On this bloody day in markets (August 4th 2011), a lot of traders are panicking — scrambling to take last minute action, wondering what they are going to do, and making rash decisions in light of their shock and surprise. It’s foolish.

There is nothing wrong with acting quickly and decisively, of course. That kind of action is required on a constant basis in trading.

But there is a big difference between seeing with a clear eye what needs to be done, and then doing it, versus being caught up in the emotional whirlwind of “Oh no what am I going to do” — and then doing something rash.

The bottom line: Panic is for suckers.

That’s not to say you can’t profit from panic, of course.

You can make a killing in a panic — just ask guys like Livermore or Paulson or Soros or PTJ, all of whom made millions to billions as markets crashed. Some guys love it when the lightning crashes and the thunder rolls (including us).

The key thing is that YOU should never be the one panicking.

You should be the one with a well formulated, well crafted plan — a plan that covers all contingencies, be they fully exploiting the event via pre-established actions or simply honoring your risk points and going to cash.

In short: If you panic, you lose, because panic means you have been caught out without a plan.

If you are still in the market on days like today, then you should be calmly executing on your established routines (or making hay if you happened to be prepared for such an event). Barring that, you should be reflecting contemplatively from the shelter of a safe harbor — not panicking.

Panic is for suckers. Never panic. Let careful planning forestall your panic. Let creeping signs of panic act as a call to take a deep breath, clear your head, and step away.

Some words of wisdom from “Deep Survival” by Laurence Gonzales:

There is a Korean martial art called Kum Do, which involves very sharp swords (and at least originally) an eventual fight to the death. It is related to Japanese Kendo. Those who practice it today use bamboo sticks, but some of the moves that have survived the centuries were developed to shake blood off the blade so that it wouldn’t coagulate and dull the edge.

Kum Do teaches students to avoid the “Four Poisons of the Mind” — fear, confusion, hesitation, and surprise.

I had to think about that last one for a while, as the others seemed self-evident to me. But I recognized that our constant tendency to anticipate and predict may sometimes put us at a disadvantage.

In Kum Do, the student must not anticipate his opponent’s moves or allow his natural instinct for prediction to run free, for that could lead to surprise, which could lead to momentary confusion and then sudden death. Instead, he must watch, clear and calm, and then act decisively at the correct moment.

Since a single blow can be lethal, can be in fact the only blow dealt in the fight, Kum Do teaches focus, precise bodily control, courtesy, humility, and confidence. Those are similar to the qualities you need when you engage the forces of nature.

cool as a cucumber in a bowl of hot sauce,

JS

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