Markets go up, markets go down.
It shouldn't matter much, but many new market timers find that their own personal mood fluctuates with the markets, moving from extreme euphoria as the markets soar to new heights to deep despair when the markets plunge to abysmal lows.
Why do market trends have such power over emotions?
They don't need to, but many new market timers have difficulty cultivating an objective mind set.
Following The Masses
By allowing fear and greed to influence their trading decisions, new traders tend to follow the masses, and when they go with the crowd, they soon find that market trends not only influence their moods but their account balance as well.
There's a strong tendency to follow the crowd. There is a feeling of safety in numbers. When you see a steady upward trend, you feel secure. Everyone is buying.
They are all doing the same thing. When other people offer confirmation of your decisions, you feel safe and assured.
In a bull market, it isn't so bad to follow the crowd. When it's a strong bull market, the crowd is often right, and it makes sense to follow them. However, when the market turns around, feelings of safety and security can turn instantly into fear and panic.
Humans Tend To Be Risk Averse
Why? An obvious reason is that many new market timers don't have the ability or financial resources to sell short, and take advantage of a bear market.
But there's a psychological issue as well. It is difficult to know how to handle falling stock prices. For example, humans tend to be risk averse.
"There's a strong tendency to follow the crowd... a feeling of safety in numbers."
When one is in a bullish position and the markets suddenly turn, it's hard to accept losses, and even harder to execute that sell signal, issued by your timing strategy, before more damage is done.
Denial and avoidance set in. At that point, a market timer with a losing position panics, hopes that things will turn around, and waits for events that are unlikely to happen.
Usually the price continues to fall, heavy losses are incurred, and as expected, disappointment and despair set in.
Detached And Relaxed
It's vital for your survival as a market timer to stay calm and objective. Don't let your emotions interfere with your decision-making.
How do you stay detached and relaxed?
First, following a non-discretionary timing strategy and knowing, absolutely, that over time it will be profitable, helps you to rise above strong emotions and allow the strategy to make the decisions.
Second, accepting the fact that you'll likely see small losses as a market timer and that you should expect to see the markets turn against you. What is important is NOT to react like the rest of the crowd. Staying above the fray is the key to profitability and knowing that the money management rules built into your strategy will keep losses small and allow profitable positions to run as high as possible.
Third, think of the big picture; the long-term profits across a series of trades are all that matters, not the result of a single trade.
Develop A Logical Mind set
Don't allow your moods to fluctuate with the ups and downs of the markets.
By trading in a disciplined, methodical manner, you can cultivate an objective, logical mind set that isn't overly influenced by market moods.
Armed with the right mind set, a disciplined trading approach, and a tested market timing strategy, you will be able to realize the huge profits of winning market timers.