We've never seen anything like this! This is going to change everything!
This week, we saw a volatility expand like we haven't seen in a long time, this is VIX chart:
VIX went from 15 to 65 in 2 days! Some are calling it Volmageddon.
Many were panicked, and the market saw significant selling on Friday and Monday as overleveraged traders scrambled to regain control before losing it all. The sell-off is attributed to firms leveraging Japan's low interest rates to invest in U.S. stocks and crypto. When Japan raised its rates, these firms were forced to unwind their positions, compounded by news of Warren Buffett unloading half of his Apple stock and growing fears of a potential U.S. recession.
This shook the market, but in a few months or a year, will most people remember this? Only those who lost substantial money. It’s a timely reminder of a crucial lesson in trading: the most expensive words on Wall Street are, "This time is different."
I've seen this throughout my trading. From the tech bubble of the '90s to the financial crisis of 2008, the pandemic of 2020, the flash crash, and 2023's "banking crises"— I've traded each one of these, and there were so many more... Do you remember the flash crash? See I almost forgot...
Each "panic" has different contexts, but the underlying patterns remain consistent. People often claim "this time is different" to justify their strategies, decisions, and mistakes, seeking to de-normalize what is, in fact, a normal part of market cycles.
The human psyche is fascinating. We’re drawn to headlines proclaiming, "This time is different," because they tap into our primal fear instincts. The fear of losing and the belief that this time might truly be different can be overwhelming. But it's essential to recognize that there’s a 99% chance this time is no different than any other.
Think back to the COVID-19 pandemic. Whether you were trading or not, it felt like a truly unique crisis. Here we are a few years later, things have largely returned to normal. It's important to not forget lessons learned each time this happens, one of the biggest lessons is this time really is NOT different.
The stock market’s reaction on Friday and Monday is being described as unprecedented or something not seen in X number of years. This rhetoric often justifies over-leveraging and sidestepping best practices.
Consider this: If you hear, "This hasn’t happened before" or "This hasn’t happened since," remember that it doesn’t necessarily mean this time is different. Everything works until it doesn’t. Taking risks and engaging in arbitrage is part of trading, but over-leveraging is dangerous. I discussed this last week: mentally stress test worst-case scenarios. This time probably isn’t different in many ways. Those who over-leverage often get liquidated at the bottom, only for the market to bounce back.
During the 2008 financial crisis, many investors believed the market's collapse was unprecedented. They over-leveraged, thinking they were seizing a once-in-a-lifetime opportunity. Unfortunately, many were wiped out when the market hit rock bottom. Those who stayed cautious and managed their risks were able to weather the storm and benefit from the eventual recovery.
Does this scenario sound a little like what we saw this week? Over leveraging because this time is different. This has never happened, so this time is different. This time is not any different.
Recognizing that "this time is different" is probably not true will transform your trading strategy. Instead of reacting to fear and hype, you’ll maintain a balanced approach, you won't over leverage, you will think about worst case scenarios. Put sales on companies you can afford to own lower is a great strategy. This mindset will help you avoid costly mistakes, manage risk effectively, and stay resilient in the face of market volatility.
Here’s what you can do right now to protect yourself:
Stay Grounded: Remember that market cycles repeat. Use historical patterns as a guide, it's more accurate to say the cycles rhyme, because normally there are small differences.
Avoid Over-Leveraging: Stick to best practices and don't let fear drive your decisions. More risk gives you more reward when things go well, but be able to handle the other side of the risk.
Stress Test: Always mentally stress test worst-case scenarios for your portfolio. It's important to think about the worst case mentally before you have to physically manage your portfolio while you are in a house of pain.
Join Our Community: Learning from people who have been trading for decades is valuable. For more insights and real-time market updates, join our Good Kids Trading community on Discord.
Do you want my exclusive insights and strategies from nearly three decades of trading experience? Join the M$M Inner Circle. Subscribe now and take advantage of the introductory price! You will get my best content and learn from my experience.
Let’s navigate these markets together and avoid the pitfalls of thinking, "This time is different."
The world probably isn’t ending, and while the market will overreact, maintaining a balanced and conservative approach is crucial to your success. It's not only about potential profits; it's also about managing risk. Over-leveraging in response to perceived uniqueness can lead to costly mistakes. Remember, the most expensive words on Wall Street are, "This time is different."
Happy trading, good kids!
-$Maxwell
For more insights and real-time market updates, join our Good Kids Trading community on Discord. If you need personalized help, schedule a 1:1 intro call using my Calendly link.
This is not trading advice, it's for your education. None of this is financial advice. Any trades or decisions you choose to make are at your own risk.
Комментарии