What Happens to Your Ego When the Market Says You Are Wrong

Last weekend I wrote this about the overall market:

My bias is leaning toward a breakdown before a breakout. Having said that, if we do get a correction, I think it will be very minor consisting of about 2-3% or roughly between 1785 and the low 1800′s.

From Friday’s close to the low on Monday we had a pull-back of 1.9%. Although it’s nice to feel that I was (almost) right, what felt better was managing my risk when I was caught on the wrong side. On Monday when we began to correct I bought some puts in-order to hedge my long equity positions. On Tuesday morning I expected to see the market further pull-back from Monday’s low. After about an hour, I saw that we were reversing back to the upside. Instead of staying stubborn and sticking to my premise of a 2-3% correction, I quickly covered my puts for a small loss and then got to reap the rewards of my long equity positions that continued to have upside. The reason I am sharing this is demonstrate that although I traded based on my bias, I allowed myself to let go of that bias when market factors were telling me I was wrong. Furthermore, I did it begrudgingly. What I mean by that is I don’t like letting go of my bias (I have an ego just like everyone else), BUT just a short time after I did, I was in a much less stressful place than I would have been if I had kept losing money in those positions. So next time the market is trying to tell you something that doesn’t go with what your brain is telling you, try to remember that the pain of crushing your ego ‘in the moment’ will reassure your ego and bring you greater confidence just a short time later.