There are all sorts of things that move markets: shifting fundamentals, technical pivots, valuation changes, macro events, market sentiment, news flow… But in my experience the most extreme market moves are about pain, and nothing else. Valuation and long-term analysis flies out the window as the margin clerks run amok and the market searches for liquidity.
The answer to the riddle of market direction can often be answered by asking, “Where is max pain?” (If your answer is, “In Sao Paulo, searching for redemption”, then you have been playing too many video games). The market will tend to move in the direction that causes most pain for most people.
I have been in the room where experienced, intelligent, wealthy traders have said “I believe our fundamental analysis, but this is too much pain. I have to exit the position.” This is after days and weeks of saying “The market will prove us right eventually. It doesn’t matter where the market goes in the meantime” and even “I’d love the market to go against us, because then we can add more”.
If you read my post on the Averaging Down Clown, you will know how I feel about that last statement. But the point here is a broader one about being clear about your ability to stay in a position. It is very good practice to decide on a stop-loss point before you enter a trade, and to stick to it. Deciding on how and when to stop out after you enter a trade is much more difficult, since you will have all sorts of emotional difficulties and hang ups to deal with.
In some ways, it is the job of the market to seek out the weak longs and weak shorts, and to test their resolve. There are certainly trading professionals whose business model relies on this: in all time frames from HFT to weekly and monthly patterns, there are traders who will attempt to “run the stops”, to find pain and to force people out at the worst possible moment. Even if there is not someone explicitly doing that, markets seem to move in that manner anyway.
Have you ever stopped out at the bottom of a move and had the market trade right back up? I have, many times. It is incredibly frustrating. You say “Oh man, I can’t believe I stopped out at the bottom. If only I could have held on a little longer.”
But here is the thing: you have the logic the wrong way around. You did not stop out at the bottom. It was the bottom because you stopped out. If you had not stopped out, that would not have been the bottom: the market would have kept on moving against you until you stopped out. It was searching for the pain of the weakest, and today it was you.
Markets move through pain. Work out how much pain you are willing to take before you jump in. Be honest with yourself about how much pain you could tolerate and expect the worst, since the market will test you just when you are least able to cope. Otherwise, you run the risk of being half an hour into the poker game, still wondering who the patsy is.