Janice Dorn, MD, PhD
Neuropsychological Trading Coach
Janice Dorn, M.D., Ph.D., has been a full-time futures trader since 1994. Doctor Janice holds an M.D. in psychiatry and is board-certified by the American Board of Psychiatry and Neurology in general psychiatry and addiction psychiatry. She holds a Ph.D. in brain anatomy. A graduate of Coach University, she is a pioneer market psychiatrist and financial neurobehaviorist. Doctor Janice has written over 500 articles on the financial markets and coached over 600 traders worldwide. She is the Global Risk Strategist for Ingenieux Wealth Management Group, Sydney, Australia.
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ROLLER COASTER
If you are one of those people who, despite all the evidence, retains some lingering illusions about the rationality of financial markets, today should have cured you.
Volatility is a form of market inefficiency. It is a reaction to incomplete information (i.e., uncertainty). Excessive volatility is irrational. The confluence of mass greed, mass fear, and mass disagreement regarding how to react to information yields to wild price fluctuations.
If you desire high long-term returns, you must be willing to accept the high levels of volatility associated with the production of such returns.
Volatility and risk are not the same thing. Volatility is the tendency for prices to change unexpectedly. Volatility is the up and down nature of markets. If your trading strategy expects the markets to move up and down, as markets do, then you must be ready to deal with volatility each and every day. If you expect markets to go straight up or straight down, then you might want to revisit your childhood amusement park and take a ride on a roller coaster. That is what we experience every day in the markets, and it is important for you to understand that it is what it is. Nothing goes straight up or straight down. It has taken economists a long time to accept the idea that financial markets are systematically too volatile. It was some 25 years ago that Robert Shiller, whose book, "Irrational Exuberance," produced what he thought was an ironclad argument against the then-dominant "efficient market" theory of stock prices.
According to that theory, movements in the stock market should always reflect genuine news about future earnings. But Mr. Shiller showed that actual stock prices fluctuated much more than any possible rational forecast of prospective profits; he thought that this "excess volatility" result would settle the point.
Of course, it didn't. Efficient-market theorists defended their thesis by putting forth elaborate statistical critiques of Mr. Shiller's calculations. Despite this, there has been a gradual erosion of belief in the efficient market thesis.
Notably, during the 1987 stock crash, Mr. Shiller had the presence of mind to carry out an instant survey of investors. This timely survey obliterated all the so-called rational explanations for the crash , because it showed that the only reason any significant number of investors gave for selling stocks was that prices were falling. Thank You for sharing!
But I digress.
I got some interesting mails today. The most interesting was titled "Why The Rally And Has Anything Changed?" That's it. "Why The Rally And Has Anything Changed?" How do I know why the rally? How does anybody know" Why the Rally?" The markets will do anything they want to do when they want to do it. We do not control the markets.
There doesn't have to be a reason. And, by the way, nothing has changed. We are still in this nauseating, vertiginous trading range that we have been in for months. Markets move up and down in their own time and their own rhythm. Markets are living breathing human entities. To attempt to explain their behavior is an exercise in futility unless one subjects them to years and years of extensive psychoanalysis and...even then...one never really knows for sure. And- if they are psychotic, we will may actually know less than we did at the beginning of the analysis and very little will change.
The questions will always be the same. It's just the answers that are different.
So the wild swings in the market were, as Mr. Shiller could have told you, mainly self-generated: the same people who frantically sold stocks over the last couple of weeks, because the prices were falling, bought them frantically today because the prices were rising or covered them in abandon because the paper gains were less than they were on Friday. The percentage gain on paper is less than it was last week and that is "scary." I commented on this briefly in the trading room today, because that is classical rat brain thinking. What is scary is that statement.
Why? Because it reflects the inability to recognize or to tolerate volatility. It represents a type of thinking that is dangerous to financial health because that type of thinking is not suited to trend trading. That type of thinking is not able to stay with a winning a position, to let winning positions run, to stay with the trend until it ends, or to tolerate any type of drawdown without panic, fear and dread. This is just plain crazy-making. This is the way to work yourself into so much stress, anxiety and worry that you will not only lose your money, you will lose your health. Stress related illness is on the way and it is just a matter of time. Tick-itis kills swing trader and investors, and absolute tick-itis kills absolutely.
Don't ask why the markets do anything. Instead, ask why did YOU do anything, what did YOU do, and how did YOU feel when you did it?
Just like the roller coaster, you cannot control the markets. The only thing you can control is yourself. When you gain mastery of yourself and your emotions, you will recognize that the markets may not be rational, but you can be. It is not about the markets. It is about you and your inner world of trading and thinking.
Either you make up your mind to get on the roller coaster and ride it to the end, or you can chose to jump off somewhere along the way ( maybe at the top just before the coaster descends, or maybe at the bottom before the coaster takes off again to the upside). The choice is yours.
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