Keep Your Eye On The Ball

When any one of us looks back at old stock market data it is easy to see the peaks and valleys in equity curves and stock charts and think that we would have bought in at the lows (when the VIX had spiked or the NYSE new 52 week lows expanded precipitously), or rode out a highly volatile double bottom only to have our trading accounts rise again to new equity highs. This is easy to imagine in hindsight and backtesting. But, when you are actually here; when you are watching your account move up and down, and when big moves up are quickly followed by even bigger moves down--it is hard to remain solvent. It is hard to stick with your plan. It is easy to be lured into margin to try and "get it all back." It is times like now that the rational and level-headed traders survive and even do well, and the traders that use margin, make panic moves, and trade to get their accounts back up to "break-even" quickly "blow up."

I know everyone has heard this, but it is important to read it again especially in this market environment. For as many articles as you read, and as many backtests, hunches, analysis that you do--the real truth is that the future of the market is unpredictable. At the end of the day, you have to either decide if you believe in the methodology that you are trading or you don't. Period. If you don't believe in the methodology that you are trading-then why are you trading it? If you do believe that your methodology has an edge than you need to stick with your game/trading plan. And, it is not time to be discretionary. Inevitably being discretionary during fast moving markets, people make mistakes....bad mistakes. The whole purpose of your trading plan from the get go was to prevent you from making discretionary moves that cause you to make irrational decisions during violent market moves.

If you've found that you have position sizes that are too big or that you are using margin or leveraged futures--you should consider abandoning your leverage. It is what will destroy you not only emotionally, but it will also destroy your trading capital. Think about it--it is the only thing that can wipe you out. Remember, your leveraged trading strategy works well every time except for one time. This could be the time. Why would you take that risk?

After all, over time, if you "keep your eye on the ball" the ups and downs of your account right now are mere blips on the long term equity curve. You need to stay in the game for that to hold true. If you try something crazy and new in order to satisfy a short-term emotional fix such as using margin or trying a new trading style now--you have a significant chance of losing everything. This market is not forgiving. Don't get too caught up in the day to day action (unless you are an intraday trader)--how is it helping you? If you have a plan that is to scale in over time; then use the clock, not the chart. If you sell when the stock goes up for two days in a row-then sell when the stock is up two days in a row--don't stare at your screen all day. This will be much easier to do if you aren't leveraged. Remember, what you are doing this for---so that you can look at your account 5 years from now and have it be much, much bigger. You don't need to be fixated on your minute to minute account action for this to happen. When you developed your plan--you knew that this was part of the market. Well, it's happening. If your plan has staying power and doesn't use leverage--you should make it through just fine.

Steven Gabriel, M.D., is a self-taught trader who primarily swing trades for his own account from his home in Orange County, California. Steven has been trading for 8 years and is a systematic trader. He uses stocks, single stock futures, options, and e-mini's for both risk control and leverage. Steven is also a board-certified physician in Emergency Medicine and still practices medicine in southern CA.