Regret

Today was the kind of day that fills the majority of market participants with regret. People are asking themselves questions such as:

  • Why didn’t I have more long exposure?
  • Why was I short?
  • Why didn’t I buy more on Friday?
  • Why didn’t I buy when I heard the central bank swap news this morning?
You get the point, very few benefited as much as they would have liked from today’s massive market surge. That’s just the way the market works – the largest moves are captured by the few, not the many. In the last week I have been faced with two major “regret trades”:

  • I was short $GRPN two weeks ago and covered for a small gain before the stock nosedived
  • I was long $ES_F with a 1154.00 cost basis at the close on Friday and sold for +18 points on Sunday night
Both of these moves look like colossal blunders in hindsight as GRPN cratered into the teens one week after I covered, and $ES_F has soared an additional 70+ points since I took profits on Sunday night. As an experienced market participant this is not the first time that I have cut profits short and missed out on major moves, but it hurts just the same.

Regret is a part of life and constitutes a huge amount of market participants’ psychology; therefore, it is essential that we learn to cope with it and move forward. Tonight I am moving on and putting the past behind me with the help of master trading psychologist Dr. Brett Steenbarger “Hindsight Bias and Regret in Trading” – Here is Dr. Steenbarger:

“In retrospect, however, traders will look back on market outcomes and selectively pick out the evidence that would have predicted the market’s movements. They minimize the ambiguity that occurred at the time and convince themselves that they knew all along what the market was going to do.”

“A psychodynamic psychologist would view hindsight bias as a kind of defense: it protects traders from the anxieties of ambiguity and unpredictability and reinforces an illusion of control. A number of behavioral finance investigations have shown traders charts composed of random price movements; invariably traders find meaningful patterns in the randomness.”

Dr. Steenbarger finishes it off brilliantly:

“Given the limits of what we know and what is ultimately unknowable, not all movement is opportunity. The key to trading success is finding the patience to capitalize on those things you do know and the wisdom to accept what is uncertain.”

This point is so crucial to the mental health of a market participant – “not all movement is opportunity” - if you find yourself feeling that you must capture every single basis point of a market move you are in a very unhealthy mindset which will ultimately lead to disappointment, and most likely to failure as well. So the $SPX rallied 90+ points since Friday’s close, how many people captured that entire move? How many captured half of the move? The answer to both questions is not many, focus on what you CAN control and not on what you CANNOT.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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