Trading Psychology

老TK

Is Trading Psychology An Excuse For Losing

Trading psychology has become so widely discussed and promoted through books and consultants that it has become a very convenient rationalization and excuse for losing. Why take the responsibility for a lack of work ethic and trading without any concept of plan, an honest assessment which would be a ‘hit’ on the trader’s self-esteem – when you can just blame it on trading psychology instead?

Trading psychology is ‘something’ that a trader creates from existing personality traits that are not initially related to trading, but surface from trading without method understanding. The outcome of course is fear, but wouldn’t this be the case when doing anything that was perceived as ‘dangerous’, and which was being done without the necessary understanding and skills? Trading, with its inherent characteristic of accepting financial risk while participating in unknown outcomes, is certainly ‘dangerous’, and thus the more preparation and understanding that is needed.

Trading Scenario

Consider the a trading plan which has the following three setup types: (1) initial which is your intended trade entry (2) first continuation which is used to enter a trade in case you have either missed your initial entry, or you decided that you wanted more confirmation because it was a counter direction trade (3) second continuation which is intended as a trade addon setup, but is also one ‘last’ chance to enter a trade.

You get an initial sell setup that triggers, but you do not take the trade = trade1. The trade breaks cleanly and goes to what would have resulted in a partial profit, and then before price goes down further, it retraces back to the area where the sell was done. This price holds so the swing remains short, and from this hold of what is now resistance, you get the trigger of your first continuation setup BUT you don’t take this trade either = trade2. Why wasn’t the trade taken? You decide that after missing the initial entry that you have missed the trade; your emotions and biases tell you that the ‘move’ has gone too far. Again, this trade breaks cleanly, not only adding to the gains of trade1, but also giving a partial profit on trade2.

Price now consolidates between the lows and the price resistance that you would typically be using to stay short if you had taken either the initial trade, or the first continuation trade. Instead of the swing reversing after consolidating, it continues down again, and with this continuation your second continuation setup triggers = trade3. AND AGAIN - you don’t take the trade. After all, if you didn’t take either of the first two trades, how can you possibly take this trade; maybe you were wrong when you thought that the move had gone too far to take trade2, but certainly that’s the case for trader3.

Like trade1 and trade2, trade3 is a profitable trade. This swing has really turned into a great directional move, with each break holding on weak retests – a textbook example of the strengths of your trading method, but YOU have never entered a trade. You are going nuts! You are getting into this damn swing - you just can't take it any more. Another retrace holds as a lower high. You don’t have an entry setup, but that doesn’t matter, the other three trades were profitable after a lower high. Isn’t it interesting, the same emotions which wouldn’t let you enter your plan trades, are now ‘forcing’ you to take a non-plan trade.

Instead of YOUR trade going to a lower low and to a profit, it instead goes to a higher low and then reverses into an initial buy. Bad just got worse, you also don’t exit when the swing goes into buy. After what you went through to finally get into the trade, you have to try and make it work, and after all the trend is down – right? TraderA uses this initial buy to exit their profitable sell and sell addon; they decide that they want more confirmation of swing reverse before trading the counter direction. A first continuation setup triggers and they go long, the swing has reversed, and this trade reaches its first profit target.

TraderB finally ‘gives up’ and exits THEIR short, although with a two point loss instead of the intended one point, and without any consideration of taking their next plan trade, the first continuation buy. This trader is done for the day, but at least they were ‘right’ all along; the swing had gone too far to enter, and their fears had been warranted – this was a losing trade that they should not enter.

Is this a trading method or trading psychology issue? What ‘message’ is TraderB going to take from what has just happened. Will they take the attitude that they should not be blamed, they just can’t trade because of trading psychology? Or, will they acknowledge that the method did win, that the resulting loss was not a method trade, and even if it was, the loss would have been offset by the prior winners. Will they acknowledge that THEY made their worst fears come true and not only turned this into a losing trade, they also increased he size of that loss, and then avoiding another method winning trade.

Granted, psychology was involved with what has happened in the described trading scenario, but that is a function of the individual’s ‘core’ personality, and would most probably be an issue regardless of what was being done; if there is ‘risk’ involved, there will be an ‘emotional’ response. Thus, it is first necessary to separate personal psychology from trading psychology, and the use of this concept as an excuse for trading actions. Then, if trading psychology is going to be controlled, this will be done through the development and implementation of a tested plan that the trader is willing to follow. Do not trade with ‘built-in’ excuses for failing, you will have lost before you begin, and will continue to do so with a continued ‘snowballing’ of emotion to the extent where trading will no longer be possible.

老TK

Trading Psychology Viewpoint

No discussion about trading, or the consideration to begin trading, can be done without a harsh realization - the vast majority of all traders lose.   

It is said that the reason that most traders lose is because they are not psychologically prepared to trade, that is they are not prepared to accept financial risk for something of which they have no control over the outcome. Trading is much more of a psychological problem then a methodological one, only the traders who have first accepted this have a chance of being consistently successful traders.  Without an understanding of trading psychology and the various issues that circumvent method, there will be virtually no chance to overcome the fear, confusion, and despair that can be inherent in trading.  Ultimately, after a series of consecutive losses, method becomes replaced with a feeling that it is impossible to do anything right; if for no other reason than this situation, trading psychology is more critical than trading method.

 

New Trader Scenario 

Consider a scenario where a trader develops a method for day trading an index future.  The method gives 15 trades per day, and the trader has gotten to the point where they are able to paper trade with the following results:  9 wining trades averaging $85 each, and 6 losing trades averaging -$65 each – thus giving $375 average daily gains.  The trader has achieved these results for three consecutive months; their paper trading goals have been met and it is time to start trading real money. 

Real money trading begins, but things quickly change.  Instead of trading their method like they did when paper trading, the trader starts ‘skipping’ trades trying to pick the winners instead of accepting the 40% losers; of course, they invariably pick more losers than winners.  Trying to then correct this problem, the trader decides that maybe they are entering their trades too late.  So now instead of letting the setup complete and then doing the trade, the trigger is anticipated so the trade can be entered earlier - the losses get worse.   

With the continued losses the emotions take over:  “What is wrong, why am I such a pathetic loser?  Maybe it’s not my fault, maybe the method just doesn’t really work.” 

The problems get worse with each trade, more emotions and more loses - the trader quits trading.  The trader now decides that their paper trading results weren’t really adequate to begin real money trading.  They will go back to paper trading and studying again.   

Thoughts that are going through the trader’s mind now:  “Maybe I should try different trading methods until I can eliminate those losing trades – then I will be ready to trade real money again.  Really, maybe I should just quit trading altogether – maybe I am just a loser, and that’s why I can’t trade.” 

 

The Trading Psychology Plan 

What should be very apparent from this scenario is that the trader never traded their paper trading method plan after transitioning to real money trading.  Unfortunately, the trader is unable to realize what they have done, instead their emotions first place blame on the method thinking that it really doesn’t work, and then on themselves for being “such a pathetic loser”.  The final result being that the trader quits trading, and if the real underlying reasons for what has happened aren’t accepted and changed, this trader will never be able to trade real money even if their paper trading results become 100% winners, which of course is not going to happen. 

The trader had a trading method plan, but they did not have a trading psychology plan.  They did not have a way to make the transition from fear and emotion directed trading to actually trading the method as designed.  They did not have a plan to objectively access and understand their given non-method actions, and then define a 'setup' for replacing them. 

The trading psychology plan must begin with an honest assessment and acceptance for what really happened:  the trader never traded their method plan; there is no other blame to be placed, or excuses to be made.  There is nothing wrong with the trading plan, and regardless, the trader has not traded it in order to be able to make that evaluation.  As well, traders cannot internalize trade loses where they lead to their viewpoint of themselves – you are not a loser because your trade is a loser.   

 

Trading Psychology Plan Components 

• Accept that losing will be a normal part of trading.  Not only is it impossible to be perfect, it is not an objective or necessary to be a profitable trader.

• Replace the focus of winning and losing with the objective of following your plan.  This was not done while paper trading, as the trader had a specific profitability goal that they used to tell them when they were prepared to trade real money.  They did not understand that the reason they achieved this goal was because of how they followed their plan. 

• Remain neutral and non-judgmental towards yourself.  If profitable trading is ever going to be possible, this is mandatory.  There is no way that you are going to be able to trust yourself to manage risk while you are also telling yourself that you are ‘stupid’ or a ‘pathetic loser’ each time you lose or feel that you have done something wrong. 

• Eliminating your emotions is not the objective; I actually do not think this is possible.  Emotions are always going to enter into trading – learn to control the emotions, instead of having them control you. 

• Accept that emotions are a part of life; they aren’t by definition good or bad, and actually if you can shift the focus of what the emotion represents, they can be very beneficial for the trader.  For instance, if I am feeling confused and that causes an emotional response or hesitation, I want to feel that emotion.  This emotion becomes a warning to me that I should wait and try to find more chart-market clarity before taking a trade, something that can be very typical when markets are in congestion. 

• Start slowly – this may be the most important component of your plan.  For instance, begin trading real money for an hour at a time, and then assess what you have done, always asking yourself the question:  did I follow my plan, or did I take non-method trades.  

Granted, you will not be able to approximate your paper trading results as the expectancy of that plan was achieved by averaging 15 trades per day.  However, not only will this help further to shift the focus from how much money did I make to did I follow my plan, it will also allow you to acclimate to the logistics of real time-real money execution, and the related initial emotions, where all of a sudden the market feels like it is moving considerably faster.  By doing this you will ‘build-up’ to trading your full plan at a pace that won’t cause you to become so overwhelmed by the process, and immediately cause you to avoid what you had intended to do as fear and emotion becomes too strong. 

You have a great trading method and trading plan. You have profitably paper traded, and you ARE now ready to start trading real money – just be sure that you have a trading psychology plan that is as good as your trading method plan, and that you realize that neither will be of any use to you without the other.

老TK

Trading Method Viewpoint

It is said that trading is 90% psychological and 10% methodological.  Does this then imply that regardless of trading method, a trader that has control over their emotional issues will thus be a profitable trader, or will it be impossible to ever control emotions without the proficient implementation of method?  The trading method viewpoint will suggest that not only are these statistics not the case - trading psychology does not exist.  Trading method will be the determinant of profitability, and this will be done through:   (1) the ability to understand the method's inherent strengths and weaknesses (2) the ability to maximize these strengths and minimize the weaknesses. 

Trading psychology has become so widely discussed and promoted through books and consultants that it has become a very convenient rationalization and excuse for losing.  Why take the responsibility for a lack of work ethic and trading without any concept of plan, an honest assessment which would be a ‘hit’ on the trader’s self-esteem – when you can just blame it on trading psychology instead? 

Trading psychology is ‘something’ that a trader creates from existing personality traits that are not initially related to trading, but surface from trading without method understanding.  The outcome of course is fear, but wouldn’t this be the case when doing anything that was perceived as ‘dangerous’, and which was being done without the necessary understanding and skills?  Trading, with its inherent characteristic of accepting financial risk while participating in unknown outcomes, is certainly ‘dangerous’, and thus the more preparation and understanding that is needed. 

 

Trading Scenario 

Consider the a trading plan which has the following three setup types:  (1) initial which your intended trade entry (2) first continuation which is used to enter a trade in case you have either missed your initial entry, or you decided that you wanted more confirmation because it was a counter direction trade (3) second continuation which is intended as a trade addon setup, but is also one ‘last’ chance to enter a trade. 

You get an initial sell setup that triggers, but you do not take the trade = trade1.  The trade breaks cleanly and goes to what would have resulted in a partial profit, and then before price goes down further, it retraces back to the area where the sell was done.  This price holds so the swing remains short, and from this hold of what is now resistance, you get the trigger of your first continuation setup BUT you don’t take this trade either = trade2.  Why wasn’t the trade taken?  You decide that after missing the initial entry that you have missed the trade; your emotions and biases tell you that the ‘move’ has gone too far.  Again, this trade breaks cleanly, not only adding to the gains of trade1, but also giving a partial profit on trade2.   

Price now consolidates between the lows and the price resistance that you would typically be using to stay short if you had taken either the initial trade, or the first continuation trade.  Instead of the swing reversing after consolidating, it continues down again, and with this continuation your second continuation setup triggers = trade3.  AND AGAIN - you don’t take the trade.  After all, if you didn’t take either of the first two trades, how can you possibly take this trade; maybe you were wrong when you thought that the move had gone too far to take trade2, but certainly that’s the case for trader3. 

Like trade1 and trade2, trade3 is a profitable trade.  This swing has really turned into a great directional move, with each break holding on weak retests – a textbook example of the strengths of your trading method, but YOU have never entered a trade.  You are going nuts!  You are getting into this damn swing - you just can't take it any more.  Another retrace holds as a lower high.  You don’t have an entry setup, but that doesn’t matter, the other three trades were profitable after a lower high.  Isn’t it interesting, the same emotions which wouldn’t let you enter your plan trades, are now ‘forcing’ you to take a non-plan trade.  

Instead of YOUR trade going to a lower low and to a profit, it instead goes to a higher low and then reverses into an initial buy.  Bad just got worse, you also don’t exit when the swing goes into buy.  After what you went through to finally get into the trade, you have to try and make it work, and after all the trend is down – right?  TraderA uses this initial buy to exit their profitable sell and sell addon; they decide that they want more confirmation of swing reverse before trading the counter direction.  A first continuation setup triggers and they go long, the swing has reversed, and this trade reaches its first profit target.   

TraderB finally ‘gives up’ and exits THEIR short, although with a two point loss instead of the intended one point, and without any consideration of taking their next plan trade, the first continuation buy.  This trader is done for the day, but at least they were ‘right’ all along; the swing had gone too far to enter, and their fears had been warranted – this was a losing trade that they should not enter. 

Is this a trading method or trading psychology issue?  What ‘message’ is TraderB going to take from what has just happened.  Will they take the attitude that they should not be blamed, they just can’t trade because of trading psychology?  Or, will they acknowledge that the method did win, that the resulting loss was not a method trade, and even if it was, the loss would have been offset by the prior winners.   Will they acknowledge that THEY made their worst fears come true and not only turned this into a losing trade, they also increased he size of that loss, and then avoiding another method winning trade.   

Granted, psychology was involved with what has happened in the described trading scenario, but that is a function of the individual’s ‘core’ personality, and would most probably be an issue regardless of what was being done; if there is ‘risk’ involved, there will be an ‘emotional’ response.  Thus, it is first necessary to separate personal psychology from trading psychology, and the use of this concept as an excuse for trading actions.  Then, if trading psychology is going to be controlled, this will be done through the development and implementation of a tested plan that the trader is willing to follow.  Do not trade with ‘built-in’ excuses for failing, you will have lost before you begin, and will continue to do so with a continued ‘snowballing’ of emotion to the extent where trading will no longer be possible.

老TK

Consecutive Loses AND The Trading Psychology Spiral

You go long and the market immediately goes down - you go short and the market immediately goes up.  That's 2 consecutive losses AND you are getting a little 'anxious' so you don't take the 'next' trade and it of course works.  BUT to make the situation worse you then 'chase' the entry and it immediately reverses - another loss AND this is 3 in a row.  Ok 1 more try - this can't happen on every trade can it - pray mode?   

This time though you will be real clever.  You have at least noticed that the market is in a range AND it's the bounce from the low/retrace from the high that is causing all the problems.  So this time the next trade you take will be a range extreme fade AND the hell with your trading method.  The market is at the range low AND per your new ‘on the fly’ plan you go long AND the range immediately breaks out giving you consecutive loser #4 - trading against a method trade that is going far enough to pay for the previous 3 losers and make you net ahead.   

Now what are you supposed to do – QUIT?  AND to be sure that there is no more temptation – your throw your computer out the window and dive out right behind it.  You are in a trading psychology spiral.

Trading Psychology Spiral Elimination Technique1 - Learn To Laugh

 

AND Now For That Classic Oldie BUT Goodie - Ode To A Trader

audio - ode to a trader

For every trade you talked yourself out of that worked AND THEN for every trade that you talked yourself into that didn't work.

For every time you ignored a trend AND THEN bought a tight congestion AND THEN sold it AND THEN bought it [AND THEN sold it] AND THEN went flat - 2 seconds before the breakout.

For every time you didn't take a buy profit at resistance AND THEN went flat at support - 2 seconds before resistance broke.  OR OF COURSE - for every time you didn't take a sell profit at support AND THEN went flat at resistance--2 seconds before support broke.

For every time you gave a trade a 3 point stop BUT THEN took a 5-6-7 point loss - 2 seconds before the trade went back in your direction.

For every time you said IF a losing trade would just get back to break even you would go flat BUT WHEN it happened you didn't exit AND THEN took a 3-4-5 point loss - 2 seconds before it went back to break even again.

AND for ALL the fear AND for ALL the greed AND for ALL the woulda coulda shoulda - AND just for EVERY other time you went TRADESTUPID - sometimes you just gotta LAUGH [bud*wei*ser].

AND pickup your sorry whining moaning grieving screaming crying beat up KICKED-IN BUTT - AND THEN get ready - BECAUSE it is time to take that next trade...wheeeeeeee

Trading Psychology Spiral Elimination Technique2 - Learn To Laugh

 

WHAT is a Trading Psychology Spiral? 

I think of a trading psychology spiral as the transition from trading losses that you have accepted both as a part of your trading method AND as something that is inevitable in trading, into a surge of emotions that continually builds to a point where you can no longer accept anything.  As this eventually ‘spirals’ out of control – trading method becomes completely ignored AND is replaced by emotional responses and decisions for everything that is done.  Even if quitting was really the only viable thing to do at the time, the tpsych spiral can cause an emotional response where this isn’t considered until the situation becomes so desperate that the trader can’t take it any longer AND does have to quit. 

This isn’t a discussion about emotions and trading, and the various fears and issues that keeps a trader from trading to begin with; as we know, emotions are an inherent part of trading – you learn to control them OR you can’t trade.  This is a discussion about emotions that are typically controlled well enough so that you ‘can’ trade AND then something happens where the trader loses that control and their emotions spiral - a series of consecutive losing trades is a root cause for this happening.

This also isn’t about something that happens only to inexperienced and unprofitable traders.  There are going to be those times where nothing a trader does will work, and that result is going to be a series of consecutive losers.  So the situation is the same, it’s the reaction that will be different.  For instance, traderA may go into a panic causing them to spiral out of control, losing all self-confidence and self-trust, and ultimately more money than was intended.  On the other hand, traderB may go into a period of revenge trading, coupled with an increase of their trading size, as they are ‘sure’ that each next trade is going to bring them back to even.  Also a spiral out of control AND as the losses continue, ultimately a loss of more money than was intended. 

WHAT does traderC do?

 

Controlling The Trading Psychology Spiral

consider:  each time a trading psychology spiral occurs AND you go out of control - the quicker the next spiral is going to occur AND the faster you will go out of control when it happens.  this is going to continue until trading becomes to painful AND you will not be willing to trade any longer.

consider:  it is better to work through the emotions instead of quitting.  quitting is too easy AND provides no solution or aid in preventing this from coming back and intensifying each time you have a rough period.  as well - you have lost the ability to 'count' on yourself when you need to do so the most.  to control a tpsych spiral before you go out of control is a tremendous win in and of itself - also do this and get your trading back on track AND you will have made gains the value of which you can't imagine as you will know that you may have losing periods BUT you can trust yourself to remain in control and not magnify the damage.

Trading Psychology - IF Lose Discussion

• consecutive losers in short time - becomes thinking that you don't know how to trade

• method trades BUT losing - the method doesn't work

Trading Method - IF Lose Discussion

• were the trades really method trades?  IF yes - retain confidence and stay with the method based on your experience and consistency of repetition over the larger number of trades.  IF no - be sure that you are only 'base' method trading - it is fine if these trades lose AND there is no way to limit those times that they may be consecutive.

Self Awareness AND Realization

• transition - normal trading emotion to anxious/start spiral to out of control

• be aware - what do you most want to remember/think about to 'stop' the spiraling

If the acceptance of entering a trade with an unknown outcome, and thus further accepting risk and the inevitably of loss aren't enough, the markets also make those fast seemingly random moves, where just about the time you think you are going to be able to take a profit on a trade, you are instead scrambling to exit.  How can this not have emotional undertones?  AND since these situations are an inherent part of trading, it would then follow that emotion is also an inherent part of trading and is not going to be eliminated.  HOWEVER, do they really need to be eliminated in order to trade successfully OR is the objective to control the emotions - accept that they are going to exist BUT learn to control them instead of having them control you? 

This becomes the difference between traderA and traderB, where two traders who are both essentially trading the same method are having completely different results - traderA is constantly losing while traderB is constantly winning, the difference being that traderA has not gained the emotional control that keeps them from spiraling out of control AND as that is the prevalent case - traderA really is NOT trading their supposed method.

How many traders start the day winning, only to lose those gains and end up the day losing?  Did the markets change to cause the loses OR did the trader change, where after getting a couple of losses following their winners the emotions started to become a factor.  One more loser and the trader started spiraling AND when the market 'changed' back to be more similar to the conditions when they were able to get their winners, it didn't matter because the trader wasn't able to 'change' back.

IF there is a transition where the trader goes from acceptable emotion to tpsych spiraling THEN there is a crossover point where IF you are aware of the situation, you have an opportunity to 'stop' this transition from completing.  What makes this difficult to do, BUT also makes it all the more necessary to be able to do, is that this is happening internally and chances are you typically would not be aware of it until it was too late AND may not even consciously realize it until the spiraling has taken over and you give into it. 

In light of this, take your key issues and write them on an index card AND stick them on your monitor, the objective is realization and making this available to your conscious as a reminder, instead of only available to your subconscious as a problem.  Thus, when you do this, BE SURE that you are writing short non-judgmental notes - DON'T let the 'solution' make the 'problem' worse. 

For instance, consider the combination of a build of emotions coming from consecutive losses which are also occurring during congestion - write notes similar to these on your card: 

• a build in emotions may come from a series of quick consecutive losses

• quick consecutive losses often come from trading inside of congestion

• are your losses 'base' congestion method trades OR are you overtrading

• there is nothing wrong with 'base' method trade loses

• your trading results are fine when you 'base' method trade

Now consider the same situation BUT different notes:

• don't be a stupid idiot and overtrade congestion like you always do

• you are going to lose your ass and end up with another losing day like usual

• you do this same crap every day and the same thing happens

• you have no reason to even trade if this is all that you are going to do

Does this seem far fetched, does common sense indicate that no one would ever write notes like these?  Absolutely some people would write these note AND worse [been there - done that], as they take the attitude that this kind of emphasis on what the problem leads to is an emphatic warning that will keep it from occurring.  But instead this backfires, as most derisive self-talk of any kind tends to do.  Now not only are the emotions stemming from this kind of self-talk in your subconscious where we know their potential to become debilitating, you have also put them into your conscious.   AND since you have them in writing - right in front of you on your monitor next to your trading charts AND SINCE what you have written is a very prevalent tpsych problem - WHERE do you think your focus in going to be?  Do you think you will continue to focus on those charts and trading method OR do you think you will keep 'seeing' your notes and intensify the problem and thus the speed of your tpsych spiral?  The solution makes the problem worse.

Remain Neutral

• remain neutral - another note for your index card

A different approach may be to write notes that include the things you can remember yourself doing or feeling as you transition from emotion to tpsych spiraling, for instance:  shortness of breath - sweating - squirming in your chair - unable to sit down.  AND as the spiraling becomes more intense:  cussing - screaming - throwing things - breaking things.  Until the spiraling is out of control:  panic - desperation.  Clearly there is a whole list of physical responses to uncomfortable emotional situations [AND another been there - done that].

This isn't what I mean by self awareness.  I want to know the potential for the spiraling situation - it is VERY important to acknowledge that you have emotions and not try to ignore them or hide from them as a solution to the problem OR because you perceive them to be a sign of weakness.  This actually will just make the situation worse - you are human AND humans have emotions AND emotions become more intense in more difficult situations.  So, I don't need to know how I am going to have responded as I go out of control.  I do need to know and have something to remember and/or think about that can keep this from happening - that can keep me as neutral as possible in what would be the more difficult trading periods - that will 'push' me back to tmethod AND 'away' from tpsych.

I also want to mention neutrality in relationship to winning; it is my contention that the more ecstatic you become from your winning trades - the more you will tpsych spiral during a period of losing trades.  Of course you are going to be 'happy' when you win, this is also a human emotional response to 'good' things happening BUT as a professional who is doing their job, and one where the significance is results over time, being as neutral as possible to single events is an important objective.

Something that I have found myself doing, and actually didn't realize I was doing this until someone in the chatroom told me how obnoxious it was [AND no I am not talking about those times I start singing :)] - which is also very interesting to me as I think about some of the NLP concepts that I studied - AND that is 'clicking' my fingers on the surface of my desk.  Somehow this became an 'anchor' back to those things that I want to be sure that I am most considering when I am having one of my more difficult trading periods.  It seems to 'calm' me down AND 'push' me from any rise in emotion from getting out of control, back near neutral as my focus goes to 'base' method considerations only.  I know that I don't and cannot trade 'base' method 100% of the time - another one of those human issues of not being perfect.  Sometimes it doesn't matter, trade in the direction of a 'big' swing and a more aggressive or 'sloppy' entry isn't much of an issue.  Now try the same thing in congestion OR any market condition that you find to be most problematic, then you have an entirely different situation, which is why I have continued to write regarding the ability to be sure that during the most difficult times the trader 'knows' to only 'base' method trade to the extent that is possible.  Like the index card notes, anything that you can use that 'pushes' you back to your 'base' method, 'anchors' you to that method, is something I believe you will find very useful.

WHAT does traderC do?  traderC is the trader who remains the most neutral in winning AND losing - the most neutral in all situations, and it's this neutrality that becomes essential in keeping the emotions from becoming a trading psychology spiral as the trader can 'accurately' evaluate their losses in terms of method AND this trader will only trade their most 'base' method setups after any difficult period - AND IF these loss, so be it, that has already been accepted.

 

Trading Method -vs- Trading Psychology

This comparison is not for debate, regardless of emotion and tpsych AND it's potential affect on the trader, ultimately it is only the proficient implementation of tmethod that is going to allow a trader to be profitable.  BUT - WHAT IF you can't evaluate your trading in terms of 'base' tmethod - WHAT IF you do not have the 'ability' in those difficult times to ensure that you are only trading 'base' method?  Clearly, you then have an impossible situation, one that probably won't 'allow' you to win under the best of market conditions - one that will guarantee that you are going to lose during the difficult market conditions, and unfortunately overall.

Paper Trading

Paper trading is a subject for another discussion, but it is also appropriate to mention it here.  IF the objective is to ensure that you are trading 'base' method to keep from tpsych spiraling OR to keep the spiral from going out of control - THEN how is this possible if you haven't already 'proven' to yourself that you have and can trade this 'base' method? 

Granted, being able to 'base' method trade on paper is no guarantee that you will also be able to do so with real money, however I can't imagine that this could possibly be done if you can't do so on paper. I strongly believe in paper trading as part of the transition into real money trading, unfortunately though I think that many traders 'waste' their paper trading efforts and get little benefit from doing so. 

Two reasons paper trading is not of value:

• The paper trader is looking for profitability and not proficiency and thus have no 'cushion' when having to trade real money.  For instance:  a trading swing goes 5 points but the trader only gains 1 point from the swing - yes this is profitable BUT no this is not proficient, and I would anticipate that this lack of proficiency where a trader wasn't realizing closer to 60-70 percent of the potential of a given trade, is going to manifest itself in real time losses across the greater number of trades.

• The paper trader is too experimental since real money is not at risk.  Thus, they gain no basis for accurate trade evaluation.  Their results are random, and the ability to ensure that they are 'base' method trading during difficult periods will not be possible because they have never developed the discipline and repetition of only method trading during the paper trading progression stage.  IF you are paper trading, and doing so differently than you would real money trade - THEN you are making a mistake that is going to show itself when real money trading and especially be of no use to you for eliminating tpsych spiraling.

 

Trading Psychology Spiral Elimination Technique3 - Learn To Laugh

Good thing my wife can't read this - she would never believe I have written it, and then she will lecture me for the next month on ways that I should do so in my other life; did I ever tell you that I have 2 teenage daughters :)

Anyway, a little laughter can be such a wonderful thing in relieving some tension and putting trading in perspective.  It's just impossible to spend the amount of time that we do, trying to continually manage unknown outcomes, and not have some relief to the situation BUT while still confronting it.  Being able to laugh at what you 'feel' was a 'dumb' trade and go on to the next setup - instead of going ballistic on yourself for being the most stupid moronic brain-dead trader alive, which is just about going to guarantee you are going to spiral if that next trade is also a loser - may be more beneficial than your 'favorite' trade setup.

 

Discussion From The 8/3/2005 Trade Journal

consider: you go long and it goes down - you go short and it goes up. you start shaking - you start sweating - you can't breathe. you are ready to throw your computer out the window AND jump out right after it. AND the market has only been open for 30 minutes - WTF is going on :)

WHAT do you do when you are having a BAD day - quitting is not an option?

chart3:  did you trade the first 30 minutes - what/where were your trades?  what kind of trading period did you think this was - 'good' or 'bad'?

 

chart3:  i often discuss the charts on the journal in light of where the setup/triggers were - why a trade entry may be a misread - how an entry price can be improved using breakpoints into break outs.  BUT on this chart i don't want to discuss the trades - i want to discuss the situation - a situation that regardless of whether these are good trades or bad trades they were trades that were done which was a series of 4 quick consecutive losers after an opening sell which was really dumb luck with the speed/distance that in our direction.  Again - doesn't matter what/where the trades were - only that they were done and a next trade will also have to be done - AND sure want to do what is possible to keep 4 from becoming 5 from becoming 6...

so the situation remains - you are trading and you are losing AND now what - quitting is not an option.  one trader mentioned - evaluate whether the market is difficult OR is it my trading that is 'bad'.  another trader mentioned - stick with your method/days like this happen.

WHAT is the very most important to me?  that i keep my 'cool' AND don't let myself go into a tpsych spiral AND that i retain my self-trust - i know how to trade AND i know that i know this - i can't let myself doubt this because of a bad trading period AND expect that i have any chance whatsoever to get 'back on track' again.  similarly i can't get down on myself AND start 'beating' myself up - how can i retain self-trust and beat myself up too - i have to 'stay on my side' if i am going to have a chance.  i am speaking to myself here in the first person as this is the kinds of things i am thinking about - i am telling myself what i know and what i can do - instead of getting down i am trying to 'build' myself up.  as in anything endeavor - you can't work with someone that you are fighting with - trading is no different AND absolutely a person can fight with themselves to a debilitating extent - can't let this happen.

regarding the 2 things that different traders mentioned - AND i did think it was interesting that only 2 people had anything to say?  to you 2 and myself i want to say that i am very sorry that it's only us that every has to deal with these problems/issues. 

(1) evaluating the market -vs- my trading - i mentioned that this is really not something that i want to do because this is a real time situation that must be dealt with to continue trading - this is not the same as evaluating results at the end of the day and trying to make a determination of how you did compared to your assessment of the market's tradability.  i mentioned how important that not going into a tpsych spiral is - what if you decide that the market is 'easy' BUT your trading is garbage - i would think this is going to worsen the situation AND can lead to some of the trader typical negative self-talk like 'the market is so easy and all you do is lose why don't you just quit trading - hell why don't you just shoot yourself because you are too pathetic to do anything else either - etc etc etc'.  you get the point.  anyway - i don't want to do anything that is judgmental - too much tpsych risk involved to do this. 

(2) stick with your method/days like this happen.  stick with your method - YES - absolutely this is paramount.  BUT what about - days like this happen?  i mentioned my thoughts on this - that i had a problem with the word days AND i will also add a further problem with thinking like this in general - again i am talking tpsych.  i don't want to get down on myself BUT i also don't want to let myself 'off the hook' - i want to retain the 'fire' and if i start think about days like this happen i think i am putting defeatist ideas in my head - as well as ideas that the day is over and therefore nothing can/will change - and how can i change thinking like this?  AND after all - it's 30 minutes into the day with the entire day ahead of myself - i am not 'writing the day off'.

so none of these responses are about right or wrong - i was/am telling you how i would react to talking to myself like that and why it would be a problem.  what i want to emphasize is the concepts and why i want you to consider what you are saying/how you are responding AND be sure you do nothing that is judgmental-defeatist OR in anyway assumes that the situation won't change - isn't going to change.

as the discussion went on - the following was mentioned that the words 'stick with the method' was too easy - after all weren't you trading the method when you got into 'trouble'.  this may be semantics and have personal meaning - for instance if 'stick with the method' means that yes the method was being traded AND it was a series of 'good' 'method' trades that were taken AND they just happened to be consecutive losers - then YES stay with the method as mentioned above.  BUT what if these weren't method trades that were losing - then the words are meaningless to the trader who would HAVE to answer this way about the trades that were taken. 

should this be determined - definitely.  BUT is this judgmental and shouldn't be done?  i answer this no AND say that this shouldn't be judgmental - this should be factual - yes it was a method trade/no it wasn't a method trade - answer the question AND if the answer is no then go forward with this realization and ensure that you are only method trading.  i also like this attitude approach - because i like the concept that i win/lose by my ability to method trade AND that it isn't tpsych that is the determinant of my trading OR that i am allowing it to undermine my trading.

specifically what happened for me - i took a winning sell and a losing buy which i am fine with.  looking at the chart the real problem was with the buy re-entry compared to the blue dot sell - this is really where i go into trouble AND then reversing out of buy2 into sell2 just didn't go far enough as it held s1 - a decent trade that just didn't work BUT as it was 3 in a row at that point i don't think i am thinking like this.  then buy4 AND i just went to a lower high instead of breaking the channel at the left and testing back to the floor pivot.  good-bad-who cares - go flat and get your head straight.  first thing i did was to decide that if i was going to trade the russell i was only going to trade the russell - no additional market distractions could be had at this time.  i was flat the euro at this time AND long the bonds and went flat bond - not a good decision simply going flat instead of entering a trailing stop BUT so be it - i put myself flat all markets.  what about the purple dot sell - should look like a very good setup/trigger on the chart AND i agree that it was except it was 1-2 minutes before a news release AND this just wasn't the time to get caught up in a news whipsaw that may add to the existing tenuous situation - so a trade that i normally would take was intentionally missed for this reason - which is why the red dot3 sell was done instead.

also - as my trading tends to include a number of reverses that are often 'pivot' trades of which a number can't be defined as 'base' method trades - i made the additional decision that i would trade 'base' while trying to get back on track - that i wanted to be more selective for now.  the sell after the news that was done was a winner AND as you see on the sheet the next 2 traders were winners and i was able to spend the next hour getting back to positive.  going forward things remained 'on track'.

 

老TK

Trading Psychology Plan

training session audio:  audio1  audio2  audio3  audio4

We continue to discuss the importance of trading AND planning saying that:  (1) you can't trade without a plan that first defines a trading methodology (2) the plan should then further defines the components of the trading methodology that can be turned into trading setups (3) the specific setups and trade quantity needs to 'match' the trader's personality.  The objective is to have created a plan that includes core repetitive setups with a positive expectancy that you can recognize realtime AND that you have accepted the implications of in terms of related risk reward - BUT this might not be enough - there still may be issues as related to emotion AND fear that circumvent the implementation of the plan.

So what about a trading psychology plan?  A plan that includes a series of steps that start where method implementation 'hangs-up'.  The objective of this plan would be to take the trader's action - give an honest assessment/understanding of the action - define a 'setup' for replacing the action.  For instance - take the excerpt from the interview about the trader who didn't trade AND view it in terms of a trading psychology plan.

Trading Plan - Methodology
15 to 20 trades a day
makes money on paper

Trader Actions
didn't trade
pick out the winning trades and let the losers go
learning by watching the market

Psychology
create excuse for not trading
anticipate negative outcome
fear [pain] avoidance

Trading Plan - Psychology
accept losing as part of trading
accept possibility of winning
replace focus of winning/losing with objective of following plan
implement plan in steps instead of all at once
 

Trader Self Talk - Question/Answer

Like a trading methodology plan as a key to making the transition from method to realtime trading ~ making a trading psychology plan is instrumental in making the transition from trader action to trader psychology AND THEN from trader psychology BACK to trading method AND real time trading - a plan to deal with the emotion/fear issues that either circumvent the method implementation OR keeps a trader from trading at all. 

The plan itself will have to include a ‘look in the mirror’ AND an ‘honest’ assessment of what you see [don’t break the mirror first].  You will have to ask tough questions AND the quality of those questions will be instrumental in getting from step to step.  I liken this to some of the trading questions I receive AND my ability to then give a general answer OR a specific answer.  Someone may ask should I go long when ttMomentum turns green BUT with no further information about market conditions regarding continuation/congestion – direction/counter – other related indicators. 

Relating this to any kind of problem solving questions ~ HOW is anyone supposed to answer such general questions with more then a general answer at best – let alone give an answer that will aid in developing a workable solution/plan - specific questions that will ALLOW an answer with pertinent content is extremely necessary.  Regarding the 'look in the mirror' questions - equally important will be to ask questions that are of a neutral non-judgmental nature in order to allow a constructive usable answer.  So consider a trader asking questions like:  WHY can’t I trade – WHY am I such a failure - WHAT is wrong with me – etc.  Not only do I view these as ‘unanswerable’ questions – I also see them as destructive type questions that will push you into [OR further into] an emotional snowball further intensifying the problems you are supposedly trying to construct a plan to solve ~ as you give answers like:  BECAUSE I am a loser - BECAUSE I am too stupid - etc.   

I see no way that a trader could ever expect to make that transition from emotion to method when they are asking questions like this OR letting themselves think like this ~ your questions will direct your further thinking AND thought processing as you answer AND certainly explains why emotional issues are so prevalent in trading – as the trader further creates AND worsens the emotions that are their primary problem to begin with. 

Negative self talk not only prevents us from solving problems BUT depending on how extensive this becomes – what is referred to as cognitive distortion – it may even prevent the person from even acknowledging that there is a possible solution.  A continual series of self talk including I can’t do it instead of WHAT can I do - both disqualifies that any positive experiences have ever existed to draw from AND directs thinking away from constructive actions.  Asking the neutral questions – the WHAT can I/HOW can I – can lead to actionable answers that acknowledges the potential for a positive solution.

Emotions Are Part Of Life

I do not think that emotions are good/bad OR should be viewed that way - they exist in everyone as a part of life.  What becomes important is your understanding of YOUR emotions - what they are AND how they further effect the way you act - again without judgment AND with the objective of controlling the emotion instead of having it control you ~ AND in this specific case - keeping the emotion from circumventing your trading plan.

Trading Psychology Plan

Like any kind of planning/plan making - analogizing the process to things that you have done before AND can relate to from experience will be very useful.  In this case it would be the development of your trading methodology plan AND making it personal to you.  Emotion AND fear have some general types BUT which ones most impact you will be extremely individual AND the trader must have a plan for both identifying what is most impacting them AND then have a plan for dealing with [I don't think the objective is to eliminate the emotion] the outcome the emotion brings.  I would like to analogize to the trading method plan AND trading indicators - to a psychology indicator attempting to measure when you are going from a neutral trading psychology to over-emotional AND thus leave your trading method plan for the actions that the specific emotions lead to.

The steps to this kind of plan were outlined/discussed in the training session - I believe that the absolute key to this plan will be defining your actions brought on by emotion/fear accurately AND without further judgment.  From here - you have enabled a base for controlling the emotion by replacing it with evaluation AND doing so as a conscious act where the objective becomes overcoming the impact emotional responses have on trading.  

I don't think that eliminating emotions is the objective - NOR do I even think it's necessarily a good thing.  For instance:  IF I am confused AND that causes me an emotional response of hesitation.  I actually want to see/feel that emotion - it becomes a warning to me that I should wait AND try to find more clarity to the chart/market - asking myself what needs to happen for me to take the next trade.  

Shift The Focus Of What The Emotion Represents

I understand the issue - WHAT IF the emotion is the norm instead of a warning of trading conditions.

• make a list of your emotions/fears AND rank the extreme of the emotion

• determine whether the emotion has reached an unwarranted extreme

• shift the focus of what the emotion represents

For instance:  you find that being stopped out on the entry bar of a trade elicits an emotional extreme - AND you further feel that IF you can be stopped out that quickly on the entry bar of a trade - THEN this represents that you are too stupid to trade AND might as well quit trading [now try to take the next trade that is setup].  

Is this extreme AND the following self talk warranted OR a logical conclusion - you will never be able to answer this [OR keep it from reaching the extreme it reaches] with out shifting the focus by asking yourself:  (1) was the trade a plan trade AND IF so - how often will that same setup/trade go on to a partial profit - isn't losing part of trading that is to be expected regardless that sometimes it may happen immediately - was there anything i can consistently see in my entry timing that could have made a difference.  (2) was the trade a non-plan trade AND IF so - what did i miss in the setup identification.  (3) did you just make a mistake AND IF so - shift the focus from the emotional extreme response to NOT being perfect - take your stop AND go on to the next setup.

Realtime Chatroom Example

This chart was discussed in the chatroom explaining why I felt the 1st blue circle buy as a re-entry to a previous buy which had been trailed flat - was really a poor trade basis mex flow - AND actually the yellow circle should have been done as a sell IF any trade was going to be done at that time.  I got lucky AND got 2 bars out of the buy instead of being stopped on the entry bar ~ the point was that I did feel emotion from doing a trade that I immediately recognized as a mistake to me BUT the emotion did not control further actions - it was a mistake AND in this case the buy was exited with the reverse at the 2nd blue circle.

 

Cognitive Distortions 

There are a number of ways that your thoughts can become distorted - recognizing and refuting these distorted thoughts are necessary as part of the plan to control the emotion. Consider the following cognitive distortions that are common to your thinking in general AND then how they show up in your trading in specific.

All or nothing thinking:  No shades of gray exist so IF your performance is not perfect - you view yourself as a complete failure.

Overgeneralization:  One single negative event is viewed as an endless pattern of defeat.

Disqualifying the positive:  You discount all positive experiences.

Jumping to conclusions:  You make negative interpretations that are factually unsupported. You feel that you know what other people think of you [mind reading]. You make negative predictions AND you are certain that they must come true [fortuneteller error].

Magnification or minimization: You may exaggerate the importance of an error or someone else’s achievements. You may underrate your own strengths or someone else’s weaknesses.

Emotional Reasoning:  You believe that your emotions mirror reality - I feel it so it must be true.

Should Statements:  You motivate yourself with shoulds-oughts-musts [woulda coulda shoulda] which leads to guilt. When you direct these statements inwardly you experience exaggerated feelings of anger-frustration-resentment.

Labeling and mislabeling:  You label yourself inappropriately - I am a loser ~ you label others wrongly - YOU are a stupid idiot.  When you do this to other people it makes it difficult for you to continue speaking positively with them - this has the same effect in your ability to continue to talk to yourself constructively.

Personalization:  You blame yourself for a negative external event for which you were not primarily responsible - a friend that you have a date with becomes ill and calls you to cancel AND you blame yourself for the cancellation.

老TK

Trading Psychology Problem - Trading Non-Method Trades

Many trading psychology problems are the result of trading non-setup trades.  These are trades that really 'should' be referred to as 'bad trades', in that not only are they non-method, the trader is actually aware of this and takes the trade anyway.  This is really the trading psychology problem, knowingly taking a non-method trade AND then having to accept this additional 'baggage' when there is a loss.

When I use the phrase bad trade, I am not simply referring to the results of a trade; a losing trade that is a base method trade is not a bad trade.  It's also not a trade that should be a trading psychology problem, the risk of loss from 'some' percentage of method trades has been accepted.  I am also not referring to a misread of a trade setup, for instance a trade that was right side base BUT where a left side 'reason' for not taking the trade was missed. 

To call a trade a bad trade, I am referring to knowingly taking a non-method trade, probably as result of chasing a missed trade, or because of fear of missing a trade.  I am calling a trade bad IF:  (1) the trade does not have method components that setup-trigger the trade (2) the trade is done at a  'filter point' specifically established to eliminate a trade at that given time.

 

There Are 3 Typical Results From Taking A Bad Trade

(1) the 'odds' result - a losing trade (2) a trade that you get a loss BUT then becomes the trigger of a base setup winner that you don't re-enter (3) a bad trade that wins - further reinforcing the trade that was taken.

Unlike a trade journal intended to focus on setup and/or trades to take [shown on the charts as green-red or blue dots] these discussions are intended to be about the yellow dots AND why they are trades to avoid, along with what a base setup would look like.  The objective being to develop a 'checklist' of these reoccurring situations-trades to eliminate - because it's the 'odds' thing to do.

Consider the chart below AND the 3 yellow dots:  (1) pmd - blue line support break (2) pause-break after the triple channel break (3) blue line reject – which of these setups are base and ‘can’ be traded?

yellow dot1:  no - you have break1 of a line that is not setup to break AND this is a counter trade.  also consider this in the context of the pmd AND our base method trades - where we reverse after there is a pmd-swing failure setup BUT not as a pmd-momentum reverse.

 

Consider The Specific Case

look at the chart AND the dark blue line - at the time of the blue line break i am still trying to hold a 'last' long.  i don't want to exit at the blue line which i think is 'too obvious' AND after it breaks - the amount of room to a support point is close enough that i don't want to exit in between.

trades that i would have done:  (1) blue line-dark blue dot - IF the line hit and retraced to a lower high with mex flow down - then i like the 2nd break of the line as a pmd-swing failure setup (2) blue line-blue dot - IF the line broke AND then rejected as resistance - what is referred to as a shift-reject.

yellow dot2:  no - i called this a pause-break after the triple channel break BUT so what - it's a breakout chase.  additionally look at the 120t below AND the yellow line across the chart as support - AND also note that 'your' break occurred on a ticki low.  this is a REALLY bad entry - be sure you are catching yourself from doing these.  breakout chasing is a big enough problem BUT to compound it by selling a ticki low right at support is a 'donation' trade.

yellow dot3:  no - see chart BT-03a below

yellow dot sell:  the channel breakout is testing the yellow lines on the 52t-120t charts AND does so with the ticki low which retraces back to the blue line.  yes there is a reject - no there is not a failure.  IF you sell the yellow dot - you are doing so at support which is actually where the left side up swing resumed - look at the dark blue line-dark blue circle on the 120t.  this trade would actually also be into a 52t pmd - look at the ttm and mex extreme AND where it is at the yellow dot.  a failure setup would look like the blue line-blue dot - where you would get a lower high into the line break with mex continuing to flow down.

 

Consider The Specific Case

red dot sell:  done as a pivot entry AND the pmd-swing failure trade - done into/through the triple break of the 2 dark blue dots.  note - without this triple break to trade into - i would not have done this pivot entry.  IF the red dot is not sold - i would not have had a sell on this chart.

green dot buy:  support holds as noted - which also gave a management decision of a 2x partial on the sell.  there is an indicator reverse AND move back to the blue line.  no buy on the first break - then buy break2 as a breakpoint entry WITH mex flow on the retrace to the higher low - you can also see the trade is into a triple diagonal break at the 2 purple dots.

Trade Avoidance Checklist

break1 of a non-setup line AND on a counter trade

initial trade after a pmd before pmd-swing reverse setup

breakout chase on a ticki extreme AND into a sup-res point

reject entries without a reject-failure combination

 

---

When you look at this chart in hindsight, what do you see - a profitable sell-buy?  Does this at all appear to you as a chart that you would have lost money trading?  Because this is what I think would have happened to many traders real time, that in an attempt to ensure that they would not 'miss' the trade, they entered too soon and lost money on the retrace-retest.

Price does not move in a straight line, price is a continuum of retrace-retest and back and fill.  The trading issue becomes, what price is going to retest.  In a continuation swing, you look for support to retest as resistance, or resistance to retest as support, what can be referred to as 'stair-stepping', because that is the visual that you see on your chart.  BUT don't forget that a continuation swing is a swing that has developed momentum and swing direction - what about the retests as a swing is beginning?

IF you are trading the initial breaks, and/or one line breaks of a line, looking for these breaks to then hold on retest and continue in your entry direction THEN you are viewing all price movement as continuation moves when entered, and this is just not the case.  We typically see these initial breaks do one of two things:  (1) they break back through the line that was traded before establishing a lower high-higher low AND then continuing (2) they retest the lower high-higher low that was made before the break-before the trade entry. 

Situation 1 is a trade that you can likely hold the retrace, providing that you aren't a trader that exits trades trying to get a breakeven exit, when the trade doesn't go to an immediate profit.  Situation 2 is far more difficult for you to hold, both in terms of actual retrace amount and in viewpoint, where you 'feel' that the higher low-lower high won't hold AND your trade will actually reverse back in the previous direction.

 

Consider The Specific Case

WHY do I think this chart would have caused losses?  Because I have seen numerous traders enter at the yellow dots AND go flat on the retrace incurring 4-6 tick losses.  Something that must be noted, and that you must consider for your trading - are you committed the relevant price initial risk for your trades OR are you trading with fixed amount stops, regardless of how that exit price will 'fit' the chart? 

I will suggest that IF you are using fixed stops THEN you are going to accumulate numerous losses on trades that could be relevant price held.  You are also going to accumulate numerous losses on trades that are entered on the first break, where the retrace-retest hits your stop amount.  Consider trade management where you use relevant price holds -vs- fixed amount stops AND then determine IF you are willing to risk that amount for a given trade, before taking the trade.  I would think that it would be a better situation, to miss a winning trade because you decided that the initial risk inherent in the trade was greater that you were willing to commit to, than to take stop losses because they weren't relevant to the given trade - especially when you would then consistently see your losing trade become a winning trade after you exited - when the relevant price held. 

yellow dot1:  the trade is entered on the 1st break of the channel inside of dc double dot - also done as an initial reverse of a left side buy -vs- red dot1 where the trade is done on the 2nd break of the channel after a double hold of resistance AND with the ttmf hook.  The win-loss on this trade is a situation of 'too soon' trying not to be 'too late'.

NOTE:  as this swing is trying to develop - the first retest is to the lower high into the yellow dot1 break AND then to the actual break area after the red dot breaks that line a 2nd time.  Both of these retraces are typical and 'should' be held.  I think most would agree that the retrace after the red dot sell is the 'easier' hold, which is the basic issue between trading 1st time through -vs- 2nd time through.

yellow dot2:  the trade is entered on the channel low breakout AND when this retraces, especially with the ttm flip, the trade is exited.  To begin with there is no setup at this time, this is what is referred to as a breakout chase - a very difficult trade to hold because of the relevant initial risk size, which like this case, is that of the breakpoint entry which was the base trade.  Considering that the trader did not do the breakpoint entry, chances are that they have 'no focus' on the blue line AND that this is what the retrace is testing, which does reject along with that of the dc channel - why I have said that the red dot sell 'should' be held.

yellow dot3:  same situation - 'too soon' to avoid being 'too late' AND a losing trade on the break back through the blue line.  Again note what your real time 'thoughts' are likely to be:  you have taken the initial reverse of a profitable downswing - better get out of that trade before the swing lows hit AND the loss gets even bigger.

Also note your specific entry IF you traded the yellow dot - this is the initial reverse after a pmd BUT is this a pmd-swing reverse combination setup?  The answer to this question is no - the trade should not have been done yet for this reason, regardless of the break1 -vs- break2 consideration.  The green dot is the buy - a base pmd-swing reverse setup AND should be entered at the blue line - NOT on the break of the channel high from the yellow dot-blue line break, which would be another example of a breakout chase.  IF the trader does not do this trade THEN the blue dot is the first continuation trade, a break and hold-reject of the blue line WITH mex flow up on this retrace.  Again, enter at the blue dot and not at the channel high breakout.

Trade Avoidance Checklist

This is a very important chart because there are two trades that both gain 2 full base partials IF the trades are entered as base setups at the red dot-green dot BUT very well would have been loses instead IF the trader entered at the yellow dots - the 'classic' situation of the trader loses but the method wins - in this case because of entering 'too soon' to keep from being 'too late' AND without committment to the irisk of your entry in the case of yellow dot1-yellow dot3 - which did hold. 

For myself, I would rather have to take the blue dot buy after missing the yellow dot3 buy AND not getting a retrace back through the blue line to give the green dot buy setup - instead of having to take the 'heat' of holding a trade.  Entering 'too soon' because of being concerned that you will be 'too late' is no reason for taking a trade, and inherent in that mindset is also the strong potential for the exit that could have been held.

 

break1 of a line in dc double dots

breakout chase entries

initial trade after a pmd before pmd-swing reverse setup

taking trades without clear initial risk and/or risk that you are committed to holding

---

BT-01A - yellow dot:  the trade is a break1 of a non-setup line against a pmd AND in this case right into the floor pivot.  IF you take this trade - you are entering against what is a textbook mixed method sell, where 'they' would go short after the pmd-floor pivot reject - at the blue line that you bought. 

A:  IF the mixed method sell continued into this setup, considering that there was a ttm reverse and mex flow was down on the retrace back to the blue line, the blue dot would be a base pmd-swing reverse - the yellow dot buy loser would in essence be done as part of a base sell setup.

B:  The base setups in this area would be the blue dot break2 of the blue line - this is a pmd failure setup, which we know to be a continuation setup.  As well, we know this to be a setup resulting in the failure of the mixed method sell, this failure very often accelerating the continuation.  IF the blue dot setup doesn't become available, then the blue line break and hold purple dot becomes the buy. 

Is this a primary issue with the trader taking the yellow dot buy - regardless that it is referred to as a bad trade - they are afraid of missing the entry which would then make them enter at the purple dot or higher?  These are tradeoffs in trading:  avoiding a trade that 'shouldn't' be done to get supposedly 'best' price -vs- still getting the same trade entry as a base setup by waiting -vs- having to enter at a 'worse' price because you waited -vs- getting a loser that then causes you not to take a base setup.  When this is considered over the larger number of trades, entering a trade because of fear of missing a breakout and/or not getting the best price - the result is going to be a net loss.

 

Consider The Specific Case

The yellow dot buy would be a winning trade if the retrace was held.  The retrace amount was small enough that I will consider this to be a bad trade winner - however, also note that the same entry was available as a base trade, and that trade went to a profit without having to hold the retrace.

Trade Avoidance Checklist

break1 of a non-setup line

trade against a pmd

trade into a floor number before it's break has been setup

BT-01B - yellow dot:  The trade is a breakout chase AND as a floor pivot breakout WHICH is current support to the left side up swing.  What is a breakout chase?  First, what it's not.  I am not suggesting that if you miss your intended entry, and then enter 2-3 ticks 'worse' to get into the trade, that you are breakout chasing.  A breakout chase is where you buy-sell the breakout of a line that is currently support or resistance to the direction of your entry.  For instance, buy a breakout of a double top - you are breakout chasing.

A:  The blue line/dark blue line-dark blue dot is the 'odds' occurrence when you breakout chase at the floor pivot - which is increased because this is support to the previous left side swing.  IF the red dot initial is not done, you are still flat until you get a setup like the light blue dot after a reject of the blue line AND break2 of the floor pivot.

B:  IF still flat, the yellow dot is not a channel reject ttmf hook sell - not against mex because that indicates the potential for a higher low AND back through the channel like the blue line.  A reject trade 'wants' a failure entry, meaning that besides the reject occurring there is also a break that indicates that the reject has failed. 

Consider this basis the red dot that was done as an addon.  Technically this is against mex BUT there are additional across the chart setup components that allowed this entry - this is also a rsr-mpf.  The channel is the right side reject, and if you will take the blue line back left you see the matched price to the support area into the pmd failure continuation AND that when this trade was done, it's also the 2nd time through the line.  This combination gives a reject-failure combination that the yellow dot doesn't.

 

Consider The Specific Case

The yellow dot would be a winning trade if the retrace was held.  What I would anticipate though - the trader who sold the yellow dot may get a base partial depending on fill, and then on the retrace tries to exit at breakeven but probably loses 1-2 ticks.  Consider this as a 3 contract trade that gets p1 and loses 2 ticks trying to 'scratch' = +7 -2 -2 = +3 ticks on this trade. 

After going flat the trade isn't re-entered at what is such a 'worse' price than the exit.  The trade management is as 'bad' as the trade entry - trying to 'scratch' a trade is not an exit setup. 

Just like you wouldn't buy the floorpivot-dc channel, there also isn't an exit at that time.  This is the bad trade situation where the retest of that trade location causes an exit instead of base management, causing a loss or in this case a very small gain, and then missing the continuation that turns the trade into a very nice trade.

Trade Avoidance Checklist

breakout chase after missed entry

buy break1 breakout of left side resistance

sell break1 breakout of left side support

buy-sell a ttmf hook against mex 'inside' double dots

buy-sell a channel reject without a reject-failure combination

 

 

Trading Psychology Problems Resulting From Non-Method Trades

The trading psychology implications from taking bad trades-from knowingly taking non-method trades, goes further than the obvious, where the trader has to accept that they were the cause of the loss.  There are times where the bad trade is a winning trade, however this will still have trading psychology manifestations, as the 'winner' reinforces the continued taking of non-method trades.

Trading psychology causes enough problems for traders as it is, do not make create additional problems by becoming a primary cause.  Any winning trade that you may occasionally be able to get, is going to be far outweighed by the losing trades AND especially by the additional trading psychology issues that make base method trading become more difficult.

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