Wednesday, August 31, 2011

The Psychology of Trading: How to manage emotions and use them to your advantage

Emotions: Proper Balance

Every book that you’ve read about trading says that you need to be an emotionless robot, day in and day out, in order to be successful as a trader. Unless you use an automated system, I believe that total elimination of emotions is impossible. Plus, I feel that a proper balance of emotions is necessary to be successful. Think of it this way, greed allows you to let profits run, fear allows you to cut losses short; you need to have healthy levels of greed and fear.

The Formula:

(A Trading Plan x Warranted Confidence in the Plan) + Patience + Discipline + (0.5Greed) + (0.5Fear) = Proper Emotional Balance
           
The Trading Plan

First, have a trading plan, but don’t just have any trading plan; have a trading plan that you are confident in. Importantly, this confidence in the plan should be 100% warranted. In order for you to determine if the confidence in your plan can be warranted, the following criterion needs to be satisfied:

-          Plan provides fundamental analysis and determines fundamental bias
-          Plan provides multiple technical analysis time frames and determines technical bias
o   Plan clearly defines technical criteria needing analysis
-          Plan provides entry execution rules
o   Defines entry process for ranging market
o   Defines entry process for trending market
-          Plan provides exit rules
o   Defines target parameters
o   Defines risk parameters / stop placement rules
o   Defines acceptable level of R Multiple (Reward to Risk ratio)

A system, in time, needs adjustments to work optimally. Due to this, monitor the performance of your system rules, and adjust accordingly to improve results. Perform regular maintenance and make minor tweaks here and there if needed, do not overhaul your entire system; just improve inefficiencies where they appear to be present.


Patience: the key to success

Impatience = Failure. Patience, be it waiting for 36 hours for your trade setup or performing your daily analysis everyday prior to entering the market, is key to success. Impatience needs to be eliminated. This is the one emotion that cannot be present in this business. It is also one that has the potential of getting eliminated quickly because it is usually a personality trait for some traders, not an actual emotion per say. A proper trading plan can help reduce impatience, but patient needs to be learned by the trader himself. Take the time in what you do, prepare, monitor, and execute. Apply patience in your daily analysis, don’t rush through it because you just want to be in the market. The more time you put into your analysis, the more successful you will be. As a trader, your primary job is not trading; your primary job is being an analyst and risk manager.  Spend time on your analysis, put 100% of your effort in reading the market. If you apply this concept, trading will be the easy part. As a trader, your duty is not to sit there and fire off trades, it’s to analyze the markets and take the positions that follow your system. If you think you missed a trade, it doesn’t matter, there will be millions more; be patient.

Discipline: without it, you are nothing

            Never, ever, stray from your system / rules. Always obey your rules, follow them, apply them, and profit from them. A disciplined trader acts as an operator of the system he is applying. He performs analysis, decides what needs to be done, and patiently waits for his setup. When the setup occurs and his system criterion is met, he does not hesitate on taking the position. Once in a trade, he has no emotional involvement with the trade, everything is defined, all possible situations have been run through and potential decisions for certain situations have been established. The execution of the trade is the easiest part, it’s the click of a button. The hardest part is entering with confidence according to system rules, removing emotions when in the position, and then exiting according to system rules. In order to perform this day in and day out for a profit, the trader needs extreme discipline, without it, the trader is nothing.

Fear and Greed: not so bad?
            Greed is the reason you are a trader. You can be greedy for money, more time with your family, or being your own boss. For most, it’s a combination of them; having the money to provide for your family while living a comfortable life performing a job using your intelligence and being the decider of your wealth. Without greed, you would be just like any other content working man, working for a paycheck until 65 and then dying; making nothing exciting of his life, leaving no legacy. I believe there are two scenarios of greed, as described below:
1)      Being greedy for (x), putting in countless hours of work to achieve (y), building a plan / an approach (z) to reach (y), with disciplined application of (z), (y) will be achieved.
a.      You realize it will be the hardest job you have ever done. You understand that the money will not occur over night but instead over time. You do what it takes to discover (z) in order to achieve variable (y).
2)      Being greedy for (x), you open an account, have no plan / approach (z), and expect to reach (y to the 5th power).
a.      You think its easy money. You’ll be a millionaire overnight. You have visions of easy $ signs in your head; a mansion, Ferrari, and vacations by the end of the year.
                                                              i.      If it’s as easy as you think, why doesn’t everybody do it and why aren’t they all rich?
The failure rate of traders is around 97% according to government research. The (# 2) type of trader becomes a statistic in the 97%. However, the (#1) type of traders are the 3% of traders making extremely large amounts of money from this business. I will tell you in one sentence how to be part of the 3%:
ANALYZE, be PATIENT, execute according to PLAN, and DON’T MAKE MISTAKES.
            That’s it, that’s the “Holy Grail”. The process is very simple. Analyze, analyze, and analyze some more. Be very patient, wait for your setup; the setup that agrees with your system. Then, execute the entry according to your plan. Finally, don’t make a mistake.
While in positions, fear and greed will be present. Whether it is setting your profit targets, stop losses, or deciding to exit a position for a certain reason; fear and greed will impact those decisions. Fear and greed determine how much you return and risk when you exit for a profit or cut a loss. Once again, think of it this way: greed allows you to let profits run, fear allows you to cut losses short; you need to have healthy levels of greed and fear in order to have the most efficient results.

8/31/11: No trades

I had other business to attend to all day today, so I was unable to watch the screens. I will be up bright and early tomorrow, business as usual. I will have the morning prep posted before 7:30am, and will have an update on longer term market analysis throughout the day. Also, I want to post a part of my book that I'm currently writing, this specific section discusses emotions. This will be the next post.

Have a good night and good luck tomorrow!

Tuesday, August 30, 2011

8/30/11 Trade Results: 9 Trades, $140 Profit

I need to leave early today, so I am ending trading at 10:15am today. I will have a video or post later on explaining today because it was the first day of almost nothing but stopped out trades. Ended the day with a profit of $140. I had 8 stops today and only 1 target met. I want to go over the trades, the reasons for the trades, and how I take stops. I have reduced risk drastically over the past few weeks because of the market environment. I am also shifting over to increased conservatism during the uncertain market conditions right now. Like I always say, "Missed money is better than lost money." Think of it that way, and be smart with your trading.


8/30/11 Morning Prep / Analysis: Consumer confidence (10am)

Fundamentals: Futures to open lower, economic data in focus
- 10:00am: Consumer confidence

Technicals: 7:48am- Fast charts showing initial signals for a short bias. Slow chats still holding long bias, but if fast charts continue direction, slow chats will slip into short bias. After filling out the DAS, my current technical bias is neutral. Because of this, I am waiting for buyer or seller conviction before taking a position.

Course of action: I will monitor charts and wait for buyers or sellers to step in. I will also keep in mind the consumer confidence at 10am and make sure I am not in a position going into the news.

Monday, August 29, 2011

8/29/11 Morning Session Trade Results: 3 Trades, $175 Profit

Very light volume this morning. Done trading for the morning session because of the lack of volume and slow pace of tape. Had 3 trades for $175 profit. I will watch the afternoon session, but not sure if any trades will be taken; if volume stays low then not trades will be placed. Here is a chart of one of the positions, all trades were long and all were stopped out for a profit.

8/29/11 Morning Prep / Analysis: PCE price index, spending, personal income (8:30am)

Fundamentals: Futures sharply higher.
- 8:30am: PCE Price Index, Spending, Income numbers
- 10:00am: Pending Home Sales

Technicals: 7:09 AM, markets sharply higher. Technicals on all timeframes showing bullish environment. News today will dictate whether markets can continue higher or will reverse. Current price above my trigger lines on all charts.

Course of action: I will be waiting for the 8:30am news and will analyze the impact as it's released. If it's positive / neutral, I will be looking for a long signal to enter.

Friday, August 26, 2011

8/26/11 Trade Results: 6 Trades, $785 Profit

Today there was a lot of information coming into the markets that resulted in high volatility. We had GDP come in at 1% v 1.1%. We had Bernanke speaking at 10am which gave the markets a big boost. I had 6 trades which resulted in a profit of $785. Volatility started dropping off around 12:15pm going into the afternoon. I would like to highlight a few of the positions below:

Trade 1- BOT Long:
Analysis told me the market was bullish, but I wanted to make sure that my entry resulted in as little heat as possible. The trade was actually managed poorly. I had a default target at 10 points, which I should have moved because of the volatility. As you see, I had no reason to exit yet and once target was met, market continued rallying.

Trade 2- BOT Long (Wedge):



This was a signal taken on a time chart. The wedge was recognized and I ended up taking the wedge support long which resulted in an R-multiple of 10.00. Max target was met at $400, 20 points.

8/26/11 Morning Prep / Analysis: GDP (1.1% forecast) 8:30am, Bernanke at 10am

Fundamentals: Futures slightly lower and slow currently.
- 8:30am: GDP, forecast of 1.1%
- 10:00am: Ben Bernanke Jackson Hole Speech

Technicals: 6:56am- Charts showing a short / neutral bias. Trade is very flat / pretty choppy at the moment. Charts reflect traders waiting for GDP and Bernanke speech.

Course of action: I will be waiting for the GDP number before even considering a position. I want to see conviction from either side of the market. Currently updating my analysis sheet and highlighting "zones" on my medium and fast charts. Here is the wedge that I've determined is the current price action.

Thursday, August 25, 2011

8/25/11 Trade Results: 3 Trades, $230 Profit

Today I had 3 trades for a profit of $230. I want to discuss one of the trades below.

Short BOT: I want to highlight the initial R multiple of 6.67 that is in place when the trade is initiated. Following that, the stop is gradually reduced to a positive stop (i.e. if stopped out you're still making a profit).



 Once the trade is confirmed, I adjust my stop to positive territory.


 I keep moving the stop down as the trade progresses in order to not have emotions present.
I got stopped out on the jump in price present by the green bars on the 1 min. Normally, If the R multiple was larger, I would allow for this pull-up to occur and then place my stop above this price action once price continues in the downward direction

8/25/11 Morning Prep / Analysis: Unemployment Claims 8:30am

Fundamentals: Futures mixed, unemployment claims on deck.
- Steve Jobs resigned
- Investors on "Fed Watch"
- 8:30am unemployment claims
- Global economic fears remain, but markets have rallied the past two days

Technicals: Charts showing bullish technicals. Long signals present on the slow charts for the past 36 hours. Medium and fast charts also showing current long bias. BUT these signals are after the sell-off in the NQ following the Steve Jobs news. Also, unemployment claims are released at 8:30am, so markets can go EITHER way after that, since the claims are looked at as a catalyst normally.

Course of action: Wait for claims, keep monitoring Apple news, and continue fast term analysis into the claims number to see if buyers or sellers will take over from a technical perspective.


Wednesday, August 24, 2011

8/24/11 Morning Trade Results: 4 Trades, $200 Profit

Today I had 4 trades, for a profit of $200. Basically, in the morning the markets were really undecided and I took a few signals that weren't really strong, so 3 trades were +$10, +$20, -$30. The trade below was a strong signal that was taken, I allowed the run-up to occur and waited for signs of sellers / buyers taking profit. I am done for the day right now, but will take a glance at the afternoon session later.




8/24/11 Morning Prep / Analysis: Durable Goods Orders 8:30am

Fundamentals: Stocks set to open lower
- Investors on "Fed Watch", expecting an announcement this week.
- 8:30am durable goods orders m/m.
- Global economic fears remain.

Technicals: Charts showing an uncertain range in the form of a wedge. Usually what you see in these types of conditions is uncertainty / a battle between bears and bulls, until a convicted direction forms. I have slower charts showing long signals, with this sell off being a pullback. On the medium and faster charts, I'm getting mixed signals with flat price movement.

Course of action: Let buyers and sellers battle it out, once I see power from either side, I will then consider a trade. I will not place any trades until the durable goods orders come out which may be a catalyst for a move in the market.

Tuesday, August 23, 2011

8/23/11 Trade Results: 5 Trades, $425 Profit

After giving up the entire profit from the overnight trade with 1 very poorly managed position which resulted in a full stop, I had a few more trades. I took regular small profit stops, but the trade that made basically all of the money today was the $400 BOT long mentioned in the post below.

On the day: 9 trade, $425 Profit. I am done trading for the morning session and probably for the entire day, unless I decide to follow the afternoon session for a little bit if signals are present.


8/23/11: BOT Long- $400 Return

I just took this BOT Long Signal. $30 Risk to $400 potential return, will adjust stop and target as necessary.
I got stopped out of the position above for a profit of $5. I then took the following trade after the open:
Update: I met target at $400.

Total on the day so far is $425.

8/23/11: Premarket Pullback Trade- $60 Risk, $300 Return / Afterhours trade update

Ok, so regarding the trade from last night, I adjusted the target and took a profit of $200 on it. This morning, I took the following trade and got stopped out at max loss, $200:
A couple notes from this trade:
- NEVER adjust a stop against yourself! This was my biggest mistake with the above trade. I adjusted my stop to max to "let the trade workout". Unacceptable.
- Wait for a signal / strength to build in your potential trade direction. As you see from the above chart, I was buying into current weakness with no clear signal, just anticipating that that was the pullback point.

So after the profit from yesterday's trade that got filled this morning and the loss on the above trade, which was a managed extremely poorly, I am currently at $0 net.

I took the following trade which was a much better, clearer, and stronger signal:

Update on the above trade: Stopped out for a profit of $20. I am very happy with taking the stop for the profit, especially after the mistake on the previous trade that should have never happened; that was an amateur mistake / horrible trade management. Remember to always get yourself into favorable situations and stick to your risk management rules.

Currently, going into the open with a profit of $20. Will be waiting for new home sales at 10am and Richmond Manufacturing Index.

8/23/11: Morning Prep / Analysis

Fundamentals: Stocks set to open higher.
- Investors on "Fed Watch", expecting an announcement this week.
- 10:00 AM today, New Home Sales numbers and Richmond Manufacturing Index released.

Technicals: Charts showing strong bullishness BUT are currently rolling over to the downside. This rollover is either a reversal or a natural pullback, it's tough to say until you actually start getting some signals.

Due to this, I am assuming a 5 min wedge / consolidation range and waiting for a BOT signal.

Monday, August 22, 2011

8/22/11 Trade Results: 9 trades, $405 Profit

Today I had 9 trades for a profit of $405. I am currently in one "position" type trade that I have a risk of $200 for a return of $1000. This position was taken into the close of today, therefore it's still open. I will adjust stop accordingly throughout the trade, but will not increase the risk. The target may also get adjusted as market conditions change.

I will have an update on the open position later.

Hope it was a good day trading!

8/22/11: BOT Long Trade

Here is my current position. Risk of positive $25, Reward of $200. This is a completely risk-free position now, worst case scenario is that I get stopped out and make $25; best case scenario is making $200. I took the BOT Long signal:

8/22/11 Morning Prep / Analysis

Fundamentals: Stocks set to bounce after volatile week. DOW futures up 145 points right now.

Technicals: Slow charts are just now beginning to show signs of rolling over to a long bias, currently signaling primary long triggers. Medium and fast charts have all signaled long.

What I am doing now is trying to ensure that I am not the last wave into the market. I also want to try to make sure that I am not taking large amounts of heat / buying at the top. The chart below shows the strong uptrend, but what I'm looking for is how the pullback is treated. If buyers step in and support price, I will be buying. I also will pay attention to flag formations on my fast chart and wait for a BOT signal.

Friday, August 19, 2011

8/19/11 Trade Results: 9 Trades, $615 Profit

Great day today! I took mostly BOT signal trades, which resulted in 7 profitable trades and 2 losing trades. I decided to stop trading around noon due to the drop in volatility / analysis signaling neutral market conditions. Here is a chart of 1 BOT trade and the performance report for today:

  
Hope the trading week went well. Have a great weekend!

8/19/11 Trade 2 BOT Signal signal- How to catch a reversal: $200 Profit

This was trade number 2 of the day for $200. So far, profit on the day is $400.

Here are the charts showing the trade:





8/19/11 Trade 1 BOT Long signal: $200 Profit

After the morning prep, I was waiting for a BOT signal long after buying support during the pullback. Here is the chart for trade 1 which met a profit target of $200.

8/19/11 Morning Prep / Analysis

Fundamentals: US futures to open sharply lower on continued economic / Euro zone fear.

Technicals: Our fast charts are showing initial signals of a long bias.

The initial technical signals to the long side will be monitored. I want to see how price reacts on the next pullback and if buyers step in with support, the long bias will be confirmed.

We always want to be VERY careful that the initial signal is not just a pull up / pullback on our medium term chart which will then continue in the original direction.

Here is our initial signal on the fastest chart:

Thursday, August 18, 2011

8/17/11 Results: 13 trades, $525 Profit

I had 13 trades today, a lot more than usual, but the result was positive. Ended the day with $525 profit. The markets were very volatile today due to a large amount of negative economic news and Euro zone fears. Let me know if you have any questions. Here is the chart:


Wednesday, August 17, 2011

8/17/11 Results: 1 trade, $200 Profit

Hey Everyone!

First day back from vacation, had a great time! I traded until 9:50am today, had 1 position. I met target at 10 points, for a profit of $200. Here is the chart:

Email if you have any questions.

Good luck today!