No one is perfect. No trader doesn’t have losses.
We all make mistakes at some point, and it’s important to pay attention to them so we can learn to improve. Someone said, “I don’t make mistakes, I make learning experiences”.
Sometimes it’s good to review what’s happened and find some company with others who faced similar circumstances. Or maybe learn from what others did to improve our own trading.
That someone also said, “learning from your mistakes is good, learning from others’ mistakes is better.” So, let’s see what happened last year and what we can learn from it.
Business as usual
In hindsight, it’s pretty evident to see when things started to go wrong for the markets in 2020.
But at the time, that was a much more difficult proposition. And this isn’t something that’s unique to covid. Whenever a recession comes along, it’s of course hard to anticipate.
It’s also hard to identify the point at which things turn over.
Market corrections are normal, and initial reports are confusing. There tends to be an expectation that corrective action will be taken.
So, traders can find themselves holding on to a “normal” portfolio, instead of a “crisis” portfolio, longer than they should. Trading strategies that worked perhaps for years leading up to the crisis suddenly don’t work, and it’s hard to adjust to the new circumstances.
What warning signs did we miss, that we can look out for during the next recession or financial crisis?
It’s time to panic
Once the crisis became obvious, uncertainty sets in, and many traders decide to sell everything (even if it implies a loss) and just get out of the market. It’s too dangerous now!
Sure; through most of March, even the most educated immunologists didn’t know much about what was happening with the virus. That level of uncertainty made most traders incredibly nervous.
However, a recession is often a great buying opportunity in the market. Of course, you need to reorient your portfolio, and change strategy. But selling out everything and staying away until it’s recovered is missing out on a potential opportunity. And potentially, it means taking losses that were unnecessary.
In fact, many of the stocks that dropped precipitously in March and April recovered or even exceeded their prior market value in a matter of months.
I’m an expert
In a world of uncertainty, some people can become more confident in what little they do know. This can lead them to take risks they might not take otherwise since their usual instinct to listen to other, more experienced, or knowledgeable people doesn’t kick in.
This is precisely because experts are uncertain, and people with less experience often are more certain because they don’t know all the risks.
Confidence is important in trading, but there is a fine line separating it from overconfidence. It’s important to know if you are confident because you thoroughly understand the situation; or because you are unaware of all the risks.