Owner: Afraid to Trade - Overcoming Fears URL:http://blog.afraidtotrade.com Join Date: Tue, 13 Mar 2007 20:31:56 -0500 Rating:0 Site Description: Designed to help traders and investors overcome their fears of stock market trading through education, daily commentary, technical analysis, trading strategies, and psychological strategies to overcome emotion in trading. Site statistics:Click here
Rules of the Game and Victory through Manipulating Them 2007-03-13 16:04:30 Is it possible that market success can be achieved by going against common knowledge and popular ‘rules’ in the market?
We accept as a fact (whether true or not) that 80% or more traders fail after their first six months or year of dedicated trading. Many people attribute this to emotional failure or a variety of other sources. I wanted to add a quick, generalized comment on one possible reason why this is so.
Money flows from those “out of the loop” to those “in the know.” Money flows from the uninformed masses to the informed and experienced minority. The ‘mass’ rushes in at just the wrong time and exits at just the wrong time - when everything feels too comfortable or too painful. Their decisions are made either with ill-informed information, untested strategies, tested strategies that no longer work given current market conditions, or strictly on their emotions (greed or pain tolerance). Those professionals who are on the opposi Read more:Rules
, Victory
Momentum Precedes Price #2: Momentum Divergences 2007-03-11 23:03:41 Momentum can also be a leading indicator when divergences between price and momentum arise and can lead to some profitable, high probability trades.
Please understand that the set-ups I am about to discuss are countertrend tactics, and as such, you must employ a hard stop in the event that the trend reasserts itself and you are on the wrong side. Contrast this tactic with the principle: “Trends have a higher probability of continuation than reversal.”
When you play for a momentum divergence trade, you are always playing for a small target and playing for a possible shift in buying/selling pressure. You can find various other sites that describe the concept of divergences with various indicators, and before attempting any such trade, I suggest researching further on this potentially profitable topic.
Some of the most popular indicators for uncovering price divergences include the MACD, stochastic, RSI, Ultimate Oscillator, momentum, rate of change, price oscillator, etc. Read more:Precedes
Momentum Precedes Price Chart Examples 2007-03-11 20:06:50 I wanted to include a post that highlighted examples of the market principle: “Momentum Precedes
Price”. It has been suggested that this principle be restated “Increases in momentum imply price will continue in the same direction of the momentum.”
I do not refer to the indicator “momentum” in this sense, but rather pure price action. A better word might be “impulse” which implies temporary, yet significant imbalance between supply and demand. Price moves in waves and when one wave is significant in scope, it is expected that the imbalance will continue to play out in the direction of the original disturbance of balance.
Nelson Elliot (of Elliot Wave Theory fame) coined the term “impulse” to describe marked increases in momentum and noted that following an impulse wave, there tends to be (at least) three pushes up in the trend direction (with two corrective waves). While I am not an Elliot Wave theorist, the idea behind hi Read more:Chart
, Examples
Taking on More Risk for More Reward 2007-03-10 19:23:19 “No pain, no gain.” “No risk, no reward.” In order to achieve success and realize your dreams, you must take on risk and manage it properly, despite the biases of your previous experiences and your personality. Some of us love risk while others hate it.
Assuming the right amount of risk not only is difficult, but is very tricky. Assuming too much risk often leads to a depletion of capital and missing of key opportunities, while too little leads to unfulfillment and lack of potential profit when opportunities arise.
Finding the balance can be achieved using the following strategies:
Work hard at understanding the basics of trading and market behavior (develop your own way to quantify market action)
Have awareness and control over your own psychological contributions to the risk-taking process (how do you feel when you take on risk?)
Practice and gain real-world experience through taking incrementally greater risks (start small and build up with early success Read more:Taking
Anticipating a New Price Swing Lower: A Rare Prediction 2007-03-09 06:46:40 I want to highlight the market principle “Momentum Precedes Price” by a past chart example and the possibility that we are seeing a similar set-up in the market. You know all the caveats about market advice; I am posting this for education - not for trading advice. First, let me post a daily chart of the Dow back in May, 2006 (Chart courtesy TradeStation).
There is a slight momentum divergence (at the bottom) if you compare the swing highs in late February, late March, and late April with price. The oscillator is making lower highs while price makes higher highs. Price failure is expected to come.
The first strong negative impulse occurred mid-May when the Dow fell from its swing high of 11,600 to a swing low of 11,100, erasing 500 points rapidly. Note the new momentum low (reading of -200 on the oscillator) - momentum precedes price, so after a counterswing up, expect a new price low.
A counterswing up occurred at the start of June (from 11,100 to 11,300) where the Read more:Anticipating
, Lower
, Prediction
Quick Comment on Less Successful Traders 2007-03-08 17:10:05 While thousands of posts and articles have been written on why traders are not achieving the success they desire (or worse, are failing), I wanted to point out three quick ideas that summarize behaviors that lead to failure in the market by newer traders.
Traders play for large targets and “swing for the fences” and take on too much risk with too little information or knowledge
Traders play for small targets when they should be playing for large targets and take on too little risk when odds are on their side and opportunities arise
(New) Traders are more likely to be distracted by others’ opinions or their own emotions (overreactions) that occur when taking risk, or just pass on the trade
In a shorter summary:
New traders take on excessive risk when they shouldn’t
New traders don’t take enough risk when good opportunities arise
New traders let their responses to their emotions keep them on the sideline altogether.
Also, newer traders tend to be REACTIV Read more:Quick
, Comment
, Quick Comment
Asking Empowering Questions 2007-03-08 16:55:30 Do you run an internal dialog with yourself that oscillates between praise and criticism? Encouragement and discouragement?
While we can’t always stop this ‘inner critic,’ we can redirect its questions from negative criticism to positive encouragement with a few tactics.
First, you must identify your internal thoughts and call them to attention. What is that inner voice saying? Is it being helpful? Seek to quell any negative talk like: “If I buy here, they’ll gun my stop” or “I just lost money and I’d rather not trade right now because I’ll lose more” or “I always lose in the market.”
Instead, use your inner voice to ask empowering questions. It might be helpful to write out a list of questions that, when the answers are provided, move you closer to achieving your goal. Examples of empowering questions might be:
What additional work can I be doing to achieve my goal?
What more information do I need to know,
The Five Outcomes of Any Trade 2007-03-07 17:41:43 When you enter a trade, you expect prices to move in your favor and gain profit from your temporary assumption of risk. The outcome is not always profit, however, and losses can be very frustrating in the market. Even though human nature primes us to put more emphasis on current events (and outcomes), trading success hinges on probabilitstic thinking and creating a positive edge over many trades taken consistently through a proven trading method or system.
Realize that “you are not your trades.” You also are not your system or method. Studying the application of the five mathematical outcomes of any trade can lift your condifence and quell the psychological pain from focusing too much on recent outcomes from your trades.
After you enter a trade, you will experience one of five outcomes when you close that trade:
You will experience a Large Profit
You will experience a Small Profit
You will “scratch” the trade for Break-even
You will experience a Small Loss
Read more:Outcomes
, Trade
Resilience, Courage, and Conviction: Link to TraderFeed 2007-03-07 17:07:58 I wanted to highlight a crucial post by Brett Steenbarger at his TraderFeed blog entitled “Resilience and the Courage of Your Conviction
s.”
In trading, there are so many uncertainties and so many “head-fakes” and false moves that true success may arise only from confidently holding your carefully analyzed (or even intuitive ‘gut’) position in the face not only of uncertainty, but of adverse (temporary) price movement in the short term.
Courage over fear (or in spite of fear), as well as confidence over indecision are absolutely essential in market speculation.
Strength of your convictions play a crucial role not only in deciding “when to enter”, but “when to exit.” As you may have read many times, humans are conditioned to take quick profits in the market (which soothes our ego) and hold on to losing positions (in an effort to prevent the pain of being wrong). While many traders who have been in the game for any time know t
Kirk Report - Winning Trader’s Edge Comments 2007-03-06 06:23:39 Kirk at The Kirk Report summarized ten steps to a trading edge from George Fontallis (author of The Stock Market Course and The Options Course) and - while I will not list all ten (visit his site!), I wanted to expand on a few of them that are pertinent to trading psychology.
1. Understand the psychology of the trade: never believe you are smarter than the markets as the markets will always win.
I was glad to see this as rule #1! Every trade you enter MUST have a guiding purpose based on a valid market principle/observation you have tested, and that you understand. It is often wise to step back before entering a trade and know not only the reasons for entry, but the logic on your side of the trade AND the logic or emotions of the trader(s) on the other side of your trade.
Realize that when you enter a position, someone is giving their shares to you (or taking the opposite side of your trade. Do you think they do so with anticipation of losing money? No, they are betting on the opp Read more:Winning
, Trader
, Comments
Quick Daily Commentary: March 14 2007-03-15 02:21:05 Wow! What a day! The Dow fell 150 points and then rallied 200 points almost without looking back! Oh what a day to be a day trader! Today was nauseating for swing traders, though. Today also pierced both bulls and bears!
I’ve been very cautious in this market but decided to be aggressively short yesterday and today. My main time to trade is the morning, and I typically do not hold overnight positions. Anyway, I wanted to post an analysis of the 5-minute chart of the DIA (ETF for the Dow Jones). There were some key things to watch today - I will admit the strength in buying surprised me, but price action is king - not our predictions.
Also, today’s action highlights two key points I have made so far: one on momentum divergences and one on a new momentum high - setting up the “Impulse Buy” pattern.
Your first play would have been short, which was developed from a bias from the daily chart patterns. The moving average (20 period) acts as entry points fo Read more:Quick
, Daily
, March
Studying Your Risk Taking Ability 2007-03-14 15:09:23 As posted earlier, to achieve higher rewards (profit), you must take on more risk (uncertainty).
But how do you know how to analyze your risk-taking behavior? In short, it comes from taking risk and writing down your responses - physical (sweating, increased heart rate, shaking, etc) and emotional (doubts, fear, negative thinking, anger, etc). You must collect data to analyze it, yet so many people do not take this step, even though they know they should. How many of you keep a trading journal? How many include a component that includes recording emotional reactivity? Now how many of you don’t keep a journal at all?
When you analyze your risk-taking behavior, consider the following:
Your propensity to set a concrete target (price or behavioral) and then take risk incrementally to achieve this goal
Your trading strategy and how it relates to your natural personality (conservative? aggressive? passive?)
Whether or not you are getting the results you envisioned and whether y Read more:Taking
, Risk Taking
Daily Market Analysis - Mar 13, 2007 2007-03-14 04:10:10 I am trying to keep this site educational in nature, and not inject too much analysis into the blog, but it has been requested that I provide a little more updates on market action. As a disclaimer, please keep in mind I do not offer trading advice - all charts are posted for educational purposes to highlight strategies and areas of possible price movement.
That said, I pray that today’s market action did not shock or surprise you. I hope you did well today shorting the market, or at least had removed most of your long positions prior to today’s action and weren’t tricked by our “ghost rally” on low volume.
I am attaching my Swing Chart to accompany the Candle Chart. Please refer back to my post “Anticipating a New Swing Lower“for a bit more analysis and charts from last year to supplement the market action.
For reference:
Green Line: 20 Period Exponential MA
Blue Line: 50 Period EMA
Red Line: 200 period Simple MA
MACD 3/10 Oscillato Read more:Daily
, Market
, Analysis
, Daily Market
Explanation in the Comment Thread 2007-03-16 07:11:47 I wanted to draw attention to a conversation taking place between Jordan and I in the Comment
s section of the post “March 14th Analysis”
In it, Jordan asks me to clarify points concerning momentum divergences and the “Impulse Buy” pattern which illustrates the “Momentum precedes price” example.
If for nothing else, you’ll get an explanation of my thinking on the following hastily drawn illustration that clarifies my examples.
In the comments, I explain why I play only for the “Red Zone” in this example, where the black line represents price. The example is timeframe independent.
Although I trade other patterns, I find this set-up to be most profitable and most comfortable for me to execute consistently.
The simple explanation is that after a downtrend (reverse the terms for uptrend), momentum and selling decline and a base forms. Equilibrium is achieved between buyers and sellers. Eventually, new information enters the arena and Read more:Thread
March 15 Educational 15 minute chart 2007-03-16 01:50:02 Today was a consolidation day, and one with very choppy action that whipsawed many traders, myself included. It was difficult to find direction today, and I suppose the story will be similar tomorrow as it is Options Expiration Friday. It is actually a “Triple Witching” Expiration Day, so my recommendation is to take the day off and enjoy a nice, three day weekend after all this wild market action recently. Andy Swan suggests the same, yet goes a step further to predict a possible bearish mauling (strong market decline) next week. I don’t know if I would go that far.
I wanted to post a quick chart of the DIA 15 minute chart over the last few days and note some educational momentum divergences forming in the creeping action we have experienced.
The most striking point to me - again - is the volume spikes on March
14th during the afternoon. The Big Picture hints that this might constitute a “Key Reversal Day”. I admit it is worth a thought. It i Read more:Educational
Five Ways to Increase Possibilities for Profit 2007-03-17 18:20:07 While there are various ways to increase your potential for profit in the market, I am submitting five categories to begin altering your trading behavior to increase potential profits.
Hold your trades longer than usual
Increase position size (concentrate capital) in fewer stocks
Decrease position size but trade highly volatile stocks (those with high beta, like Google (GOOG)
Decrease normal position size, but trade more opportunities in more stocks
Increase your market knowledge and education, or get with a trading coach or mentor
Let’s take them individually and discuss strategies for each:
Hold trades longer than usual
My bias is scalping and day-trading. The targets for the patterns I identify are anywhere from 15 cents to a dollar. I usually hold trades from 15 minutes to a few hours. If I played on larger time frames consistently and held my position using the same patterns, I would be holding for days or weeks and playing for five to ten dollars sometime Read more:Possibilities
, Five Ways
Questions Regarding Risk-Taking 2007-03-17 17:48:11 You can increase your risk-taking ability and overcome fears by analyzing your actions and asking empowering questions, as explored earlier.
Here are a few questions which can further help with your analysis and motivate you to make a difference once you understand more about what keeps you from taking risk. These questions are designed to take place when analyzing your trading decisions and chosen entry and exit points.
Exactly how much were you influenced by your emotional reactions? Did it make a major difference in your decision?
Did you stay with the trade with confidence, or did you exit prematurely once you had a profit because of anxiety?
Did you add to your position (increasing risk and potential reward) and hold it through an extended uptrend you anticipated? Did you add at all when you should have?
If the stock declined below your purchase point (but not stop-loss point), did you stick to your analysis and hold the trade (take heat) or did you cut your loss quickly?
W Read more:Taking
March 19 New Momentum High - Markets (5-min) 2007-03-19 17:19:34 I wanted to post a lunchtime chart of the QQQQ’s which had the best 5-minute New Momentum High and “two trade” Impulse Buy set-up I’ve been describing. The DIA and SPY had almost identical impulse buy setups. Remember, after a new momentum high, wait for a pullback (ideally to a key moving average) and play for the target just beyond the most recent swing high. Usually there are three pushes up, but the highest probability comes only for playing the first two upswings following the new momentum high.
Remember that these trades are good for “scalps” only, but the pattern can be applied when observed on any timeframe. Don’t get greedy and “overstay your welcome”. Play for the highest probability target and move on. Beware the natural momentum divergence (decreasing momentum on each upswing) that accompanies this pattern. Consolidation (or possible retracement) is more likely than further upside potential (in th Read more:March
, Markets
Mental Accounting Errors set up Failure 2007-03-19 00:42:24 Quick: What if I gave you $1,000 to invest however you wanted right now? It’s your money now - free. Would you put it on a speculative option play and try to double it within a week?
Now, ask yourself, would you be likely to make the same speculative decision if forced to use your own money to make a trade? Probably not. The answers to these questions help illustrate the main point of “Mental Accounting.”
Strictly speaking, we value earned money (especially if we had to work hard for it) more carefully than free money or ‘windfall’ profits. As such, we are more likely to take chances and speculate with free money, and we are more likely to preserve earned money. This, of course, makes intuitive sense but how does this affect your decisions in the market and how does it set you up for possible failure?
When you get a windfall profit you did not anticipate from a trade, you are elated and think you are a pro and want to put that money right back to wo Read more:Errors
Overcoming Mental Accounting Errors 2007-03-20 04:57:11 Once you understand how mental accounting errors can hurt trading results, it is helpful to identify patterns in your own thinking and trading which can be challenged with personal strategies.
While a blog entry cannot attempt to identify and correct these errors, I can challenge you to identify your own thoughts and seek out further resources to help you if you feel you fall victim often to mental accounting errors.
It is much easier to overcome the accounting error which is derived from windfall profits. Simply equate ‘free’ money with earned money and treat it like you would any other trading capital, rather than using it as an excuse to take that risky trade you have been eyeing. Be thankful for the profit, but consider pulling some out to treat yourself, rather than putting it back to work in a speculative play.
Most traders trade with scared money (money they cannot lose), and so that is the approach upon which I will focus.
First, ask yourself how you feel about mo Read more:Errors
Victory to the Bulls 2007-03-22 05:19:55 How did everyone enjoy today’s market action? I am noticing a shockingly similar pattern to trading days where Federal Reserve policy is announced: There is sharp contraction in volatility and immediately following the action, there are usually three sudden pulses (bursts) of trending price movement.
Such days are indeed for the bold and daring, but stops can be maintained very close to the entry and price targets (rewards) - if you are willing to hold through up to three impulses - are astronomical compared to the risk you take. I must admit that I didn’t hold through the full duration of the rapid move following the announcement but I’m not kicking myself either.
I noticed the Advance/Decline line tilting decidedly positive going into noon while the market stayed relatively flat. This was an internal hint that the market bias was biased to the upside, but still entering before Fed Decisions is dangerous. Today was one of those “grit your teeth and hope yo Read more:Victory
Stop Losses - Two Recent Perspectives 2007-03-21 15:49:13 I wanted to highlight two recent posts concerning whether or not to use stops, and what exactly is their purpose.
From Move the Markets, Prospectus discusses “What Is a Stop Loss For Anyway?” The premise is that many investors make an error by placing a stop at the point where “the market will prove your opinion wrong” and waiting for that spot to be triggered before exiting the position. A quote:
“It wasn’t the stop that proved me wrong, it was the price action immediately after my entry that clearly said that my position was wrong.”
He then describes proper usages of stops as “damage protection” or maximum loss per trade, with implications on position sizing.
He comments on how you must use stops, yet if the trade you enter does not work in your favor immediately (meaning the trade must prove itself right), then you should exit before the market declines to hit your stop. By doing this, you keep your losses very low and don’t Read more:Losses
, Recent
Advance Decline Oddity 2007-03-23 16:13:55 When trying to assess daily market internals, it is helpful to follow the Breadth, or the Advance
/Decline
Lines (number of stocks positive for the day vs. the number of stocks negative for the day).
I plot these lines to create an inverse graph, rather than simply following the breadth number because it helps show the past and the trend of the breadth better for me. When the breadth is skewed positive, I only take long trades and vice versa when the breadth is skewed negative. If the breadth is narrow, I am looking to step aside or trade with small size if I need more practice on a particular strategy.
The breadth line also helps in taking setups from stocks, which can provide much more movement with price patterns and daily bais than the ETFs or even index futures.
Normally, the breadth is skewed in one direction or the other, and may switch once or twice daily. Yesterday (Thursday), there was an oddity in the breadth which caused me frustration and a couple of whipsawed trades.
Regret Aversion 2007-03-22 14:35:10 While no blog post can adequately address the realities and implications of “regret aversion,” I wanted to alert you to its existence and possible resources for learning more.
Simply stated, we feel regret and remorse more for actions we DID take than for actions we DID NOT take. One way to understand this is that we feel pain that comes from personal experiences, especially of loss (staggering losses in the market, for example) because we lived it, experienced it, and it affected us deeply. The negative feelings from this experience are often easily brought to memory and we tend to take actions to avoid these feelings in the future (when confronted with a decision that may result in similar pain).
On the contrary, it is difficult to internalize the feelings of missed opportunity to such a degree, because the regret from the missed experience is not felt as deeply. Such memories (for example “I saw a trade set-up and did not take it and if I did, I would have made Read more:Regret
Technical Decisions and News Announcements 2007-03-24 20:00:39 By analyzing fundamental components of the economy and business cycles, you can gain an edge using technical analysis signals. But what happens when fundamental signals (or anticipated releases) thwart an otherwise good technical setup?
When I first started trading, I wanted as many signals to be in line with my analysis as possible, and as such, I analyzed far too much data before entering a position. I am inclined to short-term trading, and found myself overwhelmed by conflicting signals with fundamentals and chart patterns or indicator signals.
One of the greatest examples of my frustration came when I would refuse to take technical signals in front of major economic report releases or specific company earnings statements. I would allow my fear of sudden market volatility to prevent me from properly entering a trade based on a pre-established signal from my system. Many times, the stock would behave properly and would have resulted in large, sudden profits, and in the case where Read more:Technical
, Decisions
Chrystler (DCX) New Momentum High and Impulse Buy example 2007-03-26 03:24:54 I wanted to point to a recent, clear example of the “Impulse Buy” trade I’ve been referencing. The chart ends March 23:
A few highlights:
Note the consolidation (base) preceding the move
The new momentum high drives price sharply up as news broke (Chrysler may be a take-over candidate)
New traders entered after the news broke and probably sold as price (naturally) pulled back
The “Impulse Buy” pattern places your entry when price retraces back to the 20 period moving average
A “Rinse” (perversion) trade occurred and likely took out stops of those who placed them too close to the average
Price quickly rocketed upwards in the intended direction for those who “held on” through the rinse
Target #1 is the most recent swing high ($74) which was achieved (a great place to sell half the position)
Price is now overextended to the upside, making new upside potential very limited
While this particular technical pattern was caused by news
Trading Mental Attitude Link 2007-03-26 02:18:13 I found the article Positive Trading
Attitude at the Money Blogs to be particularly interesting.
A few quotes:
“…the right attitude helps create the conditions to reach your goals.”
“The acceptance of personal responsibility is a key difference between successful and unsuccessful traders, and success can be traced back to a positive mental attitude.”
“A positive attitude definitely is reinforced by past trading success, but when we ask which came first, the positive attitude or the successful trading approach, the positive attitude usually came first and helped cultivate the final outcome of trading success.”
Check out the article for more insights.
Ride Out Emotions for Greater Success 2007-03-25 18:13:32 Have you ever been caught in a trade and your emotions are overtaking you, causing you to make a decision based on your feelings? Now was it a good decision after the fact?
Typically, if we trade specifically on emotion (greed makes us buy too late and fear keeps us in too long or prevents us from entering at all), then our results tend to be average at best and below average at worst. Often, the best trades are the ones that few people are willing to take and “go against the grain” of what appears comfortable.
People tend to play out their emotions in the market, and seek what is certain and comfortable. Unfortunately, seeking certainty takes time, and often causes us to miss low-risk entries into trades. There is no certainty in the market, only greater probabilities. We seek these events and attempt to profit from them.
Recall the most recent market decline. Although the scenario is not complete, it would have been profitable to buy after the decline when most peop Read more:Success
March 26 Brief Analysis 2007-03-27 06:12:45 I often try to mark-up the “perfect trade zones” based on my system each evening looking back at the day’s action, and today offered very little in terms of trades I identify and am comfortable taking. Today, I was chopped around as I tried to play the short side because of the strongly negative breadth readings (which improved through the day) and took the afternoon off because of the slowly creeping trend which later became evident after the fact. It is very difficult to scalp or day-trade in a market that starts out negative and creeps higher, especially when your bias (because the market was overextended upwards) is to the downside.
Nevertheless, here are the 15-min and 30-min charts for the DIA (Dow Jones ETF the “Diamonds”):
I have added the Breadth (Advances and Decline lines) as a bonus, which shows the root of my frustration trading today. When the breadth is so negative, typically short sales tend to work out with satisfactio Read more:March
, Brief
, Analysis
Link to TraderFeed: Why Traders Sabotage Themselves (Information Processing) 2007-03-28 17:23:33 Dr. Brett Steenbarger posted a timely analysis entitled Traders and Information Processing
: Why Traders Sabotage Themselves.
This post is an absolute read. His concluding post reads:
“Trading problems begin when we enter trades by one information processing system, and manage them by another.”
To see what he means and learn his insights, visit the post or his blog at TraderFeed.
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