Trading in Denial

Many traders, even experts will go into denial when the Market goes against them. This is a sure recipe for disaster.

When the Nifty bounced back from 5750, it became clear that the market is willing to put higher lows in place. Internal examination of the Nifty price moves also suggested the same. The Nifty rallied from 5110 with gaps and large range bars – a sign of a strong trend. Then we had a higher lows, so the trade should be to either go long or avoid the market if you do not have any conviction in the up move. Not doing something is also a trade, often a wise trade.

Much to my surprise, many experts come on CNBC-TV18 and keep on giving short selling trades, saying they continue to remain bearish. Now, we can have a bearish view, there is nothing wrong in that. But, to take a short term sell when the market is going up day after day is not prudent trading.

Behavioural Science experts call this ‘denial’. We see something in front  of us, but refuse to accept the reality. I am often guilty of this, so who am I to complain? I am giving below an excerpt from our newsletter of October 12, which tells you how we can all go wrong.

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WE ARE OFTEN WRONG. WE ARE HAPPY WHEN WE ARE WRONG, SINCE THIS TELLS US (A) WE ARE HUMANS, AND, (B) MARKETS CAN DO ANYTHING THEY LIKE.

A lot of people claim 100% or maybe 90% accuracy in their forecasts. We have no such claims. We are often wrong. When we feel the market is going its own way, we try to adjust our views according to the market action. But, we acknowledge that the market is wiser than we are.

I write this to explain our completely wrong perception on the CNX-IT where we felt that a trading range was a distribution, but it turned out to be a consolidation, pushing the Index to life time new highs.

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