Trading can be emotional. You've got your hard-earned money on the line and missteps can be costly. What's the best way to combat the emotions that creep in to decisions? Rules. Having checklists to guide you can limit emotional decisions. That can be very helpful in market corrections where indecision can be costly.
How To Make Market Corrections Easier To Manage
Dan Fitzpatrick, founder of Stock Market Mentor, calls his latest iteration of a checklist "S.M.A.R.T." trading. It stands for selection, measurable, actionable, risk/reward and time efficient. The goal is to take the thousands of investment possibilities and whittle it down to few that can move the needle on your portfolio.
Being so selective means that Fitzpatrick is able to build positions up so they can make a maximal impact. He might start at a 10% position but his goal is to have 25% positions in his best ideas. Having too many stocks not only complicates what you have to follow, it also leads to watering down the results of your true market leaders.
Audio Version Of Podcast
Fewer positions also make it easier to scale back in market corrections. Many times trading during market corrections is easier, not harder, according to Fitzpatrick. The reason? The checklist can naturally put you on the side lines.
Market corrections reduce the stocks that will meet your criteria. Fewer will be actionable and the ones that are actionable, you will often see less return potential relative to the risk. Finally, market corrections often produce charts that look like they need more time to finish their patterns. They disqualify themselves on time efficiency.
Get Comfortable Being Wrong
While the checklist might help you avoid emotional decisions and reduce mistakes, it can't eliminate mistakes. At the end of the day, no matter his interpretation of the current market environment, Fitzpatrick recognizes that even the best traders are wrong in their assessment. How you handle things when you're wrong is key.
At the end of the day, "I don't get a vote on what the market does," Fitzpatrick explains. Identifying levels to know when you are wrong and taking action when it happens are key lessons that have kept him trading successfully for decades.
Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
