Trading Psychology

[johntherevelato]

I know there has been lots written on this topic but I feel the need to speak my mind as I am full of doubt as to whether I should be day trading at all.

I try to keep things simple and stick to what I know and stick to what I understand works and then not allow myself to be distracted by the factors that can so easily deviate one from the path of profitable trading.

One of my problems however is that I have a desperate need to feel that the process is simple and easy, and as soon as I feel the need to read more articles and learn more, I get agitated. This is of course just the learning process but a large part of me simply wants to believe 'That's it! I've learnt what I need to know. All I have to do is execute it.'

I suppose the question that I'm driving at is whether there is a defined set of realisations which once understood will yield profitable trading.

I use momentum trading as my style that utilises the esignal scanners; the principles that the scanners use are pretty basic and really don't require a huge amount of imagination. I suppose that the trick is to optimise the use of the scanners so as to take best advantage of opportunities that arise rather than to take partial advantage - if you know what I mean.

[DuaneG]

Hi John,

Good questions. I don't think there is a trader out there that has not experienced something along these lines in varying degrees. The mental realizations that come with being a profitable trader are not easily reached as it takes experience and often hours of introspection to get to the underlying root of a trading slump. The only advice I can offer is to relax... The agitation and doubt you mention are emotions that can dramatically affect your trading performance.

I used to get quite uncomfortable when I was trading significant size, regardless if I was making money or losing money. By defining the rules of my game, I learned that one of two things will happen when I place a trade; I was either going to make money (this is where having pre-set profit targets can help) or I was going to get stopped out (having stop loss orders can alleviate a significant amount of stress). Knowing that any particular trade would end up with a either a strong gain or a small loss was acceptable to me and hence, I no longer fussed about the fluctuations that occurred between these two levels.

Give yourself a maximum daily drawdown. If you are having difficulty with daytrading, try slowing down and introducing a few position trades into the mix. If you are uncomfortable with the dollar percentage volatility, reduce your position size. There are a lot of small things that can really make a big impact on your trading for the longer term. Don't stop learning by any means, but don’t forget what components have benefited your trading business in the past. Good luck.

[johntherevelato]

Hi Duane, thanks for getting back to me. I wholly agree with your psychological stop loss/worst case scenario approach - it certainly makes for an easier ride.

I have to confess that I haven't yet done any real trading and I'm currently trying to develop my strategies as much as I can before I commit anything.

Also, re: stop losses - as I understand it, the minimum stop loss is 2Xspread+1. So, one can always calculate the loss. My query is however - order execution. Let's suppose your stop gets hit, how often is it the case that you get closed out exactly at your stop? Or is it the case that more often you get closed out a few points beyond the stop?

What about things like bull/bear traps?

What can I expect?

If you don't mind, I may post this on another of the forum to see what sort of response I get.

Thanks.

[DuaneG]

Hi John,

These are all good things to think about. Let's tackle them one by one..

Let's suppose your stop gets hit, how often is it the case that you get closed out exactly at your stop? Or is it the case that more often you get closed out a few points beyond the stop?

It really depends on liquidity and the type of stop you plan on using. Stocks that trade a minimal amount of shares per day tend to be on the thin side. This usually translates to choppy price action that can easily bypass Stop Limit set at some price. Stop Market Orders are typically a better way to go, but again, the amount of slippage will be determined by liquidity.

Here's an example, whereas the S&P emini trades in 1/4 increments, a Stop Market will likely only give up a quarter point beyond your stop at the very most and usually only during very fast market conditions. A stock that trades 50k shares per day is likely to be choppy and have .30+ cents between the bid/ask. A Stop at Market order will get you out, but may have a pretty high degree of slippage due to a lack of buyers and sellers on the opposite side.

As for Bull and Bear traps, they happen. By learning to expect them, you can protect yourself in the event of a pullback. There was a great article published Thomas Bulkowski in Active Trader Magazine that deals with this market dynamic. Definitely a good read. Here's the link if your interested in purchasing it from Active Trader.