How often do you start the trading session with a strong conviction of where the market is headed? Then, as the day progresses, the price action of the market clearly contradicts your bias, yet you stubbornly cling to the notion that the market has to do this or should do that, resulting in negative trading performance. If this has happened, or continues to happen to you, it’s not just you; it’s a common occurrence among traders.
Traders with a strong bullish or bearish bias often tend to ignore evidence proving them wrong, until their fear of loss overcomes their desire to be right.
The reason so many traders tend to have strong biases can simply be ascribed to human nature. We humans tend to form strong opinions, and then go out searching for every piece of evidence to support those opinions. Moreover, when the evidence begins to mount against our thesis, we bury our heads in the sand by ignoring or dismissing the information as nonsensical. That is until our fear of loss overcomes our desire to be right.
The way we form these opinions can be interesting. Most investors and money managers have a bullish bias because they own stocks, and it’s in their best interest that the market goes higher. Then there are the perma–bears that will always find something that will spoil the mood. I personally have known a few of these doomsayers. One in particular made a lot of money in the crash of 1987 and that experience has tinged his bias, ultimately hurting his trading performance.
As traders, one of the toughest challenges we have to overcome is to remain objective. Being objective entails having the flexibility to change our minds and face the fact that we sometimes will be wrong in our analysis. The hallmark of a great trader is the ability to change his or her bias when circumstances change. In my personal experience, rigidity is a big factor in destroying account balances.
In today’s market environment in particular, there are many strong opinions. This type of discord is typical in consolidation periods. The bears have a litany of reasons (technical and fundamental) why the market is headed lower, while the bulls have very cogent arguments as to why the S&P will be at 3500 by the end of the year.
One of the signs that the bear cohort points to in their negative assessment of the market is the recent inversion of the yield curve which has been very accurate in the past at predicting a recession. Additionally, the ongoing stalemate in the tariff talks between the US and China has created a great deal of consternation among these Cassandras. There’s the recent spate of lackluster economic data, which has induced some foaming at the mouth of those big furry animals, the bears.
On the other side of the argument, there are value investors who believe that when the market falls sufficiently the stock market is on sale and bargains are to be had. They believe that for every bear market, there’s a longer bull market that ensues, and history tends to be on their side.
From a bullish perspective, the SP, Nasdaq and Dow are holding up very well and still within earshot of the all-time highs. This, despite of all the aforementioned negatives. In their eyes, housing, the consumer and the economy at large is doing very well.
So, as you can see, we can build a good case either way and that is what makes a market, with, for the most part, only those who have an edge and know how to correctly read market behavior experiencing positive trading performance.
The truth is that no one really knows with any certainty which direction the market’s next big move will come from. What we can do however, is to try to maintain our objectivity, stay patient, and execute on our proven process. In this market environment, only the most disciplined and flexible traders will be rewarded. As you have probably surmised, and probably experienced in your personal trading, a strong bias can certainly hinder your trading performance.
Until next time, I hope everyone has a great week.