Yearly Archives: 2009

Situational Awareness for Traders

Situational Awareness is a concept which has been instrumental in shaping how I conduct my market analysis. Many of you may not have heard of this concept, so I thought it would be good to provide a brief introduction today. And if there’s interest from readers we can go a little deeper into the topic in future articles.

This is a concept I’ve borrowed from my previous career in the aviation industry, where it is one of the key components taught in the field of Crew Resource Management and Aviation Safety.

Situational Awareness, as defined by ICAO (International Civil Aviation Organization) in their Industry CFIT (Controlled Flight Into Terrain) Task Force is…

  • “… an accurate perception of the factors and conditions currently affecting the safe operation of the aircraft and crew.”

 

You may be familiar with the statement that we don’t trade the markets, but rather our mental interpretation of the markets. Situational Awareness is about providing you with the knowledge and skills to ensure that not only is your mental model based as much on reality as possible, but that it also updates in real-time as the price action evolves.

To apply the concept to trading, I find it easier to bypass the official definition above and use the ‘working definition’ provided by Endsley (1988). Situational Awareness is…

  • “the perception of elements in the environment within a volume of time and space, the comprehension of their meaning, and the projection of their status in the future.”

 

This definition has three key components – perception, comprehension and projection.

  1. Perception – Being capable of accurately perceiving the information that the markets are providing.
  2. Comprehension – Understanding, or interpreting, the information available from the markets.
  3. Projection – Anticipating future trade setup opportunities based on your understanding of the market movement.

 

Perceiving market movement, understanding what that means, and knowing how that will most likely develop in the future.  In other words, just knowing what’s going on… or market analysis!

So in applying the Situational Awareness concept to the conduct of my own market analysis, I break the task into three distinct phases:

 

Perceive the Market Environment

(more…)

7 Steps to Surviving a Trading Slump

7 Steps to Surviving a Trading Slump

 

“How you think when you lose determines how long it will be until you win.”
… Gilbert Keith Chesterton, 1874-1936

 

As if learning to trade wasn’t already hard enough…

If you’ve been in this game more than a few months you would quite likely have experienced a trading slump at some stage – a sudden or gradual loss of form which lasts well beyond what should normally be expected.

Missing setups entirely due to lack of focus… hesitation at entry … holding losers past their stop… all the while to a mental backdrop of doubt, frustration, anger, confusion, and  continually negative self-talk.

Peak trading performance requires the trader to be in an optimal state – confident and focused, operating in sync with the market, with the ability to execute trades without hesitation.

What makes a slump so difficult to overcome is not just the fact that you’re in a sub-optimal state, but that the normal human reactions to the slump tend to maintain it or even worsen it. Continued drawdown can undermine your confidence and your motivation, leading to increased anxiety and continued poor performance. The process is self-perpetuating.

The markets are an unpredictable environment. Trade outcomes are never certain, and this naturally creates an environment of stress. If you’ve traded long enough to have some degree of success, then you will have developed ways to manage this stress and in fact may find it motivating. However when the stress increases to the point at which you start to doubt our ability to meet the demands of the trading environment, or to meet your expectations, you can find yourself very quickly digging yourself into a hole of despair, and a trading slump which if not addressed quickly could prove both financially and psychologically damaging.

So, what can be done to help us out of the hole?

  (more…)

The Confusion of Trends on Different Timeframes

Here’s another great question from a YTC newsletter reader…

Question:

Lance,

I have another question. Its to do with “the trend”. We are told, “the trend is our friend”. We are also told, “the trend is our friend until the end”, and we are told, “trade the trend until it bends”.

But the weekly and daily charts of a currency pair can show down-trending. Yet the hourly and 30 minute charts of the same currencies can show up-trending. So what does one do? Wait for the smaller time frames to down-trend like the weekly and daily, or seize the opportunity and trade the up-trend on the hourly and half hourly charts, which oddly enough, means trading against the trend of the higher time frames.

Thanks,

Brian.

 

Answer:

(more…)

Trapped Traders – Part 2

Trapped traders are a simple concept you may wish to incorporate into your trading strategy, due to its potential to offer higher reliability trade setups.

 Part 1 of this series introduced the 3-Swing Retrace. If you missed that article, you’ll find a copy at this address: http://yourtradingcoach.com/trading-process-and-strategy/trapped-traders-part-1/

 In this article, we’ll look at setups which are often referred to as Springs and Upthrusts.

 As with the 3-Swing Retrace, Springs and Upthrusts are price action based setups in which traders suddenly find themselves trapped in an undesirable situation, either:

  1. Stuck in a losing position, desperate to get out; or
  2. Stopped out of a position that then moves back in their direction, leaving them desperate to get back in.

 

In both cases the price action has placed traders in a position where their normal human emotional response will compel them to make a trade. We can then increase our odds by trading in the same direction as this new surge of order flow.

Let’s start by examining an Upthrust.

An Upthrust is a price breakout through resistance, which is rapidly rejected. Ideally this occurs on the breakout candle, or the very next candle, trapping breakout traders long, and trapping out those bears who had positioned themselves short during the consolidation at resistance. An example might help…

 

 

  (more…)

How Support and Resistance Areas are Created

Question:

Hi Lance,

In his text on support and resistance, Mike Reed talks about traders hoping the market will return to a level of support or resistance  so they can break even in that trade. So are levels of support and resistance more to do with the behavior of traders than the actual value of the dollar,

Thanks from Brian. 

 

Answer:

(more…)

Improving Exits & Win Loss Size Ratio

Question:

Hi Lance,

The exit strategy videos have really been an eye opener for me. Must say it is the best exit strategy tutorial I ever came upon. A big thank you to you.

This single aspect has been what I now identify to be the only problem for my trading. I realise that my win/loss ratio is about 60% success, I realise that my stop loss sizes (which are dictated by price action) are bigger than my targets therefore contributing to my account reducing. Can you please give me an exit plan to solve this?

 

Answer:

(more…)

Controlling Greed

From time to time I like to share some of the reader Q&A, as it often contains lessons or information that is important for all of us who aspire to master this trading game.

The following is a great question from one of the YourTradingCoach newsletter readers, Rory:

 

Question:

I have to thank you for providing me more info than what I have found and learned in months.

I am definitely creating a “system” or method of my own that I am becoming more comfortable and consistent with.

However, my problem is walking away after I have achieved my goals for the session.

i.e. I will attain my goal of $1000.00 using my methods fairly quickly but then I think there is more potential so I jump back in and end up losing what I made if not more.

The reason why I do this is because in the past when I have not jumped back in, I see I could have possibly made multiples more after getting out.

I have experienced the same situation when I played blackjack. (I know I just used a gambling example but some would argue there is a bit of strategy to blackjack).

Any thoughts or directions you can give to walk away and be happy with what I get rather than trying to “take a mile when I have made my inch”?

 

Answer:

(more…)

Trapped Traders – Part 1

Trapped traders are a simple concept you may wish to incorporate into your trading strategy, due to its potential to offer higher reliability trade setups.

These are price action based setups in which traders suddenly find themselves trapped in an undesirable situation, either:

  1. Stuck in a losing position, desperate to get out; or
  2. Stopped out of a position that then moves back in their direction, leaving them desperate to get back in.

 

The key in both cases is that the price action has placed traders in a position where their normal human emotional response will compel them to make a trade. We can then increase our odds by trading in the same direction as this new surge of order flow.

There are numerous ways this can present itself on a chart. We’ll look at one of my favorites today, and follow up with other trapped trader patterns in future articles.

Today’s pattern is called a 3-swing retrace.

You might also hear it referred to as an ABC correction, or an ABCD correction. It could also be considered in some cases a bull or bear flag.

We’ll start by examining a 3-swing retrace in an uptrend.

 

trapped traders - 3 swing retracement

 

(more…)

Forming a Bias

The following is some reader Q&A following publication of  Advanced Candestick Analysis (Part 1 of 2).

 

Question:

Hi Lance

Great article and of high value, I am impressed man.

Only one thing if I have problem from time to time with is: BIAS.

My trading suffers whenever I form any BIAS whether its for gap fill, target or still worse in a given direction (including of trend).

Psychologically speaking BIAS is something hard for me to change and remains in my thinking overruling, the current right side of the chart. Undermines my objectivity while trading.

Whenever I remain BIAS free, I manage to exit on time from the market and also do not try to impose my thinking of BIAS on the market.

What I have found is to have Preference till the prices allows you to have, supported by volume (no demand or spike).

Test of ones own Preference with price and confirmed by volume OBV (I use Moving Average 3 of OBV(9) for the eminis).

For me then its easy to prefer the trend & remain with it, but when direction differs (retracement or pullback) then the price and vol action would invalidate my preference and allow me to be in neutral state of both position & mind.

As trend most often continues than not, I allow myself to be aggressive in prevailing trend direction or conservative with change in direction & of existing trend. The neutral position to observe how easy the candle bodies are formed on which side is also quite important.

I use Haikin Ashi candles on the lower time frame chart for this purpose.

Higher time frame head wick and tails with lower time frame candle pattern and vol action is quite rewarding. But during Trends this patterns are also formed when prices/direction are working through an area or popular fib levels (trend continuation) giving misleading but weak signals (vol) in opposite direction.

Regards Minoo

 

Answer:

(more…)

Advanced Candlestick Analysis (Part 2 of 2)

 

Welcome to part 2 of our short article series on Advanced Candlestick Analysis.

If you haven’t read part 1, you’ll find a copy posted at this webpage: http://yourtradingcoach.com/trading-process-and-strategy/advanced-candlestick-analysis-part-1-of-2/

In the last article we reviewed some of the key concepts from basic candlestick analysis:

  • The importance of identifying the market context – where the pattern is happening within the market structure,
  • The importance of trading (primarily) with the trend – yes, a reversal pattern can also be applied at the end of a retracement, signaling continuation of the larger timeframe trend, and
  • The importance of understanding the probabilistic nature of the markets and the need for risk and money management to protect your downside.

 

We discovered that contrary to popular belief by those new to the industry, Advanced Candlestick Analysis (if there is even such a thing)* does NOT involve:

  • Better, and more secret, candlestick patterns, or
  • Some Holy Grail combination of western technical indicators and candlestick reversal patterns.

 

Instead, it simply involves seeing the flow of price in a whole new way.

I like to think of it as being like the Magic Eye books, posters and prints (http://www.magiceye.com/3dfun/stwkdisp.shtml) that became popular back in the 90’s, where to the uninitiated the picture was just a blur of color and shape, but through a slight refocusing of our vision the trained observer is able to see a hidden 3D image.

Thankfully, Advanced Candlestick Analysis does not require squinting or changing the focus of the eyes.

All it takes is an understanding that candlesticks are a visual representation of the bullish or bearish sentiment within the timeframe represented by that candle, and then using the power of questions to compare the current candle with those preceding it, in order to sense the changes in bullish or bearish sentiment as price flows from one candle to another.

We finished up last time with a small collection of sample questions, to help you see the changes in sentiment:

  • Is the current candle able to push beyond the previous candle high/low, in the same direction as the previous candle? Is it able to close in this area, or was the candle breakout rejected?
  • Has the candle moved beyond the previous candle’s high/low, against the direction of the previous candle? Is it able to close in this area, or was the candle breakout rejected?
  • How far does the current candle penetrate within the body (or the range) of the previous candle?
  • How far does price extend beyond the previous candle body (or range)?
  • How does the current candle’s range compare with previous candles?
  • Is there a long tail at either the high or low of the candle, and what is the significance of this price rejection?
  • How has price acted on reaching any significant areas, such as areas of support or resistance, previous swing highs or lows, previous day’s high, low or close, today’s opening price or opening range (or any other areas you deem to be significant)? Did the market accept these prices, or reject the area?
  • Is the momentum of the current price swing increasing or decreasing, especially as it moves towards the significant areas listed above?
  • Has this candle trapped anyone long? Or short? Or trapped anyone out of a position prematurely?

 

These of course are just examples, and can easily be replaced by any others which allow you to better sense the shift in market sentiment.

Ultimately, your aim is to answer the following question – “Does the current price action confirm my previous bias? If not, how is the sentiment changing and does that change my bias?”

Confused? Hopefully an example will help…

(more…)