Examining the “Right Edge” of the Chart – “What do I do?”

Mar 2, 2007: 9:11 AM CST

Whatever sparked our initial interest in trading, we all have to answer the same question daily: “What do we do at the edge of the chart?”

Even now, that question haunts me after I’ve studied my charts, examined the overall market, and scanned economic news. Even with all that behind me, when the trading day begins and I’m ready to execute my plans, that “second guessing” or nagging feeling of “what if I am wrong?” plagues me and I suspect many others. “What if the chart pattern doesn’t work out this time?” “What if I lose money?” “What if they gun my stops this time like they did last time?”

Although I know trading is a game of probabilities and uncertain outcomes, I still have to work hard daily to “silence the inner critic” and move on with my positive game plans and enter the trades with the proper stops and not watch every tick. Early in my trading career, these questions never entered my mind. I haphazardly entered trades based on momentum or a ‘hot news story’ and rarely considered the “what ifs” mentioned above. I made money until one day when I was supremely certain in the outcome (mega-profits) based on a magazine article in Forbes. I risked twice my normal size and – got burned. I lost not just all the profits I had accumulated (through greed) so far, but almost twice that amount above that initial zone. That was my ‘trading trauma’ that began the spiral into fear for me.

So, as we become professionals, we tend to focus much more on the “risk” side of the equation – as we must do – but I focused so much that it inhibited my performance in various ways. Trading is a game of balance between acceptable risk and reward; between greed and fear; between too much knowledge and not enough; between the professionals and the mass public; between the mature and immature (in our trading education). There are many pendulums we have to address when making decisions. For me, and I suspect for many others, the pendulum swung too far for too long into the “fear” and “risk” sides.

Our previous experience, our knowledge/education, and our personality (confident or fearful) affect how we address that “Hard Right Edge” of the chart and the questions we address when seeing it. Not only do we question whether we should put a trade on, but how many shares should I buy, how much should I risk, where should my stop be, where should I exit, how long will I hold this trade, if I hesitate, where is ‘too late’ to enter, is it too soon to enter, etc.

While this post can’t answer these questions, there are many resources online that can assist you in your anxieties and trading decisions. Use the evenings to study the markets and set-up your trades through scanning and chart annotation (as well as blog reading), write down your plans (plans written down have higher odds of execution), and execute your plans based on your written strategy.

Each success you experience in your trading will chip away naturally at the “fear of the hard right edge” of the chart.

BONUS LINK:

From “The Kirk Report”“Flip the Chart”
Kirk suggests we turn the chart upside down in order to cool over-bullishness (or bearishness) and examine the chart from a different perspective to help determine trading decisions. Worth a read.

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The Fear and Recent Decline

Feb 28, 2007: 10:33 AM CST

Needless to say, there was an overwhelming amount of fear that resonated throughout the market yesterday. Without addressing the specifics or reasoning behind the decline, as have been addressed by news sites and other blogs far superior to my new blog-in-development, I wanted to take a different approach and address some of the emotions of new traders behind the market action we just experienced.

Because of the steady market advance that we have witnessed since last August (following the 10% decline after May, 2006), we have been virtually unabated in our ascent and complacency. This is shown objectively by low levels on the $VIX index (around $10) and subjectively by various sources. We are hearing more talk of complacency at the least to near euphoria at the most, as new investors come into the market for the first time, especially after hearing of the 15% return of the S&P and Dow last year.

One anecdotal piece of evidence that I read recently came from Toni Hansen’s daily commentary where she noted that the recent Trader’s Expo in New York was so well attended and “busy” that she jokingly commented to another trader whether a top might be forming simply from this reality. She noted that the last time she saw attendance at these levels was the Expos of 2000 right before the great decline. We are also seeing Daytraders coming back to the scene in levels similar to those before the ‘crash’. The Expo ended Valentine’s weekend, and many new traders were so excited to put their new knowledge to work in the market, but what a wake-up call they got!

We traders have more experience than those who freshly step up to the plate; as such, those who have survived have simply outlasted these ’shock’ events and adjusted our approach to the market accordingly. If you lost yesterday, you have a battle scar to show! I suspect a lot of trading careers may have been abruptly ended yesterday before they began.

When confronted with such a blow, two approaches arise:

1) Take your punishment, and walk away with tail tucked. Sustain a trading trauma, increase fears, decrease confidence, and engage in avoidance behaviors.
2) Take your loss, realize you got greedy, realize market realities, store these lessons away, learn from the loss and catalog it, engage in stress reduction techniques, move on to trade another day and hold fast to your risk management profiles.

I know each successful trader can point to one or two trades that “got them” and changed their world perspective. I can. In fact, true professionals will be able to point to multiple occasions. Don’t lose heart if you were blindsided by this drop. Don’t throw in the towel and quit. Believe me, I’ve been there with you not long ago. All of us who stay in the game simply do so because we learn how to overcome these events, and file them psychologically differently than those who walk away with crushed emotions and expectations. Take time away from the game and gather knowledge, but please come back to the game.

Please stay with me here at afraidtotrade.com. I am working to develop a community of traders and knowledge to help you overcome fears. Please be careful, be patient, and mind your risk!

 BONUS LINK:

Oda at Options the Easy Way  posted a great, quick summary of the recent decline and encourages us to stick with our plan and our discipline and keep finding trade entry points.  Yes, a lot of people got hurt, but we must press on and keep analyzing and finding trades that are congruent with our system. Please check it out.

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We Took a Hit, Captain

Feb 27, 2007: 11:14 AM CST

There’s no avoiding it – the market got clobbered this morning before the opening session and has not managed to recover as we just breached the noon hour. Although the instinctive move might have been to “fade the gap”, realize that this gap was largely fundamentally driven with a possible contagion effect and struck with the indices on technical sell signals. The technical picture was shattered this morning with that gap and the market (both Dow and Nasdaq) has violated their rising 20p and 50p Moving Averages on a significant candlebar. The caution I warned about yesterday was warranted as the long, uninterrupted uptrend is now called into question, although it is still not invalidated (that will come with a lower low, lower high, and a strike-out below the new lower low). Caution is now strongly warranted as we see how severe the “Asian Contagion” from China, strength in the housing sales and consumer data (which may lead to higher probabilities of an increased interest rate hike) along with Greenspan’s recent warning of “a higher than anticipated probability of a recession”. Clearly, it is now time to raise your stops, take at least partial profits from any remaining position trades, and be very cautious with new buy swing set-ups. My guess is that we will be seeing a plethora of shorts begin to set-up if we make a lower low and then retrace upwards from that low. Please be careful out there and mind your risk management parameters you have set in place.

On a surprising note, I have rarely seen Breadth levels so divergent (as of Noon, EST)
Advancing Issues: 487
Declining Issues: 2,770

Another internal is shockingly high:
The TRIN reads just over 4.50

Also, in the last two sessions, the $VIX has risen from around 10.0 to 13.40. Quite the “fear” spike.

In the meantime, look at these ‘blood in the water’ charts.

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The Four Fears of Trading

Feb 26, 2007: 6:08 PM CST

When beginning this blog, I think it is important to highlight one of the classic ideas from Price Headley concerning “The Four Fears of Trading”

1. Fear of Loss
2. Fear of Missing Out
3. Fear of Letting a Profit Turn into a Loss
4. Fear of Being Wrong (not being right/perfectionism)

Links come from Price Headley, supported at TigerShark Trading.com
tigershark_topl.gif

Conquer the Four Fears of Trading (to Achieve Consistency)” – A Must Read for beginners
Fear of Missing Out
Handling Fear and Greed in Your Trading
Pulling the Trigger Consistently in your Trading
Pulling the Trigger on Your Trades” (Price offers more advice to those who are hesitant)
Are You In Control When You Trade?” (You can be mentally in control while you cannot control the market outcome)
Seven Insights for Disciplined Trading” (From Mark Douglas’ Trading in the Zone)
Building Your Trading Confidence
The Perils of Perfectionism in Trading” (Perfectionism related to “Fear of Being Wrong” and can be deadly)
Tune In to Trading Excellence
Learn from Champions to Improve Your Trading
Your Plan for Improving Your Trading
A Lesson in Contrarianism
Which Stock Market Theory Works?” (Dow Theory, Elliot Wave, and Fibonacci)
Learn to Avoid Traps that Lead to Trading Losses
Using Stops and Limits to Improve Your Trading Profits
Advantages and Disadvantages of Different Trading Systems
Two Heads are Richer Than One” (Discusses the Advantage of “Trading Buddies”)
Always Use Stops When You Trade
Planning Your Trades
Assembling Your Trading Arsenal
The Process Gets You Paid in Trading
Setting Up Your Trading Workspace
Beliefs of Winning Traders” (Six traits and beliefs)
Freudian Trading Techniques” (Four strategies to overcome ego in your trading)
Mental Toughness for Traders” (Becoming a great trader requires mental toughness)
Checklist for Success in Trading” (Six items to assess)
Going from Good to Great in Your Trading” (Cultivating work ethic)
Focusing on One Trading Goal at a Time
How to Set Goals for Your Trading
Key Trading Skills You Need for Success” (Six key skills from Price)
Four Stages Of Awareness in Trading” (Excellent post to help you know where you are in development)
Preserve Your Mental Capital for Trading

BONUS: “The Fear of Missing Out” personal blog post of Kevin at Kevin’s Market Blog.
Personal story and pertinent advice including, “What works for me is to simply follow a trading methodology and have the discipline to stay with it” and “Another way to avoid the fear of missing out is to condition your mind into believing that it is more painful to lose money than it is to miss out on a trade that is not part of your game plan.”

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Link from TraderMike.net

Feb 26, 2007: 5:02 PM CST

As I awoke this morning to read TraderMike’s headlines, I was astounded to see my link in his link list!
I just created this blog this weekend and most definately was not ready for any publicity, nor had I reached out
to anyone yet before I had the site ready.

All I have for you so far is to read over my “About Me” page, bookmark this site.  Please know that I have great desire and ambition
to provide a high-quality blogsite and community for you all to connect and share ideas and personal stories.

Please bookmark the site and email me at corey AT afraidtotrade DOT com for suggestions, support, and ideas.
I will have this site completely ready shortly and am very thankful to TraderMike for his link.
I will be updating frequently as I get acclimated to the online blog capabilities and world.

Don’t be Afraid! This blog and website will be fully-functioning soon!

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