Impatience

A key requirement to be a successful trader is patience. Even very experienced traders will admit that their trading would improve if they work on their patience.

New traders are impatient and and long to be in a trade and until they take a position tend to see every tick as loss of opportunity. Once they are in, they are very impatient and want the trade to work right away and take them to profit. The moment they are out of a trade whether due to hitting a target or being stopped out, they want to be in again. Therefore, impatience makes traders overtrade.

Impatience, combined with greed and fear will force traders to have impaired judgement and results in inconsistent performance. Its very unlikely that a trader who is entering and exiting a trade every two or three bars to have a high success rate. Even a high success rate can be neutralized by a couple of poor trades if you focus only on small moves.

Patience for a trader, is being able to do nothing for hours while waiting for a proven setup o form and when it does appear, to act on quickly. After entry the trader should not exit as long as the stop is not taken out unless a setup in the opposite direction sets up and is triggered. The trade should terminate either by reaching a target or being stopped out. Patience and confidence in the setup will enable you to take larger profits.

Impatience is addressed by focusing on large moves. Looking for a large swing move will check your impulse to be in a trade since there are a small number of large moves in a trading day. Holding at least a small portion for a swing will also satisfy your need to be part of a move without having to re-enter every few bars.

Fear

Being stopped out several times will wreck your confidence and the trader may turn into a victim of fear. Fear is always an immediate emotion and will paralyze you and prevent you from entering viable setups.  Often very good setups will move immediately after triggering and your hesitation will cause you to miss out. Fear will make you miss out on many solid trades.

Since good setups will often give a strong entry bar and the entry bar usually grows very quickly after the trade is triggered, you may curse yourself and enter mid-bar, a few ticks or a point above your ideal entry. This also means your risk is now larger by a point or so. This means fear forces you to enter on a large risk.

With a few exceptions a slight pullback after an entry trigger is a normal event and mid-bar entry may cause your stop to be taken out. A trader stricken with fear is unlikely to loosen the stop or add-on (unlike the greed stricken trader) but would probably reverse at the stop. Fear will cause you to be pushed around by every pullback and strong move the market makes.

Reversing every two or three bars will destroy any confidence you still have left in your ability to read market direction and you will get chopped up. Unlike the greedy trader who's account is killed by few large losses, the fearful trader's account dies by a thousand small cuts. If you are fear stricken, you should never reverse a position.

A loss for a fearful trader puts him "on tilt" and he is likely to make more mistakes if he continues to trade for the rest of the day. Fear is rather hard to overcome and the only way out is to realize that every setup has a certain percentage of wins and the remainder are bound to be losses. Some losses will be clustered close enough that it will appear that you have lost your ability to trade that setup. The best approach is to stop trading for a certain number of bars after a loss and stop trading after a certain number of losing trades for the rest of the day. The knowledge that your losses are limited per day in the worst case is a stabilizing force on your psyche.

"Be greedy when others are fearful" is easy to say but impossible to practice since you are the fearful one. The antidote to fear is risk management. Once you understand and accept the maximum losses per trade and per day, you already know how much you will lose in the worst case for any given period of time. If this is something you have already accepted as the cost of trading or learning to trade, fear will be much more manageable.

Greed

Traders should not be ashamed to admit that greed is probably what motivated a lot of us to get into trading. After all, there is the promise of easy money or rather, lots of easy money that we can gain by trading. Greed may be good, but it will force the trader to make many mistakes.

One of the worst mistakes a trader can make is entering on a poor setup because "this could take off from here". You are afraid to be left out. This brings us to our first realization: Greed is just fear thats not immediate.

However, when you do get in on the poor setup, either because the signal bar was poor or because the pullback was too shallow or any other reason, you probably entered at a poor price point and a possible pullback will take out your stop unless you use a wide stop. From this we infer: Greed forces us to enter on a large risk

Often, even a large stop could be hit and you may resort to loosening your stop, which of course can still be hit so you end up taking a stop much larger than your profit expectation. A stop placement on entry is a statement that if the entry is correct, the price should never touch the stop. If you loosen stops habitually, you are not really trading with stops. Therefore, Greed forces us to disregard our stops

Some traders when faced with a wide stop will add on at the worse price so that they have a better chance of breaking even and a tighter net stop. This means that Greed forces us to throw good money after bad.

Ideally, you want to be very choosy about where you enter and understand that success lies in consistency (steady, higher percentage of wins) rather than depending on any one trade "taking off". The key to this is to take strong bars on deep pullbacks or at the ends of a trading range. However, if you do enter on a poor bar and it does not take off, remember that the first loss is the best loss. Take your loss and wait for the next setup. Refusing to accept being wrong and replaying the losing scenarios described above is the quickest way to a blown account.

"Be fearful when others are greedy" is a simplification. Fear is equally unproductive. The correct antidote to greed is caution. When you feel an urgency to enter, do not enter unless the signal is good and risk is acceptable.  Do not fret about letting a big mover pass you by. There is always another trade with a better signal in the very near future. Once you enter, let the trade fail if it needs to. You will never know what trades you are capable of reading and entering correctly if you don't let the market stop you out.

Vacation

I'm on vacation till Jan 2012. I will continue to post articles regarding market psychology and trade management instead of the daily market commentary.

Meanwhile, this is a good opportunity for both me and my readers to revisit various posts in the blog.

Double Wedge

A double wedge is simply two wedges that terminate at the same bar. In the chart above, it may be argued that there are two wedges W 6,24,52 and W 34,39,52 or other variant. A double wedge can lead to a large move (b63-b81).

For a double wedge to form, a pullback from a recent swing point (b24) needs to be deep enough that the next leg is likely to need multiple pushes to take out. A strong deep move (b24-33) consisting of CT bars may also demonstrate counter-trend strength that will encourage with-trend traders to exit and counter-trend traders to enter beyond the swing point (above b24).

Reversal bars

Reversal bars often signal reversals, regardless of where they are. A well placed reversal bar (b6) can signal the end of a move (b1-b6) but so can an incorrectly placed reversal bar such as b15 signaling the end of the prior move (b10-b15).

A reversal bar followed by a reversal bar in the opposite direction (b15,16 and b32,33) is usually a very strong signal, especially if the second reversal bar can be viewed as a 1PB in a new trend move, i.e. its the first pullback after a possible reversal.

Similarly, reversal bar failures are very strong with-trend signals. Often after a recent possible reversal, the failure of a reversal bar can often be used as an entry. You could enter long on a stop above b32 (for example if you did not already get a buy signal at b33)

A reversal bar of the wrong color such as b39 are usually traps and if the trend has been strong, may be traded as a continuation signal.

Small reversal bars (compared to prior bar or recent bars) are subject to failure such as b68 and you should only take second entries. The only exception is when the tail is at least as long as the body and you have additional signs of strength in the direction of the signal.

The first two legged pullback

On many days, the open may constitute an opening range made up of erratic moves (b1-25) that finally break into a trend (b26-b38). Some traders may get repeatedly stopped out on the initial range and their later trades will barely make up for their initial loss.

The trick to avoiding being chopped up on the opening TR is to wait for a trend attempt and take a clear pullback on a strong signal bar. This is essentially the philosophy of the 1PB trade.

Determining if a leg is a trend attempt is a bit tricky. Any two or three trend bars are a possible trend attempt. One bar does not usually make a trend (unless its very large). Once a trend is attempted, it will either reverse and a new trend is attempted in the opposite direction or a pullback gives a possible continuation of the orignal leg. A strong reversal attempt is 1Rev. A pullback is 1PB.

Today, there was a trend attempt from b3 to b5 and a weak reversal attempt on b5. Then possibly a second trend attempt from b6 to b9. Note that this bar is made up of weaker bars and is unlikely to succeed, especially in the absence of prior bull strength.

b16 represents the first two legged pullback of the day and is a possible 1PB long entry of the long trend attempt. However, the signal bar was a doji and the reversal was fairly weak. However, this is still a viable long entry. When the long entry failed to take out the old high, it turned into a first 2 legged LH, turning into a 1PB short at b20 of the original short trend attempt.

Another way to read this is that b2 and b9 represent two failed attempts to close the gap leading to a bear trend. Even though many traders may have correctly read b9 as a possible 1PB short, waiting for a strong signal bar (b26) is usually the right thing to do for a profitable entry. This is because shorting below a bull bar is always subject to failure, regardless of the correct read of the market direction, especially on a choppy open.