Debra looked at the candle on the daily chart. It was yesterday’s candle and it was red just like several before it; and it looked good. You see, it represented a pull-back from a high several days ago on the YM E-mini. The high was the latest in several higher highs and higher lows that stretched back a few months representing a strong upward trend. What looked attractive to her was the fact that the price action had bounced off a 10-period and a 15-period exponential moving average several times, and as well the highs pulled back off significant resistance levels several times. On this day, the price action’s pull-back was hitting a significant support level, which also happened to be coinciding with an upward cross-over of the two moving averages at the open. For her, this was an important set-up that she had been waiting for.
Debra was an experienced trader, and she appreciated that having a trade plan was essential; she also had a plan for this trade as well…that was her method; she aimed to plan her trade and trade her plan. There was, however, a fly in the ointment…she "knew" that the price action was going up! In this instance, she had a "long" internal bias fuelled by certainty…this is not a good thing.
As she executed her limit buy order slightly above the resistance-that-had-now-become-support level by a tick, her order automatically set her hard stop four points below the entry when she was filled. Everything looked superior, that is until the price action began to breathe, dropping down one point, then two, then three and got perilously close to her stop.
However, Debra "knew" that the price action was heading up. She told herself that the set-up was perfect, and she wasn’t about to let a dip in the price hit her stop, take her out and then retrace upward leaving her behind. So, she moved her stop. This was a clear violation of her rules, but she felt a little fudge was OK; after all, she was about to profit nicely when the price action finally goes up and hits her target for a gorgeous 4:1 reward. But, to her dismay, the price action continued to drop and headed straight for her stop again…and she moved her stop again. She was now fully caught up in her certainty, blinded by fear of taking a small loss, fear of being wrong and greed as she anticipated the profit.
Then she thought, "?oh what the heck, it’s going to go up; look at that trend." So, she took her stop out. Just then something terrible happened; something that she had never in her wildest dreams of this trade had anticipated…the price action began to plummet like a red brick falling off a high ledge. You see, this was February 27th, 2007, when the Dow dropped 350 points in 5 minutes, and a 500 drop total for the day. She watched in horror as the long red candle bled down her chart and haemorrhaged her account. But, she was unrepentant because she still held on to the "hope" that the price would come back.
As the price approached the Average True Range she thought, "…well, it surely will retrace at the ATR, and even if it doesn’t come all the way back, if I double down, I will get my money back!" But, alas, it didn’t come back and the price continued to fall. She was frantic and fully frazzled by the events that were unfolding in front of her. When the pain became so acute that it wrestled her from the trance she was in, she finally liquidated her position; but not before she had lost 20% of her portfolio in one trade and in one day! Now, this story begs the questions: Was this catastrophic loss due to a lack of knowledge? No, it wasn’t; Debra had experience and knew what she was doing. Was the loss due to something that couldn’t be managed? No, with training and the use of emotional tools, she could have managed her situation and taken the small loss early on. And, lastly, if she had followed her rules, could she have avoided this disaster? Yes, most definitely. Debra had found herself in a negative trader trance stimulated by fear and greed, and driven by subconscious beliefs and thoughts.
Episodes such as Debra’s can and do happen all too often for far too many. In fact, for some it is a daily occurrence. The point is to remain in a state of self-awareness and to be in the moment for the moment, fully available, fully present and in the now of the trade. In this way you will be able to align yourself physically, mentally and emotionally so that your entire system is working in the same direction and on the same goals.
When you are aligned you can access and activate internal resources like the ability to remain focused with intention and attention on what matters most; and the ability to see both the big picture and the details with emotional tools at your disposal in the service of your "A" Game. When you do this, you can resonate with the reality of the charts and the markets without succumbing to internal bias. You can develop a "positive trader trance" in order to be proactive in trading what you see, and you’ll be less prone to being seduced by illusions brought on by what you’re making up about the market, the news or the charts.
Now, being fully available, in the moment for the moment, fully present and in the now takes practice. The tendency for most people is to focus on the past or the future in a negatively obsessive rumination about past injustices and losses; or future angst ridden doom and gloom visions of how things will turn out badly.
Your mind is always turned on and you must break the spell of the ego which makes you a slave of your rampant, unceasing, monkey-mind that is full of underlying subconscious limiting beliefs, negative thoughts, and painful emotions. Breaking the spell of the ego means, in part, that you must identify the gaps between the thoughts where you can return to just being and without judgment notice and become aware.
The practice is necessary because it’s quite difficult to wrestle yourself free of the barrage of thoughts and to allow yourself to focus on exactly what you are doing in "this" moment only; to find joy in being on purpose and on task with even the most seemingly mundane chores. Make a game of it and you’ll find that it becomes easier and easier to focus in the moment and bring yourself closer to a "flow" experience.
The flow experience was coined by psychologist Mihaly Csikszentmihalyi in his book "Flow: The Psychology of Optimal Experience." In it he outlines his theory that people are most happy when they are in a state of flow or concentration, complete absorption with the activity and situation at hand. Flow is identical to the feeling of being in the zone. It is being completely involved in an activity for its own sake; the ego falls away and time flies. Your whole being is involved and you’re using your skills to the utmost.
There are several tools that can help with being in the now and in the flow state and many of these are taught in Mastering the Mental Game. Tools like Emotional Freedom Technique, Meditation and Self-hypnosis that can support a positive trader trance where you’re apt to develop a magnificent obsession with doing only what is in the best interest of your "A" Game and highest and best trader.
Dr Woody Johnson can be contacted at The Online Trading Academy