To Chase, Or Not To Chase, That Is The Question

2016-01-21 | John Carter

Let’s face it.  So far in 2016, these markets have been bat shit crazy.  I know I’m not supposed to say that.  I should say “volatile” because that is more professional.  Polished, even.  But let’s call it what it is.  Bat shit crazy.

It’s like you’re trapped in the ring with an enraged Brama bull that has a $20 bill stapled to its hindquarters.  If you can grab the $20, you win.  To do that, you have to chase that bull down.  And, guess what, he’s not scared to turn around and chase you either.  Grab the money and get out of the ring before you get killed.  That’s the game.

Also known as, “Just like trading in January 2016.”

Chasing is a primal reaction.  We see the market running away without us, and we don’t want to miss out on the action.  On the profits.  On the cash.  Our “gut” tells us to get in, even though it is against our rules.

In the heat of the moment, this argument makes sense.  That $20 bill, stapled on the back of a large, enraged animal, is almost within reach.  If we run after it, we think, we can grab it.

And that is right when the beast turns around and rips your face off.

Why do we have that urge to chase the markets in the first place?  That sense of urgency we feel comes from dopamine circuits deep within the brain.  Dopamine is the brain chemical designed to motivate us to chase and not give up until we “hunt down the food.”  The trigger is instantaneous, happening in less than a tenth of a second.

This is why, as a trader, we are smart some of the time, and dumb the rest of the time.

Dopamine stimulates the entire nervous system and makes us feel smarter.  The key word there is “feel” smarter.  It doesn’t actually make us smarter.  When dopamine kicks in, the nerve supply to the brain is turned down.  The chemical surge distorts our trading psychology.  The brain wants us to act first and think later.  Which is helpful when you are hunting down a Wooly Mammoth.  Chasing $GOOGL?  Not so much.

And that is why it is so important to stay flat, at least, some of the time.  As traders, that is when we are the most intelligent.  The longer we can stay intelligent, the better decisions we will make.

The next time you have the urge to chase, remember, it’s not your fault.  Evolution programmed us to survive.  There are situations where we turn into moist robots, running software in the background.  These moments come up sometimes in relationships, but all the time in trading.

And that is your signal to go flat, put the mouse down, and go for a walk.  Reboot the brain software.

Trade well, not often.