Decoupling your PnL from the MkT

 A pitfall that every trader faces, and one that "got me" this week in fact, is thinking that one's PnL is positively correlated to market volatility. It's not something you consciously think about explicitly, i.e. you don't actually look at the volatility and think "I need my PnL to track this market volatility." Rather, it's something that amounts to the market simply pulling you in, as if not participating in a spectacular move will ruin your chances of making it as a trader. This is like saying not "finding" a significant other in high school or college ruins your chances of ever being in a relationship. Utter insanity when you look at things in hindsight. The reality is that you have ample opportunities (in both areas), but one's perception of the "right time" to take action can be highly biased.

When you as a trader are potentially making money both long and short, both in steady markets and volatile ones, why the heck would this type of FOMO kick in? It's likely related to the fact that at the end of the day, we're members of the animal kingdom, and are often driven by deep evolutionary habits. We bring our natural reflexes and personalities to the market, and anyone who's gone fishing knows that one of the best ways to lure a fish is to quickly move the bait away from the fish, triggering a hunting response. And a wise hiker who hikes in the wilderness knows not to run away from certain predators, as they'll perceive you as prey. Similarly, the market somehow knows how to separate you from your money by running away from you!

There's no magic bullet for overcoming our natural instincts to take often injurious actions when market conditions scream "do something!", but the first step in counteracting them--much like the basis behind many other things in trading--is to recognize the mathematical reality of your PnL journey vs your natural instinct for a call to action. In my example, I had ramped up a small account by over 30% in two days during non-volatile periods, but somehow still felt the need to participate in a sudden mid-day decline whose magnitude I underestimated (going long to capture the reversal). Not only did I participate, but I doubled down and ended up getting stopped out almost perfectly at the market bottom, wiping out all my gains in 5min. Though this is a simple example, countless traders probably throw it all away in a similar fashion at the end of a day/year/career. Ego and excitement take over, and rationality is nowhere to be found. Be careful out there.