For the past 2 weeks, we have been calling shorts on all the major stock indices, as well as on the EUR/USD and the CRB Commodities Index. The latter has also led us to call shorts on many commodity stocks, including Sakari and Olam.
After the negative jobs data on Friday, and the US markets plunging, it is no surprise that the markets will open bearish on Monday. If the market gaps down significantly, I might consider taking some profit.
Last week, we have an open seminar at CIMB Securities to share about what it takes to be a professional trader. We started off with the different attributes required of a trader, then delved into our trading style, before ending off with a market outlook and stock picks.
As it was a full house event, we apologise if some of you could not make it this time. Since the response was rather good, we might consider having more of such seminars for the public in the future. Do sign up for our mailing list to stay informed!
As we mentioned during the seminar, they keyword of the day is “SHORT”. I hope that all participants have a better idea of how we use price action to understand the past, anticipate the future, and trade in the present. Remember: only take a position just as a significant move is about to take place!
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This is the daily chart of the EUR/USD. It has broken below the previous swing low, and pulled back to test the breakout. I will be looking to short this.
This is the daily chart of the USD/JPY. It is pulling back after a strong upmove, and is now resting on the fibonacci 61.8% retracement. I will be staying out of this one for now. Keep watch to see if the uptrend resumes.
This is the daily chart of the GBP/USD. It is trading in a range, and is now in the middle of the range, resting on support. After the failed wedge breakout, it has decline rapidly, and I am looking to see if the support holds.
People exhibiting regret aversion avoid taking decisive actions because they fear that, in hindsight, whatever course they select will prove less than optimal. Basically, this bias seeks to forestall the pain of regret associated with poor decision-making. It is a cognitive phenomenon that often arises in traders, causing them to hold onto losing positions for too long in order to avoid admitting errors and realizing losses.
Regret aversion also makes people unduly apprehensive about taking positions after a string of losses, as they feel instinctively driven to conserve, to retreat, and to lick their wounds. This might cause them to hesitate most at moments that actually merit aggressive behaviour.
This can also affect a person’s response to winning positions. For example, traders might be unwillingly to sell an in-the-money position despite negative signals, choosing to cling on to it because they fear that the stock might continue to soar even higher once they sell it.
People who are regret-averse try to avoid distress arising from two types of mistakes, (i) errors of commission and (ii) errors of omission. The former occurs when we take misguided actions, while the latter arises from misguided inaction, that is, opportunities overlooked or foregone.
The other danger comes from “herding behaviour” where traders simply try to follow the crowd, since following the mass consensus diffuses responsibility and hence the potential for future regret.
The way out of this is to have confidence in your methods and your skill, so that despite a string of losses, you will still be able to trade consistently, because you know that in the long run, you will be able to recoup those losses and turn up a profit when you manage to catch the big moves. The key here is discipline and consistency.
“I visualized my grief if the stock market went way up and I wasn’t in it – or if it went way down and I was completely in it. My intention was to minimize my future regret, so I split my retirement plan contributions 50/50 between bonds and equities.” – Harry Markowitz, father of Modern Portfolio Theory
If you would like to learn more about trading psychology, also check out: “The Complete Guide to Investing & Trading Psychology”
All 3 indices attempted a pullback over the week, and overall the Singapore market was the weakest, closing down for the week, albeit almost flat. Prices may attempt a sideways movement or rebound next week, but overall it still remains bearish, and prices are expected to continue drifting down in the absence of any major positive news. I am holding shorts and waiting for a chance to short more.
