Today the KLSE preceded the drop on the Dow. If it fails to penetrate the yearly top of 970 then it will be punished severely and 970 will turn from an expectation to an illusion.

So now would be a good time to practice what they teach you in the army. It’s called “visualisation”. This means imagining yourself in front of your enemy and visualising the events frame by frame in your mind as you pull the trigger and see the bullet hit an unprepared human being and kill him.That’s what I and all professional risk managers do to our portfolios. I imagine what will happen within my mind if my stocks were to go down by 5%, then 10% and then 15% etc. I imagine myself experiencing the whole range of emotions from surprise, to fear, to guilt then finally to sleeplessness, and from that, I ask myself what price i would pay to avoid all that, and then that is where I will put my mental stops in.

You see, it’s always important to have a stop and then the discipline to use it because basic human nature always gives bad trading advice. Most people suffer from the fate of closing out their trades far too early and their losses not early enough. This is because we don’t like to be out of the market nursing a loss, no matter how small. We always want to be in it. Otherwise how are we going to make money??? So the compulsion is always to be in the market, even if things go against you, because our instincts crave exposure. we’d rather be in than out, even if we were underperforming. The problem with that is that mathematically, the odds swing against us dramatically when we are in the red. Imagine that you had $100 in your account. If you lost 10% on it, you will be left with $90. In order to get back to where you were, your portfolio must perform by over 11% to make your money back. If you lost 20%, then you must perform by 25% to get back to where you were and so on. Conversely we don’t like to see our trades doing well for too long. We always want o lock in our game. Again, that comes from the feeling that if your money is in a trade, then it is not a true profit. You can’t smell the money. It’s still locked in the share. So the temptation is to sell and realise the profit so that you can see $$ in your bank account. So human nature always tells us to do the opposite of what is right.

So like I always say, it’s never too late to do the right thing. Keeping this in mind in the following days may very well save your bacon…

Happy Trading!