Fear and Stop-Losses Link

Mar 28, 2007: 1:01 AM CST

I wanted to highlight a personal post redarding a recent stop-loss experience from the 59 Cedar Street blog, which personifies experiences I have had, and I know we all have had.

BP references the fear once in a trade and the almost compelling notion to move your stop to break-even once profit is achieved. I have done this so many times and often ended with the same result as BP – a scratched trade on a possibility that would have achieved or exceeded my target.

Not only does he post the experience, he posts the lesson he learned from it, and with this realization, he can evaluate how to “take the heat” a little longer and fight the urge to avoid pain by killing a trade early.

The post is definately worth reading, as he explores his thinking and how fear tends to cost us in the market (or as Mark Douglas says, we tend to create the result – losses – that we are fearing).

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Quick Comment: The Disciplined Trader – Mark Douglas

Mar 27, 2007: 9:15 PM CST

Readers,

I just started reading Mark Douglas’ The Disciplined Trader and am gripped by the intro and first chapter and wanted to pass on the reference to those who are gripped by fear in trading.

I take notes on everything I read, and in this book, I have written down so much already, and I am just beginning!  I can’t wait to study more into the insights of the book and how fear develops, causes us to trade from a fear mentality, constricts our view of market opportunities, and causes what we fear to come true.  I suppose I’m most interested in how to overcome this, but knowing the foundation is important.

Mark gives his personal story, which sets up the rest of the book, and describes how successful traders can overcome their fears with a new mentality.

I plan to post more insights from my personal experience and trading as I progress, but I wanted to pass on how much this book has captivated me already.

Feel free to post comments if you have read this book as to your overall thoughts and how the book has helped you.

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March 26 Brief Analysis

Mar 26, 2007: 10:12 PM CST

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 satisfaction. Today, it didn’t.

Notice on the 15 minute chart how the market defied an “Impulse Sell” set-up (indicated by the red arrow). Although the trade gave 20c of satisfaction, the actual target was the most recent swing low which was not achieved. When an Impulse Sell or an Impulse Buy fails (remember these are set-up by New Momentum Lows or Highs), odds then switch strongly in favor of continuation in the direction of the failure.

Often, creeper trends sneak up on traders and catch both sides of the market leaning the wrong way, as was likely the case today. Markets can creep higher because short sellers are forced to cover at higher prices, which attract new buyers, and the cycle repeats. Creeping trends are difficult to predict and much more insidious to trade.

Here is a swing chart of the DIA on the Daily Frame.

My hat is now off to the bulls (buyers). They have managed to overcome immense technical adversity and now have proven themselves with a bounce off the daily 50 period moving average (to the penny). Although a lot of news is bad (with a possible recession on the horizon, as some economists and analysts predict), the charts and price are king.

Notice the momentum divergence with the two recent swing lows (red bars) and the new momentum high on the oscillator. Also, notice price has now crossed above the key moving averages. The techincal picture is much better than it was early last week, to say the least.

As such, we must respect the courage and strength of the bulls and recognize that – at extended technical price levels AND in the face of a sharp morning drop – the buyers have yet again pushed this market higher.

I still must remind readers that the market is overextended to the upside in the short-time frame (daily chart) and caution is warranted before committing new capital into the market, or getting overly aggressive now with initiating new long positions.

Stay safe out there.

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Chrysler (DCX) New Momentum High and Impulse Buy example

Mar 26, 2007: 1:24 AM CST

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 and rumor (private equity or an unknown company may be buying portions of Chrysler), the pattern played out as perfectly as an Impulse Buy pattern could unfold (with the exception of the “Rinse” into the area of tight stop-loss placement).

A few lessons:

  • Establish positions AFTER the retracement following a key breakout and new momentum high (new price highs are likely to follow)
  • Give the position a bit of leeway to avoid rinses and washes beneath your entry
  • News events often serve as the impetus for the Impulse Buy pattern, but cannot be predicted in advance
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Trading Mental Attitude Link

Mar 25, 2007: 6:18 PM CST

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.

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