What to do if we find out we are driving on the wrong side of high way?

It does not happen often in real life. But in the market, it happens all the time.

Before I was able to start writing about this, my friend already gave the simple answer:

Get off the freeway and take the correct route. :)

Pretty straightforward, isn't it? We all know. But let's go a bit deeper. Sorry, I am a very verbose type person. I often try to dig out tiny little details out of simple things. So please bear with me.

In the market, it is very hard for us to take above actions when we are on the wrong side. Why?

Let's be more specific. You drive a BMW or Honda Accord. You think you are an experienced driver.

And you just realized you are driving on the wrong side of the highway.

What will you do?  Several Choices:

Choice 1: Get off the freeway and take the correct route.   If you have a nagging wife sitting beside you, you have no choice. She will scream and you will get off to shoulder and find the immediate exit.

Choice 2: Try to use your superior driving skill to make your way out of it. This is not kidding. Deep down inside, we all have a bit of that desire to do it.   James Bond did it, every 007 did it. Matt Damon did it. Tom Cruise did it. And they all lived happily after that.

Choice 3: Close your eyes and let it be.  This sounds like an absurd choice. But my trading buddies and me invented several magic methods to deal with risky trades.  One way is to go to bathroom together, virtually. We think we can piss down the market when we are holding shorts. Another magic is to turn off monitor.  Believe or not, it works sometime.

Why it is so hard to get off the freeway at next exit and get on to the right direction in trading?

Well, we traders are not so stupid. It is more complicated than it seems to be.

First, in trading world, highway direction is NOT fixed.  Market flow is twisted by various level of forces from different time-frames and non-stop real time events.  Flow changes direction, you are driving on the wrong side this minute, but next minute or next hour or next day you could be on the right side again.  It is crucial to have the skill to determine the trend and the continuity of trend.

Second, it costs (a lot) to get off and get to the other side.

Change back to right side of highway does not cost you anything, but changing direction in trading cost both money and mentality. It usually means you are cutting your loss, cutting your plan, and slamming your own face. None of this is easy. What's worse, you might be indeed RIGHT in the first place.

This worth a lot deeper thinking and there are tons of books talking about this topic as far as how to 

deal with uncertainty, cut loss fast, etc.  But I am just going to explore one common scenario.

A huge truck is driving toward you.

In trading, we face this type of feeling a lot. Everything is sweet and beautiful. Suddenly, market turned against you fiercely.  When you see the truck driving toward you, it does not matter whether you are on the right side or not. You should get off the highway. You don't reason that the truck is not following rules or not, you just get the heck out of its way.

Sometime I imagine it is a train, or a tank. We don't fight against the trend. Period.  Once we are off the highway, we save our lives and have time to think what to do next.

Skillful traders can reverse the positions right away. It requires not only the ability to identify trend,

but also very good training on how to flip the position.

Now I am going to jump right into the next topic. As simple as the rule is, but why can't we follow it?

Why do we break our rule and fight against trend? I have explored that topic in my previous blogs.

It is simple, we FEAR.  We fear that we will miss the turning of trend. We fear that we will missing the chance to revenge. Turning of trend is usually very profitable and it is also very glorious moment.

FEAR is a super powerful emotion.  If we don't maximize the size for the next golden chance, it is painful.  " I could have make 5k, instead I chickened, I made 1k only.  I am so stupid!"

We are fearful about the WRONG things indeed. We should not fear the uncertainty of market. That's the nature of market. We should not fear losing on one trade. If we manage the risk well, one loss should be a small part.

What we should fear are following:

1. I don't have a real consistent method that I have mastered to make money
2. I don't have a very concrete plan to manage my risk in the worst case scenario
3. I don't have the discipline to follow the rules I set and I can lose control

A well trained trader enters market prepared, maintains focus, and stay conscious about his/her own state. If you are not, then start to train yourself.

I should stop for now before I blah blah to nowhere. If you feel confused by now, it is not your problem. It is my poor English and non-stop typing.  Have a nice weekend!