sounds familiar to anyone out there, then you need to take a break. It’s probably time to turn off those screens, and walk away.

Sounds easy doesn’t it? To just walk away?

Rest assured that everyone in the Australian Stock Report Trading Team has been there before. Sometimes it’s pretty damn hard to walk away. What if I miss a trade? What if the market bottoms, or what if it breaks out – I want to be there for that…What if the market crashes? I need to be there – I need to know what’s going on. Maybe I can do something about it – maybe I can make some money.

We hate to miss out don’t we? But here’s a news flash: The market isn’t going away. Sure, it may go up and go down – we concede on this point. It will still be there when you get back from your break. Stocks will still be soaring and crashing, investors will still be just as irrational, and there will be more tops and bottoms.

Unless you’ve just been chosen to head the first manned mission to Alpha Centuri – then you have the luxury of taking some time off and coming back to the market at a later date with a fresh outlook.

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Recuperate

You need time to recharge your physical, emotional, and psychological batteries. If you find yourself at the point where it is becoming increasingly difficult to stick to your trading system and make unemotional decisions, it’s time to take a break.

This means closing out those positions that are in trouble, and or those that are causing you the most distress. This is hard to do. There is always the fear that as soon as we close out a losing trade, it will immediately bounce back into profit.

Whilst it may seem at times that the whole market, nay – the whole world – revolves around every action you make: well, it doesn’t. Sorry to spoil that for you. Close those losing trades out!

The trades which are in a winning position need not be closed – after all, why would you exit a trade which is doing nothing but good for you? Trail stop losses on these positions up to a point where you would be comfortable to take a profit if it all happened to go wrong on those positions. Perhaps even set up some optimistic limit order targets. Leave these trades – they’ll be fine without you. Finally, cancel all pending orders you have in the system.

Now walk away. We suggest for a period of at least a week. Don’t even check prices for this time. Don’t even watch the 6 o’clock news for fear that you will see something that will make you want to check prices. Relax. Enjoy being away from the market for a while.

This process will teach you that the market does actually continue to function without your undivided attention. Your winning positions are just fine without you fretting over them every minute of the day. You don’t move the market, and when you return, it will still be there.

If you are able, try get out of the office/study/house – wherever you normally conduct your analysis and trading. Get some fresh air and some exercise. Healthy body, healthy mind and all that sort of stuff.

But the important thing is to change your routine. You never know – you might like ‘not trading’ so much that you never return! Let’s hope things aren’t that bad!

That’s all we have time for in this week’s MarketPulse, but we will pick up this discussion and muse over the other two “R’s” next week.

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