Traders and investors are often confronted with information that is counter to their expectations. It is not a matter of if this will happen, it is simply a matter of how one reacts. To be honest, I have reacted extremely poorly to a larger move than I thought possible in the Canadian Dollar and have been punished for that reaction. Perhaps I can blame the fact that I have spent the last two weeks in transition from Germany back to Canada. But far more likely is that I was simply recategorizing the contrary information as it transpired.
If I had asked myself a month ago what my threshold for upside was on the CDN, I would have likely said something like 82.5. At that point I should have had stops set and reevaluated the situation. But I did not. It blew through that level, and I adjusted my threshold to 86, which was a weekly moving average. At the time, I was looking for reasons to justify the move and again watched it blow through that level on it's way to 90 - round number resistance! The Loonie opened higher this morning and I have finally conceded - at a significant loss from what it should have been.
I am surely not alone in experiencing this kind of frustrating behaviour. But the worst part about it is that I am fully aware of the tendency (technically referred to as cognitive dissonance) and have previously caught myself many times from what would otherwise be terrible trades. I've spent a great deal of time reading and researching behavioural finance books, all of which are supposed to teach one how to defeat the natural human inclinations that make 90% of investors and traders lose money. For the most part, I've been very good at rooting it out, but I let myself slip this time.
It is just one expensive reminder that no matter what the situation, stop losses are an imperative part of investing, even for long term investments. Today's high volatility markets can be seductive, as one knows that in just one day things can turn around. It is tempting to "just wait one more day" before finally giving up on a losing trade. But the volatility makes the necessity for stops more important, not less.
For readers who have followed this blog since inception, it may be surprising to find out that I can be wrong. After calling the deflationary collapse years before any "expert" (there were in fact many others waiting for the same), and experiencing triple digit gains on my account two years in a row, I suppose being wrong was a tough pill to swallow.
I am sure I will learn from this mistake like I have others (I refuse to be one of those pundits who never admits they've ever been wrong). But I write this in hopes that my readers can learn from my mistake instead of making their own.
Perhaps it's time I reread one of my Kahneman and Tversky books...
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