Staying calm and following your game plan is the best thing you can do when the market starts to decline, said Doug Hirschhorn, a Wall Street trading coach.
“When people start to get irrational with the market they start to do things that are irrational,” Hirschhorn said Friday on CNBC’s “Power Lunch.” “That is what triggers all of these volatile moves. Fear drives the market — 100 percent.”
The stock market officially went into correction territory yesterday after the Dow Jones industrial average dropped more than 1,000 points Thursday, only to rally 330.44 points Friday afternoon.
Hirschhorn, who is not a financial advisor or licensed psychologist, calls himself “an expert in the mental game,” on his website.
“The markets are like life,” said Hirschhorn, who holds a Ph.D. in sports psychology and worked as an in-house trading coach at a hedge fund for 15 years. “There are up volatile days and there are down days. And there are days when it’s just ok to drop your sails and go sideways for a bit. And that’s what we might be in this environment.”
He cautioned investors not to engage in “dysfunctional trading.” The fear of missing out, he said, causes investors to rush into the market when stocks look good and rush to sell when things look bad.
“If you’re sitting on the bench and you’ve watched this bull market, you have this ‘I missed out’ [mentality]. Then you want to get back in and make great things happen,” said Hirschhorn, who is the author of the book “Trading Psychology Playbook.” But Hirschhorn said investors need to wait for the right opportunity in order to invest properly.
“If the opportunity doesn’t appear and you’re forcing it, that’s when you have these issues,” he said.
Instead, Hirschhorn suggests a few other strategies.
Stay calm
When people start to panic they experience “cognitive biases,” or a lack of rational judgment, Hirschhorn said. “They lose their ability to be objective,” he said. “People who are afraid to take a loss might do something two or three times worse.” That might include holding on to a tanking stock even as it continues to decline. “People are psychologically hardwired not to take a loss,” he said. “But if you hold on and don’t sell when you’re 5 percent down, and you wait, then it turns into a 10 percent loss, then you’ve lost more. Maybe you even buy more because you think the stock will turn around.” Instead, Hirschhorn said to actively manage losses and get out when you can.
Follow your game plan
Investors need to have a game plan, Hirschhorn said. This includes an “entry-level price,” or the price they are willing to pay for a stock; “a stop price,” or the lowest price until they sell, and an “up-to price,” or the price they want to sell at. “That is the most critical thing a trader can do,” Hirschhorn said. “Because you’re going to start to feel anxious when the numbers start to move up and down.” Rather than getting unnerved, he said, “all you have to do is follow that plan.”
De-risk
Evaluate your current position and consider selling, but only some of your shares, Hirschhorn said. If you own a stock, take it down to half. “You’ll still have a position,” he said. “But if you can’t stomach watching $10,000 swing, you have only $5,000 at risk.”
Flatten out
When a stock starts to plummet, short-term traders can simply sell their shares in a company. “If the wind is too strong, you might be more comfortable sitting on the sidelines and watching the market this time,” Hirschhorn said.
