Monthly Archives: June 2012

Patience – Wait for the Trap

The last week was quite tough in many markets, with lots of sideways action and the occasional sharp directional moves in-between.

In tough environments, it pays to be VERY patient. Don't push trades. Wait for the A-trades only; the ones which are screaming out to be taken.

One that screams out to me is demonstrated below – a directional move, stall and trap.

Play defensively. If it doesn't move immediately, consider scratching to reassess. Quite possibly you're the one getting trapped!

directional move, stall and trap

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The Double Failure Pattern

Let's continue one of the secondary themes from last weeks article:

  • "Trade against those who attempt to fight the market bias, aiming to enter at or before the point of their trade failure, to profit from their exit orderflow."

One way I love to see this set up is via a double failure pattern.

This can display in many ways, but essentially involves a significant price movement in one direction which sucks in the masses of traders; pushing once and failing, then pushing a second time and again failing.

It really plays with their emotions. The first move gets them excited about great profits. The first failure worries them. The second move relieves that pressure and again gives them hope. The second failure destroys them.

We of course aim to enter in the opposite direction, at the point of their exit, if not before.

The key is context. The pattern must provide some kind of significant move, such as:

  • A gap opening
  • Break of a major S/R level
  • Break of a significant swing high/low

And ideally the pattern should be operating against your market bias, or be one that changes your bias.

Let's look at some examples across different timeframes.

double failure pattern

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Sorry To Be So Blunt!

Question Received via Email:

I'm an experienced long time, unsuccessful trader looking for profitability and consistency (aren't we all), anyway you seem to have way TOO much information. Can your method be boiled down to a few simple rules or is it more complicated than that. Sorry to be so blunt. Thanks.

Initial Email Response:

Thanks for your email. The short answer is no! My methods cannot be boiled down to a few simple rules.

It's a good question though so I'll expand upon this answer in Friday's newsletter, looking at a trade sequence from today's HSI market.

That will give you greater awareness of how I trade.

And also why I don't believe that market success can be boiled down to a few simple rules.

A Bit More Detail:

To say that my methods cannot be boiled down to a few simple rules, is not quite correct. It can be:

  1. Trade against those who attempt to fight the market bias, aiming to enter at or before the point of their trade failure, to profit from their exit orderflow.

  2. Improve your ability to do step 1, over time, through application of deliberate practice methods of learning.

Simple rules… but not easy to implement as they require a process of skill development!

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Surrender your Fate to the Markets

In my experience, most traders are too focused on individual trade results.

Individual trade results do not matter (provided of course they do not violate your trade, session or longer timeframe drawdown limits).

You need to expand your focus beyond the individual win or loss. Once you've proven your strategy in a sim environment, the only way you'll be able to identify the live environment psych, risk acceptance or execution issues that need addressing, is through trading your strategy for a sequence of trades. And then reviewing that sequence in-depth to find your strength and weaknesses; to find those elements which contribute to greater profits; and those which damage your overall P&L.

So stop hesitating. Pre-accept your risk and take your trades for a full week or 20 trade sample (or however else you wish to define your sequence length). Surrender your fate to the markets. And look at your results in-depth on achievement of your complete sample size.

Don't hesitate!

Enter… and surrender your fate to the markets!

(The following examples are not a sufficient number of trades to constitute a complete sample size, but are included as an example of the mindset related to individual trade results. Win, lose or breakeven… we accept the result and move on!)

trade sequence 1

trade sequence 2

trade sequence 3

trade sequence 4

Lance Beggs


Apparently The Hanging Man Didn’t Make Any Difference

I'd like to share a great question received this week which highlights a number of recent topics that have been discussed via the newsletter or blog – the irrelevance of individual trades, the imperfection of ALL exit strategies, plus patterns vs context and the way price movement influences other traders' decision making.

Question:

I stumbled onto your website over the weekend and found it quite informative. I was trading the eur.usd today, June 5, 2012, and was long on a run that started approximately 08:15 est. at approx 1.2412. I was watching 5 and 15 min charts, macd, stoch. rsi. I made it through the first retracement without selling, but at approx. 9:30 est a hanging man appeared on the 15 min. chart. All other indicators except the 5 min macd looked positive. Although my gut instinct was to stay in, I exited at 1.24475 deciding not to risk the profit I already had. The run then continued to 1.2462 and started to pull back. Apparently the hanging man didn't make any difference.

I was curious about your take on the matter as you seem to have quite a bit of trading experience.

Let's look at the chart:

Please note: My chart timezone is different. The bullish price swing traded in the question commenced from the lows just after 22:00. 

hanging man pattern

hanging man pattern 

Response:

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Biofeedback for Trader Psychology

(NOTE: This is not an advertisement! It's a report of my first attempts to introduce biofeedback into my trading routine.)

Several weeks ago I advised in the YTC newsletter that I'd bought an emWave2 biofeedback device. My plan was that I'd experiment with it over the following 6-8 weeks and report on it's effectiveness as a state management device for traders.

Quick summary… I like it… and I'm going to keep using it!

trading biofeedback

How I Discovered The emWave2

I'd heard of biofeedback being used by traders before, through the excellent blog posts and books by Dr Brett Steenbarger (see here for all three of his books under the Trading Psychology heading).

But I'd never had any thoughts of experimenting with it myself. The last thing I wanted to do was to be "wired up to a computer" while trading.

Then two months ago I got an email from YTC Price Action Trader reader, Jeff, in which he shared the following article link:

This is quite an interesting article about NFL kicker Billy Cundiff and his use of the portable emWave to place himself into peak physical and mental state prior to performance. This got me interested. And a quick search through Dr Steenbarger's old blog posts and a review of his books, led me to the discovery on page 84 of The Daily Trading Coach that the emWave is the same unit used by Dr Steenbarger himself.

Now I was really curious… and I just had to try one!

What is Biofeedback?

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You Have Too Much Focus on Individual Trade Results

Ok… maybe not you… but too many traders DO have too much focus on individual trade results.

I get a LOT of email from readers asking about particular trades; where they went wrong in their decision making and how they could have done better. While it's great to review each individual trade, the wording in emails often leads me to wonder about their expectations. I really feel that too many people have too much focus on individual trade results, believing that each and every trade SHOULD have been a winner. This is far from the reality of trading, in which the majority of your trades will fit into the categories of small loss, breakeven or small win. A smaller percentage of trades will likely be the ones which make all the difference.

Losses are a part of the game. We expect them. We aim to minimise the number, but we still expect there will be many. Hence the importance of trade management, in which we also aim (over a series of trades) to ensure our average win is greater than our average loss.

In many respects then, individual trade results are irrelevant. Longer term samples of trades are what matters.

Here are a couple of notes I have on a whiteboard next to my desk to remind me of this:

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