Panic: a sudden sensation of fear, which is so strong as to dominate or prevent reason and logical thinking, replacing it with overwhelming feelings of anxiety and frantic agitation consistent with an animalistic fight-or-flight reaction. Panic may occur singularly in individuals or manifest suddenly in large groups as mass panic or herd mentality. – Wikipedia
The Dow fell more than 2,000 points over the weekend down 7.3% while the S&P fell close to the same at 7% from Friday’s close. A fall this fast triggers a ‘circuit breaker’ that is put in to place to protect against these panic sellers. The first breaker was tripped within the first 10 minutes of open Monday morning so we got a 15 minute time-out while the markets were halted. So we sat and waited. And we were left with our thoughts to think about our next moves. This circuit breaker acted exactly as it was meant. Shortly after markets re-opened we saw a slight bounce off the lows. There are three different circuit breaker levels based on the S&P:
Level #1: 7% drop = 15 minutes of market halt
Level #2: 13% drop = 15 minutes of market halt again
Level #3: 20% drop = markets halt the remainder of the trading day
We have yet to see if the remaining 2 circuit breakers will trigger today or the rest of the week. But one thing for certain is people are starting to panic. Most of last year brought “dip buyers” that didn’t have a rhyme/reason/plan to trading except to buy when the market dips. That’s not a plan – that’s a failed approach of trying to get rich quick. That’s not putting in the time to do your homework and understand market movements and signals. That’s exactly how we got the ‘melt-up over the last 6 months. With that melt-up came a false sense of security and now here we are: PANIC mode.
Eleven days ago we were at all-time highs and today we dropped back to where we were last June. Nine months of trading wiped out in 11 days. That’s fierce and should give good reason for some to panic if they have not managed risk well.
Get to the point:
- Don’t risk more than you can afford to lose. No one wants to lose sleep at night praying the market goes in their favor. Overnight moves can clean out your bank account and it can be gone by morning. Don’t risk your house if you don’t want to sleep on the streets.
- Study charts and signals. No one combination is the winning trade model but if you can see when the market is getting squeezed out and overpriced, you will know when to trim your positions and hold cash tighter so any panic moves may be less painful or expected.
- Have a plan. People panic when they see others panic ie: herd mentality. Know your limits and what you’re not comfortable losing. Set those limits and stick to them. Don’t pull the trigger on something based on what the herd is doing.
- Be patient. Markets ride up and down with a wave. Set your limits (*have a plan*) and be patient while the markets wash out those that panic.
- Always have a STOP Order. Don’t enter a trade without also placing a stop. Without a stop, you are trading on hope and that is a horrible trade plan. Enter a trade slowly but get out quick. We like to enter with Limit orders and get out with Market orders.
- Diversify. Don’t dump all your money in to one sector or stock. If one crumbles by 7%, you want others to fall back on to minimize the pain or rebalance your portfolio.
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