In Trading/Investing: There are always times when following questions confront us:
1. Should we hold on to existing PROFITABLE investment/trading position considering risky market environment?
2. Should we use this risky period to buy a stock that we always wanted to buy?
3. Should we exit on recently entered trades which is already in deep loss?
All these are good questions but very difficult to answer. There is no right answer. There are only choices and consequences.
There is time to BUY AND RIDE and there is time to SIT TIGHT. Corrections are healthy in markets and should not scare one but sometimes market corrections are so brutal that it does create doubt on what may happen next. It is during these times we end up taking trades which we regret later. Last few days of selling has been pretty brutal and it has created enormous doubt on the health of the market. No one knows – Is this the start of correction or we are done with it?
The problem: How to make decisions in this environment.
Let me give you one illustration. Trading is like driving a car. The car being the stock and the road being the market condition.
This was the road condition for last 3 months
It was clear and sunny market conditions. All you had to do was pick a right stock and ride it as long as you want. The risks were far and few and skillful stock selections were giving impressive returns. Since driving condition was good, more and more high performance cars were getting launched and it was creating excitement among investors and market was rewarding them with great performance.
Also, it was not as if weather conditions were not changing. Dark clouds used to gather but they used to clear out in no time. BUT Now, that’s not the case.
The corrections of last one week has changed the weather and road conditions pretty dramatically.
Current Condition: This is what you see on your windshield when you drive
You know there is a road ahead. You can be confident of conditions ahead but the fact is – you cannot see ahead clearly and the risks have increased manyfold if you stay on road. Your car (stock) can be excellent but road and weather conditions can impact your car adversely. Generally, what is the most sensible thing to do in such an environment: Drive slowly (Reduce profitable positions) and if possible: Get off the road (Liquidate loss making positions completely). And if you are at home/office: wait for the weather to clear up before venturing out on the road. It means sit tight and not take fresh positions. Also, Bad market conditions mean uncharitable market behavior. Just look at the way how stocks are cracking – correcting 10%-15% just like that on small bad news. Just visualize car skidding on the road. Generally, it is this kind of environment that damages a person psychologically more than financially. It reduces your confidence to trade.
I am not saying that you should completely exit the market. If you have a position where your conviction is very high and you are in profit – you can decide to ride and brave the weather out. It’s all judgment call one has to take. I am also not saying that one should not take trades with proper setups but one should be very careful of the risks involved in current market condition. The objective of writing this article was to give a psychological twist to managing trading and investment positions.
The best thing to do right now: OBSERVE VARIOUS BREAK OUT STOCKS and see how they are behaving. Which one of them showing strength and which one showing weakness. It will help you focus on right stocks when weather improves.
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