Touch, pause, engage!

[gododdin]

Thanks Jason - that's very interesting and a new take on the emotional element - so I think what you're saying is that my emotions about a particular market or trade will reflect the emotions of many others who are in the same boat, and I should say to myself well, if thousands of other traders are feeling the same as I am just now, they will probably do this, causing prices to do this, so I should do this if I want to profit. It's almost as if I should pay attention to my emotional responses and then do the opposite to what they tell me I should do!

That's really quite an eye-opener and worth a lot more thought - thanks!

Right, back to bed for me...

 

[dbphoenix]

I'll have to part company with Jason on this one. Generally, those who are "emotional" about their trading are those who are the least prepared. And to suggest that trading without being emotional about it hinders one's ability to make decisions is perhaps to draw the wrong conclusion from the research he cited. Where trading is concerned, it's just the opposite: one is far better able to assess the probabilities and make the decision when he's calm and objective.

This is not to say that understanding how other people trade with their emotions is of no benefit to you. You can do quite well using others' fear and greed against them. But you're going to have a tough time doing that if you've joined them.

 

[jasont]

I'm not sure I explained the idea of emotions as well as I could. In fact it is a very difficult thing to explain. When you're in the zone you trade as you say Db, calm and relaxed. However saying you have no emotion is not quite right, you do have emotion, it is just in a well controlled state. When you take information in visually in regular situations, information first goes to the neocortex of the brain. This is the rational part of the brain.

This part processes the information and sends it to the amygdala which is the emotional part of the brain. That is the process that occurs when you make decisions such as what you feel like to eat or drink etc. Now under stressful situations your information is sent to the amygdala and the neocortex at the same time. This results in the amygdala triggering impulse actions before the rational mind has had time to assess the situation and tell you what to do. Say a ball is speeding towards your head and you duck prior to the ball hitting you, you haven't made a conscious decision to duck because the amygdala has pushed you to act prior to the ball arriving.

Now what is the point of all this? You want to trade under stressful situations with your neocortex taking the information and sending it to the amygdala. Not have the information arrive at both at the same time which results in emotional and impulse trades. Being in the zone allows you to take what you see from the market and process it through the neocortex. However your decisions still must pass through the amygdala before being made, the emotions are just in check instead of being wildly out of control.

What happens if you bottle up your emotions you feel whilst trading by attempting to feel nothing at all? It results in an explosion of energy. Physics dictates that energy doesn't simply disappear it shifts from one form to another. Should you have a build up of anxiety, fear, greed etc, it will turn into another form of energy such as an impulse trade. To combat that impulse trade you simply need to recognize that emotion and sometimes do something to let it out.

Now there is a big difference between feeling no emotion and being in the zone. Emotions hit you in the zone but you're in a state that allows you to assess them like you would deciding what you want to eat. There is no pressure behind the decision at all so you rationally can decide.

I agree with Db that being emotional whilst trading is the worst thing you can do, however feelings come by whilst you are in the zone and instead of feeling like I must be in this big move up, you instead have a feeling to jump in but know it's best to wait for the pullback. Instead of being clouded by your urge to jump in, you see the urge others would have to jump in and can wait for the ideal moment to short the market.

 

[dbphoenix]

We'll have to disagree again. You're beginning from the position of a stressful situation. But the situation is not inherently stressful. If one trades randomly and wildly, then one can expect wildness and randomness.

If one knows what he's doing, there is simply no reason to get all emotional about it. Consequently, there's nothing to bottle up. Granted those who trade emotionally won't understand this at all, but there it is.

 

[jasont]

Although I enjoy a good debate and still think I'm not properly explaining myself, I don't want Gododdin's journal taken up with non related discussion. Db, I enjoyed the discussion and will be content with differing opinions. Hey thats what makes the world interesting.

 

[gododdin]

Okay, some lack of activity here for a couple of days, but you could say that having ‘touched’ I’m in a ‘pause’ phase – a period of reflection based on all the great advice I’ve had since I started this journal. ‘Engage’ will come soon enough…

I’ve taken a couple of things really to heart – I’ve become sceptical of indicators and have started looking at just the ‘bare’ charts – at the mysterious (for now!) way that prices ebb and flow, sometimes hitting areas of support and resistance and bouncing back and at other times powering through them. It’s really quite an eye opener when you look at, say, MACD and think – aha – it’s signalling an uptrend, but then look at the prices and think, well, I can see that for myself, let’s turn the old MACD off! I’m sure that many will disagree with this, and I’m probably being pretty naïve but hey, that’s the advantage of ignorance – the only way is up…

I’ve also read the book recommended by Nut – ‘Channel Surfing’ by Michael J Parsons and I can recommend it for anyone interested in price action and price channels. I’ve been reading TraderDante’s excellent thread ‘How to make money trading’ as well – I’m only on page 14 though!

I feel that once again I’ve learned a great deal, and so I think it’s necessary to revise my strategy almost before I’ve started. But that’s okay, because unlike some others here apparently I’m not in a great rush to ‘engage’ (other than due to the ‘Reaper’ and I guess that if he calls, then all my aspirations and problems are solved ☺).

One of the things I’ve found is that trying to do all that analysis on the 100 charts of the FTSE100 is completely overwhelming (even with this much time on my hands, never mind when I go back to work) so I’ve decided to switch, for now, to Forex and look at only the major pairs – this way I have a maximum of seven charts to analyse which in itself will be a joy. I’d welcome your thoughts and opinions on whether I’m doing the right thing.

Also, I’ve decided to ditch indicators and walk naked amongst the prices (not a pretty sight!) just learning to do my own analysis based on the price action. It’s quite liberating but also quite scary! I accept that this will take some time to get a handle on and so I’m just going to paper trade for quite a while (but as if it was real money, so with ‘real money’ attitudes to management of stops and so on. In fact I’ll probably use a Capital Spreads’ dummy account.

The only thing I’ve always been sure of and continue to be so is that end-of-day trading is for me. That way I can set up my trades for the following day giving due regard to entry and exit levels and money management in an unhurried and cool way. I would usually plan to be out of a trade in a few days at most and exit by using trailing stops.

EOD trading also gives me more time to fill in my forms and print out my charts to keep ordered records. The only trouble is that with no indicators, keeping records becomes a little more challenging – no ‘red line crossing the green line’, no ‘price moving above the 50 SMA’ etc, but I guess I’ll figure something out.

Oddly I feel a kind of invisible pressure to ‘get on with it’ since I started this journal. In my mind’s ear (?!) I hear people reading it saying – “this is all very well, but when is this guy actually going to DO something?” But like I said at the start, this journal (remembering the relationship of that word to ‘journey’) is a record of my (probably long) learning process, and as such, in my terms, is a continuing success, because I’m still learning new stuff every day!

Thanks to everyone who’s contributed both here and by p.m. I really appreciate it. Please keep it coming.

 

[jasont]

Great work Gododdin,

You have come a long way already and continue to go at your own pace. A mentor once told me that he finally became consistent when he removed the pressure he placed on himself. This journal is for you, it's not to please the people reading or provide a source of entertainment. If it does those things as well then thats great but you want to make sure you keep an eye on that pressure you feel to perform for the journal.

You are doing a great job thus far taking it easy and working your way into trading at your pace. I wish I had taken my time when I first started trading 2 years ago instead of wanting to make money yesterday. Your journey is much more interesting and valuable to people than your results.

 

[nine]

Don't give in to the invisible pressure. After you have a strategy and a documented plan and have tested both on prior data ---- please, please, paper trade it for at least a month so that you build up good behavioural habits for when you add the pressure of money.

The confidence of knowing it worked in real time and the habit of doing the right things right will be a great benefit when you increase the pressure.

 

[dbphoenix]

At this point, which do you understand the best:

1. Stocks

2. Indices

3. Currency pairs

 

[gododdin]

The honest answer to that DBP, is that I know a bit about all of them, and not a lot about any of them. I suppose I've been hanging back from doing in-depth reading until I decided which one to go for. Once I decide (hopefully with some guidance from you guys) then you can bet that I'll read everything I can lay my hands on. Right now I'm attracted to currency pairs because there aren't that many of them, which in itself is an attraction. I suppose that in turn though limits the opportunities for good set-ups? The other thing is that traders mostly seem to trade currency intra-day and I can't do that (yet) because I work full time.

 

[gododdin]

Hi Nine - thanks for that - I will certainly be paper trading my system for at least a couple of months (in truth until I feel it's working properly). There's a lot to work out and refine in the meantime, and I won't be rushing into putting my equity on the line (learned that lesson well already ).

 

[dbphoenix]

Then which do you understand best:

1. The traders who trade stocks.

2. The traders who trade indices (such as futures or ETS).

3. The traders who trade currency pairs.

 

[gododdin]

Forgive me DBP - I know you're trying to tell me something, but I must be having a dim day because I can't figure out what it is... I'm going to blame it on the pain, go back to bed, pop a couple of pills and think about it for an hour or two. Truth is, I don't know any traders at all, really, but somehow I don't think that's the point you're trying to make.

 

[gododdin]

Okay, I had a think. Best I could come up with today was - maybe what you're saying is that each group of traders has different behaviour patterns or differ in the ways that they trade, and that I should decide which group is the best fit for me, and use that as a basis for deciding if I should choose to trade stocks, indices or currency pairs?

Alternatively, perhaps you're saying that I should 'know the ways of my enemy' because these are the people I'll be up against when I trade?

Unfortunately as to the nature of those differences, I don't have a clue, but I'll see what I can find out.

 

[gododdin]

I'm curious as to why no one wants to make any recommendations about what to trade. If someone could point me to a link on the web (I have been searching without success) which has something like:

What should you trade?
Stocks - Advantages/Disadvantages/Kind of person you need to be to trade these
Indices - Advantages/Disadvantages/Kind of person you need to be to trade these
Forex - Advantages/Disadvantages/Kind of person you need to be to trade these

I'm not usually the type to be looking for quick and easy answers, but I'm genuinely struggling with this one.

 

[dbphoenix]

Okay, I had a think. Best I could come up with today was - maybe what you're saying is that each group of traders has different behaviour patterns or differ in the ways that they trade, and that I should decide which group is the best fit for me, and use that as a basis for deciding if I should choose to trade stocks, indices or currency pairs?

Alternatively, perhaps you're saying that I should 'know the ways of my enemy' because these are the people I'll be up against when I trade?

Unfortunately as to the nature of those differences, I don't have a clue, but I'll see what I can find out.

Whether you choose to think of other traders as the "enemy" is not particularly relevant to understanding why other traders trade the way they do. If you don't understand the nature of the instrument you've chosen to trade and you don't understand the behavior of those who choose to trade it, then you are in effect doing little more than following the bouncing ball. If you don't make random trades based on what you feel, which is what most beginners do, there may yet be a disconnect between what you see and what it is.

For example, if you use support and resistance, you can see it as a line you've drawn somewhere for some reason, or you can see it as a line that exists outside of you as a necessary feature of the chart. Like a kidney. All you've done is locate it.

More generally, and using the indices as an example, the Nasdaq behaves differently from the S&P behaves differently from the DJIA in part because of the stocks that each contains and because of the traders who trade those stocks. If you view all of them as simply "indices" and make no attempt to understand why they move the way they do, you will be at a severe disadvantage. A "sucker", so to speak.

 

[timsk]

I'm curious as to why no one wants to make any recommendations about what to trade. If someone could point me to a link on the web (I have been searching without success) which has something like:
What should you trade?

Hiya gododdin,
I suspect that the reason you've not received a reply is that it's 'horses for courses'. Each trader's circumstances are different: one instrument (or group of instruments) may be right for you and another for me. There is no "should". I appreciate your dilemma at arriving at an answer though. It's not easy. All I can do is to tell you what I trade and why, which may help shed a flicker of light on what's most suitable (or not) for you. I day trade U.S. stocks - U.S. rather than U.K. because there's more of 'em and, in the main, they have more liquidity and volatility. The consequence of this is that the spreads are tighter and then there's the small matter of stamp duty: there isn't any! I trade stocks rather than futures or currencies for the exact opposite reason that you feel drawn to them (currencies). There's a lot to chose from. On days when the market is stuck in a narrow range - there are always strong trending stocks to be found (although I admit that this isn't always that easy). If you just trade one index future (as many traders do), potentially you have a lot of time sitting on your hands doing nothing. For example, take a reversal pattern such as trader_dante's 'pinbar' set up; you could wait days before a decent one comes along. Murphy's law being what it is, chances are it'll appear in the 10 minutes in the whole day you were away from your screen! Just to be clear, I'm not anti trading currencies or futures, far from it, all markets have their pro's and con's. A personal view of mine is that the futures markets are inhabited almost exclusively by professionals. For the most part, retail traders go for equities and, while one can not escape the sharks, it's somehow comforting to know that there's plenty of other minnows besides me in the equities tank!
Tim.

 

[gododdin]

Accepted, and I have no desire to be a 'sucker' . So given that I know pretty much nothing about any of them, it seems to me that the best way forward might be to choose ONE index like the FTSE100 index or ONE currency pair - perhaps EUR/USD, and trade it using my (developing) system until I understand it inside and out - what makes it move and when etc.

I'm pretty convinced that the only way to gain the intimate knowledge that you are referring to is by focusing down rather than taking a scatter gun approach.

The only problem is that I'm then up against the same old question - which ONE thing should it be? Maybe it doesn't really matter that much at this stage as long as I choose one and stick with it.

 

[gododdin]

Sorry Tim, I was referring to DBPs post of course...

 

[dbphoenix]

Accepted, and I have no desire to be a 'sucker' . So given that I know pretty much nothing about any of them, it seems to me that the best way forward might be to choose ONE index like the FTSE100 index or ONE currency pair - perhaps EUR/USD, and trade it using my (developing) system until I understand it inside and out - what makes it move and when etc.

I'm pretty convinced that the only way to gain the intimate knowledge that you are referring to is by focusing down rather than taking a scatter gun approach.

The only problem is that I'm then up against the same old question - which ONE thing should it be? Maybe it doesn't really matter that much at this stage as long as I choose one and stick with it.

First, don't trade either one. Don't trade anything at all. Study both and determine first what appeals to you, e.g., the volatility or lack of it, the predictability of it or lack of any, the susceptibility of it to events or lack thereof, etc. Only then will it be appropriate to develop a system. It's not up to the market to suit you. It's up to you to conform to the market's demands.