This was originally published on RealMoney. It is being republished as a bonus for TheStreet.com readers.
It's turning into an exceptionally tough year for long-time traders who usually make money, day in and day out. Of course, the losing bug hasn't infected everyone. It really depends on how your strategy has adapted to this wicked tape, and whether your market vision is clear enough to keep you out of trouble during periods of high risk.
In fact, I know an automated-systems daytrader who's having his best year since 2000 because the Market Volatility Index (VIX) has risen over 20 and stayed there for many months. For him, this twitchy and unpredictable market is offering the ideal environment to execute his fast-fingered strategies.
But it's been a major challenge for position traders who measure holding periods in days and weeks, not minutes and hours. As Doug Kass notes, the 2008 market has no memory. This amnesia is a major drag on profitability when your trading strategy depends on logical price development from session to session.
From my vantage point, the need for absolute discipline is the most important message in the 2008 tape. In better markets, we can get sloppy with our position choice and timing but still make money. However, anything less than perfection in this environment will trigger major losses or wash you out of the game permanently.
Feeling the Pain
For many traders, this is their first major drawdown of the decade, or at least since the bear-market low in 2002. Unfortunately, the market has a way of balancing the books, and many of these folks have given back a fair share of their long-term profits. Sadly, common sense indicates that things will get worse before they get better.
Drawdowns trigger all sorts of psychological and logistical issues. Realistically, it's really tough to turn on your trading screen after incurring a series of losses that might have been avoided in better days. The assault of red ink undermines your confidence and makes you second-guess all the strategies that worked so well in the past.
Alan Farley
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