InvestorQ : When and how do I show my mental capital in the stock markets?
Shreya Mashelkar made post

When and how do I show my mental capital in the stock markets?

3 years ago

Whenever you are in doubt or things are just too uncertain, just listen to the markets. This is a cardinal rule. When you are logically correct but results are not showing, just pause. The market is, probably, trying to tell you something you are not able to decipher. At this point, just listen to the market. You have likely missed some very important aspect of the market. In such cases, arrogance will be of little help, which is what LTCM did.

Markets may be irrational but don’t expect it to become irrational in the next few days or even weeks. Markets can be irrational for much longer that you can be solvent. Overvalued markets correct and undervalued markets move up. Nobody doubts this theory. The problem arises when you try to set a time frame for this mean reversal. It gets worse when you leverage your mean reversal bet. As time passes and your view remains elusive, the problems of liquidity and funding start cropping up.

You could be right or you could be awfully wrong. Ensure that you are never so wrong that you are left without an escape route. Most traders tend to fall in love with their market view. Don’t stack up trades in such a way that you have no room for a U-turn. There is no harm in doing an about-turn, once you are convinced that your view was wrong. Keep room for an escape. There is no shame in admit that you went wrong. That is basic mental capital that a trader must have. Remember that when you sit on a losing trade, it is not the monetary loss that matters. It is the mental capital spent that is important.