There is no doubt that fear and greed drive market action. A little over a week ago, many were buying aggressively.
Of course, they were expecting the markets to accelerate higher — and they sure looked like they would.
However, options traders, measured by the Equity Put/Call ratio, were “all-in” long.
Last Wednesday, I told traders in the Green Room, this is not going to turn out well for them, it rarely does.
While this did not mean that there was a market collapse at hand, I said that the odds of a meaningful move higher were low.
Chart of Trader Sentiment
Today, many were dying to sell out of fear of a market collapse. That fear based on growing trade war fears. Eventually, these short-term market concerns will fade away. But the mistakes will linger.
If you have been on the wrong side of too many trades, what are you learning from them?
Most eagerly put on trades thinking a huge profit is assured, but when they see the market shift, they tend to get out as quickly as possible. The fear is being trampled by the masses as they all rush to sell.
Fear and greed are powerful emotions that underlie the actions of the masses, but regret is equally powerful.
Regret is so powerful, in fact, that we may avoid putting on a trade because we do not want to beat ourselves up for making a bad mistake.
To preserve our feelings of worth, it is often easier to avoid taking a risk than facing humiliation and self-criticism when we lose.
But you'll never learn to trade profitably if you don't take risks. That’s a fact.
Money Management is key to trader psychology — and exponential profitability.
We experience regret when we look at a decision and imagine it could have turned out differently.
In trading, it can be hard to escape regret, since we can feel regret by taking action – or doing nothing.
When we open a position and end up losing, we can regret executing the trade. But we can also feel regret when we let a winning trading opportunity pass by because we were afraid to take a risk.
In both cases, we let our mind imagine alternative realities, and when we start to think that one of those imagined realities are better than the way things actually turned out, we feel regret.
We think, “If things had turned out differently, I would now be a winning trader.”
This is not rational thinking because you cannot change who you are in the moment, but we have all thought it.
When you make a losing trade, you may feel regret for making a mistake, but this unease can also force you on to make a new trade in order to earn back the capital you have lost.
This move typically doesn’t turn out well and it’s the wrong way to win – if you do.
Regret is stronger after a loss than after a win. But it is likely to be even worse after the second trade when it too is a loss.
You start thinking, “It is bad that I lost on the first trade, but the second one was so foolish and I didn’t have to lose again.”
Vicious Cycle of Fear, Greed, and Regret
Traders can become so consumed with regret — even before they have something to regret!
They have yet to make a trade but worry about feeling bad — if they make a trade and it is a loss.
It becomes a vicious cycle where you can start to doubt everything you are doing!
Just thinking about the possibility of making a future regrettable mistake can prevent you from trading. If you suffer from this, tell yourself encouraging thoughts.
Remind yourself that if you do make a mistake, you will be recording it in your trade journal and learn from it. Then by reviewing mistakes, they will not be repeated.
Losses are the tuition you pay to learn to master the markets. Turn a past losing trade into a winner, by learning from it and creating your future now. That is what Master Traders do!
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All the best,
Managing Director of Master Trader
Trading the Pristine Method — Origin and End
Chief Options Strategist