How to Recover From a Market Shakedown

If you are passionate about forex, and closely follow the markets on a day to day basis, the chances are that you might have come across a frequent pattern of being shaken and perhaps spooked from your positions or your analysis.

Pardon the cliché, but to quote John Maynard Keynes, “The market can stay irrational longer than you can stay solvent.”

This is a common phenomenon that occurs frequently and depending on your trade exposure and/or your level of conviction; it can certainly impact your psyche as well. There are days in every trader’s career when the markets make you feel like dumb and at times lead you to question your abilities.

But fret not, as you are not alone when this pattern occurs, and you can break out of that sour feeling it leaves you with.

Can you relate to this cycle?

On closer observation, traders will notice that there is a recurring cycle.

It typically starts with either a random discovery or finally spotting a trading opportunity, which usually results in profit. This obviously evokes the curiosity in you, leading to a further analysis of the asset or instrument in question.

There are times, sometimes prolonged periods of times when you are absolutely locked in on an asset. You are able to pick the turning points quite nicely, to the point that you could accurately tell where the next intraday reversal might happen.

What follows later is a string of really good trades, which starts to boost your inner confidence. This could lead some traders to a sense of complacency which is usually the start of the shake out. From a trading perspective, your complacency could lead to scalping for a few pips within the larger price action or leaving your stops a bit too wide, knowing certainly that you are in sync with the markets. Of course, what could go wrong? You’ve been watching the price action, and you have the pulse on the fundamentals, you certainly know what you are doing.

When the market shakeout starts, it typically results in a strong price action, leaving you perplexed. You might start to doubt the price action itself, leading some to continue adding to their positions, despite the market moving opposite. This is also referred to as being married to your position or adding to losing trades.

What turns as “I’ll wait for a little bit longer and then the markets will reverse” soon results in the trade going horribly wrong. Sooner or later if you don’t cut your losing positions already, you are faced with a decision to either let the broker stop you out or hope that the markets will reverse.

After the painful loss, perhaps a day or two later, you do see that the markets start to reverse, only that the reversal wasn’t at the price that you expected.

Dealing with a market shake out – The mental preparation

Break the routine. Reset your mind

The first thing to do when the market catches you at the wrong end is to take a step back.

Most traders tend to immediately jump right back into the trade at the first signs of price moving in the direction of your analysis.

At this point in time, you should realize that you have become emotionally invested in the trade and any decisions you make are based off your emotions. Call it a revenge trade or whatever, but this approach can be risky!

The best way to deal with a market shake out is to simply give your trading a break for at least 24 hours. Focus on something completely unrelated. Either read a book or watch a movie or spend time with your family, do anything that can break the previously established routine. This will help to reset your mind and also help you to deal with the emotions that come following the shake out.

Don’t discard your analysis

Most traders tend to simply close out the old charts and prefer to start with a clean slate. Logically, this makes sense, but it also leaves you with an unanswered question about “what went wrong.” The best way to come back is to actually go back to the original chart where you have your notes and analysis and to figure out what went wrong.

In some cases, you will find the answers right there on the chart, especially when you look back at the chart with a fresh mind. In other cases you might have to re-adjust your analysis, the support/resistance levels, etc.instead, to account for the latest price action that caught you off guard.

If nothing, at best you can look back on your old analysis and learn something from it.

Never get too comfortable

A winning streak is good for your trading psyche, but it can also lure you into a false sense of security. When you start to notice that you are getting a bit too comfortable, is when you need to start paying attention.

Stop adding to your position instead, focus on managing risks. If the price has moved favorably for you, start to cover your risks by moving the stops to break even or to lock in some profits. Try to manage your trades such that the risk from one instrument/asset is covered by the locked in pips from other instruments. This way, when you are wrong, at the very least, your bottom line equity doesn’t get hurt.

Remember that the markets move on the ever shifting ground of sentiment and expectations. Sometimes strong price action is established on a fundamental report, which can be accounted for. But every now and then, the markets can move strongly simply because of sentiment or a totally unrelated event.

Traders are better equipped when they understand that the market shakedown is part of the trading cycle. The sooner you acknowledge this, better are the chances that you will be prepared for the eventualities.