Responding to a Stock Market Pullback

· 10 min read
Responding to a Stock Market Pullback

Everything is Clear in Hindsight

Do you ever buy a 'sure fire' stock that you were certain is going to rocket but somehow pulls back the second you buy it? That large, sometimes over-sized trade soon turns into an anxiety riddled affair and all of a sudden, like magic, the setup doesn't look that clear anymore.

As hundreds of chemical reactions flood your brain and start prodding switches and mechanisms in your psyche, control is hard to maintain during a quick pullback. Far too many traders learn it the hard way - there is no sure thing in the stock market.

Seldom are trades taken thinking "how much could I lose". Typically amateur traders focus on the upside and when it doesn't show up, there is no plan other than panic. We've all been there, making decision after decision that grinds down our account and more importantly, our head-space.

As the saying goes "Everybody has a plan until they get punched in the face". Trading will knock you out if you you don't have a trading plan. The plan itself if maintained is exactly what removes the emotion from trading.

One of my personal 'favorites' was selling out of Tilray (TLRY) before a 1000% run! I had $25k positioned in this stock, it conformed to my rules (IPO base) and risk (1% of whole account) but the reaction just "scared me".

I jumped out of this stock because of fear and lost out on a possible $100k (at least) of profits. This happened a few times and was demotivating the bananas out of me during my formative years in the market. It became clear that my emotional reactions to market pullbacks were costing me significant gains.

Market Pullbacks  and Trading Psychology

The cascading events tend to happen after a correction or pullback when we own stocks, specifically if we sized the position "intuitively" as opposed to having a defined position size or clear trading plan:

  1. We doubt our decision and the entire market sentiment feels negative - any blip on the screen now feels hostile
  2. Options are bought to protect the downside, and typically don't work out, death by 1000 cuts, some like to call it "hedging"
  3. The position turns around as if by magic the second we leave the trade and rallies hard but we are too scared to buy it again
  4. We turn from position traders into day traders watching every tick of the screen, our judgement turns fuzzy

The reaction to a pullback and knee jerk emotional response is easy to spot using a trading journal.

How it shows up in a trading journal:

  1. Our trades are erratic and we buy too much or too little, or do both on the same day running up commissions
  2. Trigger happy trading - buying and selling at random points close to the breakout, another form of over-trading
  3. Moving stops up too quickly, having a high win loss ratio but the wins and losses are almost even in % terms
  4. Ignoring the strategy and buying poor setups which we sell soon after - the exception of when you should sell too soon!

It can be a daunting realization when you see this type of behaviour in an a trading journal and contemplate it. You know what to do, yet somehow you are in the moment doing the exact opposite. Much of the time, these are normal market reactions not the end of capitalism (dream on commie).

Far too many traders get this market feedback and simply throw in the towel. The emotional pain tied to winning and being right or wrong far outweighs the opportunity to learn in their eyes. The funniest part of the market and developing the skills required to succeed is that these moments define whether or not you will be a good trader. So what's going on when we react like this?


When large reactions or pullbacks occur, we make a number of even more more silly decisions. Instead of truly introspecting and asking what went wrong, people tend to simply hop to a new strategy or trash their own. A flip flop ensues between buying and holding (investing) or trading. Consistency seems unattainable at this point.

So we have a perfectly legitimate trading strategy, don't trade it and then blame the strategy that we aren't trading. This is precisely why trading is the best sport on the planet and the reason I love it so much.

You can decide to see the situation for what it is (simple probability) or you can project your own inadequacies into the strategy and then blame "The market" when it doesn't work. Selling a stock on it's first reaction and getting scared out of the market is a market feedback in it's purest form. Something has to change. In a day job people can be nice and you get away with mistakes (some people for years) in trading however, you lose money - instant feedback.

At these points in a traders development, it is imperative to pause and reflect on the behaviors and patterns defining your trades and repeating themselves with regularity. This is really something nobody can do for you which is why in coaching sessions I prefer to be direct and objective vs catering to people's ego. I would rather have 1 true student than 10,000 'customers' who will never get it.

If you are selling too soon, there is something in your psychology that needs to be either rectified or replaced with new habits, it takes work and full personal responsibility.

What Psychology Drives Selling Positions too Soon

If you are selling stocks too soon or letting losers run away with you it's typically because:

  1. You have faulty beliefs still in play about what makes money and what doesn't in trading stocks (or you wouldn't be reading this)
  2. There is little confidence in your strategy or you do not understand it/have experience with it
  3. The amygdala may be hijacked and the flee response is in full effect, selling things out of fear
  4. Outside influences have changed your opinion on the position, be it news, social media etc.
  5. Ego does not want you to be 'wrong' and creates a series of impulse decisions or trades to protect your self-image

The great news about these issues is that they are easy to spot, once you create awareness around your own behavioral patterns. Better news still is that you can visualise this by using data generated by your trades. Trading gives you this constant feedback with one of the easiest metrics MONEY. You either make decent gains, or you lose your money.

In no other business can you get this feedback so instantly and react in seconds, perhaps that is why some can't handle it and these patterns emerge. Selling too soon costs huge money in the long run and could can be avoided with experience, humility and practice.

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Boiling it Down to Basics

If you boil the psychological drivers down into some fundamental triggers that show up during sell-offs, some common feelings and actions arise:

  1. Loss of control - trying to force your will onto the stock market
  2. Creating your own narratives or illusions
  3. Trading with too much size
  4. Buying without a trading plan
  5. Not having a clear and measurable strategy
  6. Switching between strategies
  7. Managing too many trades
  8. Positions that should not have bought in the first place

Fear is a direct result of self-created uncertainty. Without having a truly repeatable strategy it is near impossible to assess what is going wrong. If we are overwhelmed by uncertainty, illusions and flashing tickers going red all day, the doom loop is in full effect and we are in the passenger seat while our emotions take the wheel. And what a fucking sleepless nightmare it can be.

I have been here enough times to know that these factors will ruin most traders and is one of the primary reasons novices wipe out. They are too scared to take losses and end up taking a huge one or sell too soon and miss life changing opportunities. Nothing is clear because they really have no clue as to what they are doing.

How to Avoid Selling too Soon

This is the easiest advice to give and some of the hardest advice to follow, particularly if one has a large position in a stock. The truth however is that implementing a strict and disciplined approach to trading is an absolute prerequisite to long term success. Some of my own strategies to avoid selling too soon include:

  1. Trading reviews: Making sure that every week, I review each and every trade to ensure it is consistent with my strategy
  2. Using my 'What If' journal to reinforce the correct behaviors and rewire my self-perception - trading is reflection incarnate
  3. Making sure my to STOP if I have an emotional reaction and use my trading journal to assess whether I am positioned correctly
  4. Accepting loss - knowing the risk up front, executing the trade and being fully okay with the possibility of losing 1 R (one unit of risk)
  5. Implementing standard position sizing
  6. Creating set processes and rules for buying and selling consistent with my strategy

It sounds like a lot of work. That's because it is. Everyone wants to walk into the stock market and pick up their free Bentley but the truth of trading is not as glitzy. There has to be a defined plan in place that can limit emotional destruction and provide insights to guide you to profit.

Some Tools

I have a pretty heavy arsenal of tools that have been shaped over 12 years including:

i. Periodic and systematic reflection

You may be sick of me mentioning my trading journal (everyone really gets fed up with it). I too used to reject the axiom - "You can't manage what you can't measure". Now in my eternal wisdom (sarcasm), my trading reviews are the core of how to know what is working and what isn't.

Every last Sunday of the month, the trading journal is populated and I literally go through each and every trade to see whether or not it conforms to my strategy. In fact, one of my reviews changed my life and trading results so dramatically that I finally realised I can quit work and trade for a living - there is NO other way!

Which leads me on to my point:

ii. Writing Down and Systematizing as Much as Possible

My ultimate breakthrough - finding out I was selling too soon out of fear, allowed me to create a flowchart (mentioned in another blog). The same has been done for my buying criteria and selling criteria when I hit profit. Think of it this way. Do pilots know what they are doing? I sure hope so, they still however have a checklist during an emergency. Trading is the same. If we do not have a clear set of rules on what to do, when and understand the rationale, what is the point of trading at all!?

iii. Mindfulness and Meditation

I have mentioned before that I have used psychedelics to perform a really deep dive into my ego and parts of my personality. Meditating is probably the closest thing to this experience that I can do within a routine and not scare the neighbors - unfortunately, during my last trip I ended up chatting to my neighbor. The poor fella.

I will write an entire blog on this soon but it really needs to be investigated by each individual. Meditation is very powerful in dealing with fear and remaining objective. Good trading should be boring, systematic and mindful. If the market is pulling you around against your will, this can be a very useful tool in taking back your power.

iv. Routine

All of the above won't count for shit unless they are implemented within a specific routine. During coaching sessions I have seen people come and go but the same habits show up time after time. People feel that they are smarter, different or somehow are can 'remember' to do everything just right, every time. It makes it near impossible to get through to people as they hold onto faulty habits and beliefs which keep getting in the way of success. It's hard to pull people from their illusions and ego.

Building habits, repeating the correct ones and systematically rooting into why you act in certain ways is literally the only way to achieve true financial independence or wealth in trading. In fact, this goes for any of life's activities which is another reason to be infatuated with the market.

A Note on Hypocrisy

It is very easy to write down a quick theory on why selling stocks too soon can destroy your trading account. The truth is over a number of years I had intermittent success with trading until I truly treated it like a business.

These realizations took many years to understand because there was a constant fight between laziness, arrogance, ego and greed. When I was 18 I knew everything, now that I am 31 I realize that learning is an evolutionary and constant process, we don't know much at all. There is no shortcut to becoming a great trader, it takes effort, systems and reflection.

Reading my blogs, other people's books and following people on twitter will do absolutely fuck all unless you totally own and be accountable for your trading system and results. This is not a quick fix, it is hard and the path is laced with mistakes guaranteed by the nature of the market.

One axiom I will leave you with, and no words could reign more true:

"I start early and I stay late, day after day, year after year. It took me 17 years and 11 days to become an overnight success" - Lionel Messi

If you truly want the large market gains available in stock trading, get stuck in and start writing down your plan. Alternatively, reject the discomfort you feel from this article and go back into your blue pill reality (not viagra in case you haven't watched the Matrix) and stay in autopilot mode with the other 90%.

I hope you've found this helpful. Please share your experiences with us. I will post some good book recommendations on the topic shortly.