How to Save Mental Capital in a Bear Market

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If you have been in the wrong stock or sector the past several months, and really all year, the pain to your portfolio in this bear market has been extreme.

For example, Goldman Sachs (GS) is the poster boy for the weakness in the Financials (XLF) as the stock is down 37% from its March highs. Or take a look at the Oil sector (OIH), which has been a total mess since October as stocks like Schlumberger (SLB) and Haliburton (HAL) are each down more than 40% year-to-date. And while Cabot Options Trader subscribers have largely avoided most of this mess and are holding a Put position as a hedge, it has been almost impossible to avoid losses entirely. That said, almost more important than saving financial capital in a rolling bear market such as this one, is saving your mental capital.

Unless you had a portfolio full of utility stocks and bearish trades headed into October you have likely felt pain recently. So here are my personal rules for dealing with a bear market and losses so that you can save that mental capital:

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Three Ways to Save Mental Capital in a Bear Market

Avoid beating yourself up. There is NO upside to constantly staring at your past mistakes and re-analyzing what went wrong. For example, I hate that I bought Pure Storage (PSTG) calls days before the market fell apart. But at the time of the trade, the market looked like it was in good shape, the stock had come off a big earnings beat, and the risk/reward was right. Unfortunately, the market fell apart, and I was wrong. So like a quarterback who just threw a first-quarter interception, I quickly analyzed my mistake and then moved on knowing that there will be more throws/trades to be made.

Recognize that you, the investor/trader, will not be perfect. The only traders who will get every trade right are con artists like Bernie Madoff. You will make trading mistakes, and there will be losses from time to time. Knowing this, my general goal for trading is to try to get six out of 10 trades right—and of those six I hope to really hit a grand slam with one or two of those trades. That said, if I’m hoping to get six trades right, that means there will be four trades that won’t work. If you go into a trade recognizing that you could be wrong, when it happens, the mental strain will be less.

If you get cold, or the setup isn’t right, don’t trade. This is the hardest rule to adhere to, but it’s the most important. I like to trade as much as anyone. However, I also like my hard-earned money as much as anyone. So if there is no edge, I won’t trade. Here is a quote that best summarizes waiting to find the best setup that I have on a sticky note on my computer monitor.

“You don’t have to involve yourself in every market movement. In fact, you should not attempt to. Be an exacting opportunist. Be selective and pick your entry spots very carefully. Wait until the probabilities are stacked in your favor before you act. With patience and discipline, you can profit from market opponents who are less disciplined and less capable than you are. While you do nothing, less skilled opponents are laying the groundwork for your success, and you get to wait and watch for free. What a deal!”

We will take more shots into this market in the days/weeks to come. I like the look of stocks such as Ciena (CIEN), Zscaler (ZS), Etsy (ETSY) and others. However, it won’t happen until I feel that the risk/reward is in our favor—and I will recognize that when I buy there is no guarantee of success, and should I fail, that the next great trade could be on the horizon.

If you’d like to find out what that trade is, click here to join me.

Jacob Mintz

Quick Profits, Controlled Risk

Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

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