Who would have thought that the COVID-19 outbreak in Wuhan would result in a global economic meltdown only a few weeks later? With some 144,078 cases and 5,397 deaths reported globally (this is the most recent statistics at the time of publishing this article on the website), coronavirus really does demonstrate chaos theory (or the ‘Butterfly Effect’) in stark reality.
In Chinese, the two characters forming the word ‘crisis’ are ‘danger’ and ‘opportunity.’ With equity indices seeing trading halts on their way to losses nearing -20% this month alone, we are entering a new realm of ‘danger’, particularly for novice investors.
It has been relatively easy to make money in 'the bull market of everything’ but that is now very clearly changing. Novice traders who may have generated decent returns being long (everything) are now facing an environment that has not been seen since the depths of the financial crisis over a decade ago. Whilst many more aged investors have been quick to point this out and ridicule those less experienced than them, this to me does feel like a different dynamic given the nature of the catalyst in the virus.
The 'danger’ then is clear. So how do we realise the ‘opportunity’? A lot of people will claim that there is a load of money to be made when markets are volatile, which is true. But the opposite truth is that there is also a lot of money to be lost if you do not have the process and mental fortitude to take appropriate risks and prevail. This is something that Lex emphasizes in our Million Dollar Traders Course, in which he devotes an equal amount of study to understanding the psychology and mindset required to navigate a crisis as he does to understanding the fundamentals or technicals in his process.
Here’s where mindset should be in order to trade successfully...
It's far easier to assume this mindset via a nice little diagram than it is in reality when markets are seeing daily swings of 10% in either direction. But without it, here are some of the costly mistakes that less experienced investors are prone to make, specifically a loss of discipline and composure, and inevitably, exhaustion.
A lack of discipline may be present in your current trading if you failed to cut risk and are sat on a lot of losing positions (admittedly, I am somewhat guilty of this). However, the biggest mistake here is 'trying to catch a falling knife’ and ‘averaging down’ with speculative long positions in a cascading market decline (as the VIX rips higher, now above 75!). The bottom line here is that you MUST have a plan and stick to it if you are to have any chance of surviving the market we find ourselves in.
When you start deviating from your plan (or worse, trading without one ever in place) it won’t take much for you to lose your head when others around are seemingly losing theirs. With the market seeing its second-biggest single-day loss on record this week, I’m sure a lot of retail traders will have blown up or 'thrown in the towel’. Perhaps this further exacerbated their ‘lack of discipline’ in deviating from their plan (adding more risk) or saw them make a poor decision under stress. Either way, you wouldn’t be alone if you lost your composure in the action this week, but managing that is key if you are to become a successful trader (Lex explains some of his techniques in the MDT Course).
Finally, we arrive at exhaustion. Even if you haven’t committed the previous mistakes, this type of market can be exhausting for even the best-prepared traders with the fittest minds. This is something that I have always relied on to my advantage when markets become potentially stressful and all-consuming. You need to find ways of managing your psychical and mental energy levels through sleep, diet and exercise, and other pursuits that allow you to distance yourself from markets and approach the next day in a slightly better place than the next trader. I won’t bore you with my personal regime, but I do maintain it with self-discipline and awareness irrespective of the prevailing market environment so that I feel prepared to face anything, at any time.
All of this is absolutely vital to your success as a trader, beyond the rest of the process that we teach here at the Academy. To close, I wanted to touch on another important aspect that we also emphasise in our programme - understanding the current market driver. There’s no denying that a whole host of technical market factors have contributed to the decline (coronavirus being the initial catalyst), and whilst I don’t have time left to discuss these today, the market is undoubtedly being drawn towards technical levels as it attempts to find support. Here’s one final chart (and a whole other topic in our MDT Course!), showing the level (2042) that I’m looking for in the S&P 500 futures...
If you would like to learn from the ground up with online tuition from Lex in our Million Dollar Traders online course or join us for our real-time analysis of global markets in our Trading Club each week, then join us now and take your financial knowledge to the next level right away!
James Helliwell | Chief Investment Strategist
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