It’s impossible to not get excited and motivated by our daily closing account balances when it’s up and watching the markets go back on the top. If we’re a trader, it seems to spell that we’ve had favorable trading conditions come our way.
The inclination is to fall into the trap of thinking that nothing can go wrong and that a bull market will continue un-relentlessly. Given the volatility of the recent past few months, first during the surprising Brexit vote outcome, then the unexpected Trump win, the speculation of more economic doom and gloom of Europe (does it ever end?), it has been hard as a trader to face the markets with optimism. However, it does look like relief is in sight.
However this can be fraught with danger as there is a risk of exuberant euphoria and overconfidence based on the thinking that profits will be there for the taking, and the easy times have returned.
The fact is that profit taking is never easy. There is always a need to correctly identify an opportunity and which way the stock or market is going to go. The current environment remains as open to negative news and downturns as it did a few months ago and recovery is far from complete.
So risk management remains as critical now as it ever did as this is the only way a trader ever survives in the long-term, no matter what the prevailing market conditions are. If we want examples then just take a look at Samsung and the market reaction to all their various significant news stories in the last few months after their Galaxy Note 7 global recall.
Put this in comparison to aluminium producer Alcoa who is enjoying a surge after the recent split into two. The markets continue to react in a way that remains as hard to predict as always. So always remain cautious and sceptical.
There is a risk that we as traders find the shift in conditions hard to manage. For those who decided to opt out and reduce their trading during the recent election market pull back, this may seem like the period when you need to shift into gear and start turning more trades and profits to make up for the lean times.
You may start to put pressure on yourself to perform and that current ‘good’ trading conditions mean you should make each trade a profit. However, fact is that it’s always possible to be on the losing side of a trade and the more pressure we put ourselves under, the more likely we are to miss opportunities or not execute according to plan and thus increase our risk.
If we are to remain a successful trader, we need to remain focused on our daily processes and keep an eye on the big picture so we remember our risk management and trade plans is our key to survival.
We must never fall into the trap of looking for the one big trade but instead recognize the value of consistent and small profits. The novice trader may think that current times is all about identifying every single opportunity and acting on it, but this is setting yourself up for failure since it’s almost impossible to achieve.
Realism and setting ourselves up to be relaxed and focused is what will make the high probability setups stand out and plans easier to follow. This in turn will bring about profitable trades.
Good times or bad, the over confident and over optimistic trader is always going to put their profits at risk by their behavior and attitude. Profit making is all about hard work, focused planning and risk management, and it is these that will enable you to take advantage every market condition.