The Fear and Recent Decline

Feb 28, 2007: 10:33 AM CST

Needless to say, there was an overwhelming amount of fear that resonated throughout the market yesterday. Without addressing the specifics or reasoning behind the decline, as have been addressed by news sites and other blogs far superior to my new blog-in-development, I wanted to take a different approach and address some of the emotions of new traders behind the market action we just experienced.

Because of the steady market advance that we have witnessed since last August (following the 10% decline after May, 2006), we have been virtually unabated in our ascent and complacency. This is shown objectively by low levels on the $VIX index (around $10) and subjectively by various sources. We are hearing more talk of complacency at the least to near euphoria at the most, as new investors come into the market for the first time, especially after hearing of the 15% return of the S&P and Dow last year.

One anecdotal piece of evidence that I read recently came from Toni Hansen’s daily commentary where she noted that the recent Trader’s Expo in New York was so well attended and “busy” that she jokingly commented to another trader whether a top might be forming simply from this reality. She noted that the last time she saw attendance at these levels was the Expos of 2000 right before the great decline. We are also seeing Daytraders coming back to the scene in levels similar to those before the ‘crash’. The Expo ended Valentine’s weekend, and many new traders were so excited to put their new knowledge to work in the market, but what a wake-up call they got!

We traders have more experience than those who freshly step up to the plate; as such, those who have survived have simply outlasted these ’shock’ events and adjusted our approach to the market accordingly. If you lost yesterday, you have a battle scar to show! I suspect a lot of trading careers may have been abruptly ended yesterday before they began.

When confronted with such a blow, two approaches arise:

1) Take your punishment, and walk away with tail tucked. Sustain a trading trauma, increase fears, decrease confidence, and engage in avoidance behaviors.
2) Take your loss, realize you got greedy, realize market realities, store these lessons away, learn from the loss and catalog it, engage in stress reduction techniques, move on to trade another day and hold fast to your risk management profiles.

I know each successful trader can point to one or two trades that “got them” and changed their world perspective. I can. In fact, true professionals will be able to point to multiple occasions. Don’t lose heart if you were blindsided by this drop. Don’t throw in the towel and quit. Believe me, I’ve been there with you not long ago. All of us who stay in the game simply do so because we learn how to overcome these events, and file them psychologically differently than those who walk away with crushed emotions and expectations. Take time away from the game and gather knowledge, but please come back to the game.

Please stay with me here at I am working to develop a community of traders and knowledge to help you overcome fears. Please be careful, be patient, and mind your risk!


Oda at Options the Easy Way  posted a great, quick summary of the recent decline and encourages us to stick with our plan and our discipline and keep finding trade entry points.  Yes, a lot of people got hurt, but we must press on and keep analyzing and finding trades that are congruent with our system. Please check it out.

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