One down day, and people acted like the world was over.
I’m not only talking about TheoTrade clients. I’m talking about X, and I’m talking about the gym, where some guy asked me if I got caught in “that crash.”
What crash? The S&P had a selloff of about 4% from near an all-time high, matched the lows, and bounced.
You Haven’t Even Scraped The Surface
In 30 years of dealing with this, including 15 on the brokerage side of the business, I’ve never heard so many people cry out in pain over one freaking down day.
There’s an entire generation of traders right now that doesn’t believe markets can go down. And every quick bounce like this one ropes more of them in. It gets reinforced, it gets learned, and at some point it’s going to end horribly.
Do me a favor. Pull up a chart of the SPY, the ETF that tracks the S&P 500. Look at five years and go, “Oh damn.” Then look at 15 years and go, “Oh crap.”
Now think about the math. If the S&P rallies to 8,000 by year-end, you’ve got roughly 450 points of upside. If it cracks the recent lows around 7,350, it’s a slaughter fest. You can easily see 7,000, maybe 6,800, before it even stops.
Call it 500 to 700 points down versus 450 up, and I think I’m being conservative.
Stop With The Bull-Bear
I’m not telling you to go short. I’m telling you to push aside how you’ve been handicapping markets for the last 10 to 15 years.
Volatility is an emotional animal. The best comparison I’ve got is my 17-year-old daughter. At times she’s lovely, and two seconds later she can rip your head off for absolutely no reason.
The only assumption I’m making is that we’re in volatility now. If you get in front of these moves with anything more than a spread, you will walk away bloodied and beaten.
It Works Over Time
A spread caps what you can lose before you ever place the trade. Lately I’ve been paying about a dollar for spreads that can pay four or five.
Most of them will lose. When you risk a dollar to make four, of course it has a lower probability of success. If you don’t like that, you don’t have to trade it. I’m going to do the same trade again and again and again, because it works over time.
Do smart things consistently, and you’ll be okay. Do stupid things consistently, and you’ll chip away at your account without even realizing it.
If you’re in a spread right now and it doubles, close half and let the other half ride. In volatility, you sweep your chips off the table when the market hands them to you.
To your success,
Don Kaufman
P.S. When the market drops and everybody wants out, my guest this Thursday starts paying attention.
What I like about her is she doesn’t need to be in a trade. She’ll wait, she’ll pass, and when she’s wrong, she’ll tell you she’s wrong.
