During uncertain economic times like these, trading the markets can be frustrating. There’s an aura of uneasiness these days. No one is quite sure what will happen next. What financial institution is about to fail next? Will government intervention actually stabilize the markets in the future? Just what the future will hold is unclear, but whatever you do, don’t panic. It’s vital to stay calm, and now more than ever, make trading plans and follow them.
Depending on how you look at it, each trading day is marked by one unexpected, adverse event after another. It seems as if we have been continually bombarded with new information that moves the markets up or down. To some traders, the volatility is an opportunity, but to others, it’s difficult to feel comfortable. Usually, the conventional trading wisdom is to stand aside during earnings reports or decisions by The Fed, since these events may adversely influence your trading plan. A good trading plan always accounts for potential adverse events, however, which may mean staying completely out of the markets, or at a minimum, demands careful risk management.
Making trading plans has psychological benefits as well as financial benefits. When you make a trading plan, you take control and you feel that you are in control. Even when trading chaotic, uncertain markets a sense of control can go a long way. A study by Dr. Timothy Steenbergh and colleagues at the University of Memphis (Steenbergh, May, Meyers, & Whelan, 2005) suggests that you are better off making a plan and following it. They studied a group of university students who played a computer game of roulette. All participants reported they had gambled recreationally in the past year. Researchers asked participants to describe the strategies they used while playing computerized roulette. About 25% of the participants reported they had no strategy or plan for winning; they just saw outcomes as random and passively accepted outcomes without taking any action to get the odds to work in their favor. The remaining participants reported that they had developed a strategy or game plan.
Results of the study suggest that it is better to make plans and take an active, rather than a passive approach. Participants who came up with some sort of strategy, sound or not, believed that their actions had an impact on roulette outcomes. They made more bets than those who didn't have any strategy, and made more money in the end. These findings illustrate how it’s vital to engaging in active planning strategies while trading, especially during particularly chaotic economic times like these. Don’t make the mistake of passively thinking, "Why bother, it doesn't matter." By taking an active, problem solving approach, you will feel in control, protect your assets with proper risk management and increase the chances of capitalizing on market opportunities.
Written by Michael Shopshire
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*Day traders typically suffer severe financial losses in the first few months of trading if they attemp it alone.
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