Whether it is this go around or another, it is inevitable that at multiple points during your trading career you will suffer setbacks. Regardless of how seasoned you become as a trader there will always be times when the market goes against your positioning in a normal and healthy manner. While the correction may be needed and healthy in nature, it results in a decreased trading account, which obviously dampens your mood and trumps any thought of the health and well being of the market as a whole. Sure, we would all love all our longs to advance forever while our shorts plummeted to zero, however that isn’t possible. It is during these challenging times when one starts to really understand and appreciate what it takes to be a market participant over the long haul.

I have spoken with a few traders over the last couple of days that have taken some big hits dancing to Mr. Market’s beat a little too long and not able to head for the exits quick enough when the music stopped. They gave back more than was ever desired and now face the daunting task of rebuilding.

While this may not be you today, if there is one thing I can predict with certainty, it will be someday and this may be some words to file away for another time.

First off, make sure you look forward and not backwards until you are far down the road. History is something we can learn from and I am a firm believer in that however shortly after a draw down I feel it produces no positive energy to sit and try and find the big mistakes you have made. It quite possibly may be that you made no mistakes at all however you were just caught in a healthy slide. Overanalyzing when you are already in an emotional state is very hard and often results in compounding the issues. Keep your eyes focused on the future and when many months have passed or times have improved, carve out some time to spend with your trading log and charting software to start the analyzing process. At this point, the emotional attachment to the draw should be gone and you can assess your action in an objective manner.

With your eyes firmly planted on the future, and understanding that tomorrow is another day, take the opportunity to weed out the garbage. One of the biggest mistakes I have seen are traders holding onto positions that have broken down and suddenly rationalizing why they own them. Hopefully, when you put the position on the sheets in the first place, you had a thesis in mind with a clear stop area. If the only thing that has changed is your stop has been hit but you remain in the stock, a quick self-assessment may be in order. While there is always an opportunity for stocks to bounce back ask yourself how you made good profits in the first place? Did you try to buy depressed broken down stocks or did you buy stocks exhibiting excellent relative strength with corresponding chart patterns? I will assume the later, so why change now? If you have recently come through a draw and find yourself grasping onto hope that a stock will miraculously bounce back to health, it may be time to cut the stock and run. A valuable lesson I learned from one of Cramer’s books was how often his wife would sell a position they owned as he went out for a pretzel. He would argue with her about the position and its merits however when he returned and noticed it was no longer on the sheets, he was extremely relieved and could clearly focus on the future. If you are having a hard time selling a dog, take a walk and ask your spouse to sell it while you are out.

With eyes firmly planted on the future and a purged position sheet, make sure you stick to your style. It will take some time to not only rebuild your capital account but also your confidence. This won’t take place in a few hours or even a few days. Just like an athlete that has been sidelined by an injury and is in need of rehabilitation, start back to action very slow. Even if the markets bounce back a gazillion points, pay it no mind. Start slow and pick your spots very carefully. Reduce your position sizing and keep your time frames short. It is far more important for you to increase your confidence first, than it is your trading account, this step cannot be overlooked. I have often seen the proverbial gambler, start to do the exact opposite, throwing out big lines on speculative bets trying to get it all back at once. Most will fail miserably and the few who succeed are arguably worse off as their style will be tainted forever.

When you have cleared your mind, your position sheet and are ready to start anew, do so slowly and adhere to your style with the strictest of discipline. Before you know it, you will have made up lost ground and your account will be back to highs, your confidence will be soaring and it will all be just in time to repeat accordingly.

Futures are down ahead of the bell as traders await further economic data and clarity regarding the mortgage issues. The fruit posted another solid quarter and is trading up over 8% in the early going, which may keep tech the leader and is the first place I will focus my attention. As I mentioned in last nights Tape Talk, it will be very important to see how the financials act, however as I have been reading over the last 24 hours, it seems that so many eyes may be watching this area, which may mean it is far too early for any sort of bounce just yet.

Until I see charts set up in the proper manner, I see no edge to playing the action at least in the early going. I will remain patient and let the action come to me rather than force anything.

Trade ‘em well today.

~ Quint