What goes up…
What goes up… must come down. All of us have experienced that, it is called gravity. When you throw a ball in the air, you expect it to come down. The same principle applies to the market, but we tend to forget it.
I have posted a few articles on how our mind and our emotions can affect our judgment. Fear and greed can impair our decision-making process, and we may take decisions that are not rational. As a matter of fact, in trading often we have the hope that what goes up will keep going up forever. Hence, we may enter a trade not based on our system. The price is going up so much, I also want to make money like the “others”. Does it sound familiar? I bet so.
I want to show you here a nice example of this phenomenon. Look at this chart. It is an ETF tracking Palladium (ticker PALL). By the way, I have used this ticker in a past article to explain the concept of support.
It looks great, don’t you think so? Many could be tempted to buy. Maybe you should not according to your system but hey, look at the chart. It was going up so much, so it can only go up. At this point, if you read my article on representativeness, an alert bell should ring.
So you decided to buy, ignoring your position sizing (what is that?), ignoring to put a stop loss (I don’t need it), ignoring your system. You are so excited that you put a lot of money, thinking that you can get some easy money soon. A few days later, you open your trading account and…
More than 17% loss in just one week or so. Wow. Now you are in despair. You got a huge drawdown. What to do?
This is exactly the situation that you do not want to experience. You should follow your system and do not let emotions affect your judgment. So next time you are thinking about buying just because you see the price going up fast (does bitcoin ring a bell?), remember this: what goes up… must come down.