C) The Sense of Having a Quota
This is most definitely one of the biggest factors in what causes me to switch from being precise and patient to being a loose cannon. I feel as though I have to pull some pips, often lowering standards for trading habits in hope of getting lucky and getting a few pips. This is by far most noticeable after losses. After I have lost, I feel as though I need to “get my pips back,” which most of the time leads to losing more pips. This is a variation of that sense that there is a quota to be met, or a target that I need to reach.
This “quota mentality” ties in to the “target mentality” that I have been working on lately. It seems that in the same way I can set a pip target while in a trade, and often ride it negative while waiting for price to reach my target, I can also have a pip target for the day, or some idea that there is a number of pips that I should end up with. Such targets or quotas can be dangerous if we treat them as a minimum that we must reach. One thing that helps me be consistently profitable in trades is the idea that the target should be treated more like a maximum. I think this mindset can be applied to the issue of having a daily or momentary quota also, so that I look at my quota for the day as a maximum, with the minimum being dependent on opportunity.
Regarding this issue as it relates to losses, I believe that I need to just learn to be okay with losses. Most of the time this is not an issue, but when I am not closely monitoring my emotions, that sense that I need to get my pips back can creep in, and lead to all sorts of ugly trades. I haven’t thought of a name for this yet, but it is the close relative of the Big Bad FOMO Monster. I need to keep in mind that having some pips and losing them does not mean that I have to get them back, most of the time this ends badly, and leads to out of control desperation trading.
I have noticed these problems at high news events, which often times seem harder to trade, perhaps due to the fact that emotion can quickly take over. I’ve had a couple of bad high news days that have gone something like this: I get in based on FOMO, I get stopped out once or twice, then I get back in because I am frustrated by the fact that I am losing money instead of getting paid like we are all “supposed to” on high news days. Then I make another trade or two, all within a few minutes, trading both ways, with no clear directional bias, or complete disregard for bias if I had actually established one. Then I leave even more frustrated than I already was, with the question, “What just happened?” resounding in my mind. These are the kinds of days that I want to avoid.
Some good habits to avoid the quota or target mentality:
Most everything in trading ties together, and the product of all of these aspects of my personality, style, and habits defines who I am as a trader. All of these rules or habits to help me stay on course do not work by themselves, so focusing too much on one rule may lead to oversight in other aspects of trading. These good habits have a synergistic effect, producing exponentially better results when combined. I must learn to ingrain all of these habits into my identity as a trader in order to succeed and become a consistent, disciplined and profitable trader. I am confident that with time, and constant introspection I will be able to do this.
Editor’s Note: Fx365i student Chris Gibson was kind enough to share some excellent insights from his trading journal. This is the first in a two part series.
Sometimes when I trade, I find myself switching from being very conservative and controlled to being very reckless and out of control. I get desperate for pips and lose sight of the value of conservatism in the number, frequency and style of trades. This typically leads to taking too many trades, taking trades too often, and taking lower probability trades. Trades like this are often based on nothing but emotion. Most of the time the main problem here is that I take too many trades.
Why does this happen?
A) Desperation mindset kicks in
B) Defense is forgotten in the name of offense
C) The feeling that there is a quota to be met for the day
Understanding these issues
All of these issues tie together, but to get a better understanding of all of them, I want to focus on them individually.
A) Desperation Mindset
I sometimes become desperate for pips. I become overwhelmed with a desire to get pips, to the point of becoming blind to the fact that there is no room for recklessness in trading. I feel like this is based in ego, and the desire to succeed. It is very important that I keep the consequences of this in the forefront of my mind. There needs to be a clear understanding of cause and effect, of actions and consequences, because the truth is, that the very thing I think I need to do to get pips for the day is going to be the thing that can result in me being down 20-30 for the day (this amount is 50-75% of my weekly goal in the wrong direction!). I must always remember that if I choose to trade in a desperation mindset, it can almost be guaranteed that it will end terribly.
There is much to be said about the need to keep your cool when trading, and not trade based on emotion, the type of trading that desperate trading exemplifies. I think the solution to desperate trading is broad, since the idea is rather nebulous, but some good habits to form would be:
B) Forgetting Defense In the Name of Offense
One thing that I have found important as I have been learning to trade forex is the value of a good defense. Offense is important of course, because I would get nowhere without it, I would have no pips if I had never made an offensive move to take a trade. Despite this fact, I think that it is more important to focus on defense of pips that I already have than to focus on getting more, and not allow my desire for more pips to leave me with less than I had to begin with.
The whole idea of defense in trading forex is kind of funny because no one is coming out to get you, you are safe behind your screen as long as you are careful with your trades, but as soon as you enter a trade, you have made a very serious decision to expose yourself to the risks of the market. So then, it is not necessarily the market I have to defend against, since I am the one who is clicking the rate indicator. The real fear should be of myself. This is who I need to defend against, this is the enemy. He is the one who takes my pips. The portion of my being who exposes myself, my money, and my emotions to all kinds undesirable things, this is who I need to watch out for. There is an expression: “the best defense is a good offense,” But the opposite is true in trading; the best offense is a good defense, and if I defend against my own tendency to become sloppy and careless in my trading habits, I have a great chance of being consistently profitable in trades.
Some good habits to form so that I can keep my defense strong:
Day trading is hard, no doubt about it. The emotional ups and downs can surprise even the most level headed of us. Winning can make us feel jubilant and secure in the knowledge that trading for a living is possible, but when we lose it can be devastating to us emotionally. Fail to maintain perspective and all hope of being a professional trader can vanish.
I’ve always wondered why the market made me feel so vulnerable when my account was down. I can remember days where I would walk out to my car and feel like something was missing, like there was a hole inside of me somewhere, or that I didn’t have what the successful others did.
For a while, I had trouble coming to terms with these fleeting feelings. I mean, no sane person should beat themselves up as hard as I was over losing a couple of bucks. After all, its only money right?
I recently stumbled into my box of old college essays, and amongst them was a paper written on the Kubler-Ross model, otherwise known as the 5 Stages of Loss. From a psychotherapeutic perspective this model can give a psychologist a framework to understand a client’s psychological state after the loss of a loved one.
As I sat there thinking about this psychological theory it made me wonder.
I take my trading account as seriously as a heart attack. Can I apply this to my trading?
As it turns out, it can be applied to all sorts of personal loss. So let’s try to understand it from the personal loss of money.
The 5 Stages of Loss are Denial, Anger, Bargaining, Depression, and Acceptance. The amount of time, order, and intensity of each of these stages will be different for everyone.
Denial is a defense mechanism that protects you from the intensity of your emotions. As a trader, typically this is experienced when the market is moving against you, but you refuse to change your mind about your position.
Anger is a way of deflecting negative feelings away from ourselves and can be semi-therapeutic but ultimately not a long term solution. Blaming is a large indicator of this stage, like blaming the person next to you for being loud, or lashing out at those who are trying to help you.
Bargaining, for a trader, can be the most dangerous phase. It is this stage where we seek to avoid another loss by……. getting into another trade. Sounds pretty illogical right? For instance, if price has hit our stop level and then rotates to go in our direction, we imagine that this trade is going to be huge, and it may, so we immediately look for another entry. We say things like “if only price would come back up to this level then I’m in, and I’ll catch the ride down”, all the while remaining completely unaware of what higher time frames are telling us. What most do not realize is that they are making trading decisions from an emotional context and not a rational perspective. This is why the first trade of the day is generally our most clear understanding of the market
Depression is the stage where negative self-talk occurs. “How can you be so stupid to trade during accumulation?” “Why the hell did you go long when everything is short?” “May as well put a gun to my head”. The sooner you can recognize this stage the better, as it is typically at this stage where account destruction occurs (ask me how I know). The best course of action is to sever your access and SHUT DOWN your computer. Better yet, take off early and hit the gym or go for a run to clear your mind and work out some aggression.
Acceptance. Emotional calm may be experienced if this stage is reached. This is best characterized as when, after taking a losing trade the trader can unconsciously say “oh well, there is always tomorrow”. Consistently getting to this last stage is when the unfolding of a professional career can begin. You’ll begin to hear your self say things like “I don’t quite understand what the market is doing so I’m going to stay out” and “I must be tired, I’m stopping before I take a hit”
D. If you can maintain your rational perspective while taking small losses, you will dramatically shift the probability of a long trading career into your favor. After all, 90% of trading is not actually being in the market but deciding when to get in.
So be patient, be bold, and remember that there will be another trade tomorrow.
When Investment Banks and Financial Institutions (I.E. Market Makers) hold price in a tightly confined price range, it is the beginning stages of Accumulation. This is the stage that they collect orders to be used later for manipulation. As the Retail Trader begins placing trades (and stop orders) in this seemingly unimportant area, the Market Makers to put it simply, are doing the same. These areas are essentially where Market Makers are layering their own trades. They are looking for, like all Retail Traders, the best entry they can get. The only difference is they require vast amounts of liquidity to place their trades.“What does Accumulation look like?”
Accumulation is generally preceded by a push, followed by setting a tight box shaped area of price action. It can build straight to the right, or be slightly slanted long or short. What’s important is that it is a confined area of price. An Accumulation is not affected by time, they last as long as the Market Maker sees fit.
“What do I do once I’ve Identified it?”
The easiest way to take advantage of identifying an Accumulation is by drawing a line straight through the middle of it. This line represents the Average Price of buyers and sellers in that zone. Since Market Makers are also getting into their own trades in these areas this is an important price to track. If you have identified it correctly, you will be amazed at how often there is a clear rotation off of these prices. Market Makers will often bring price back to the accumulation at some point to knock out Retail Traders. They will take it far enough for stop taking, but not so far as taking themselves too far out of the money. Following a clean rotation off an Average Price line the Market will often run several hundred pips in the opposite direction. The other benefit of identifying Accumulation is knowing that some sort of Manipulation is eminent. It is from the Accumulation area that the Market Makers will begin to manipulate the Market usually by taking price through prominent highs/lows near the accumulation against the overall bias. This is the time that is usually best to place a trade. After Retail Traders have already been taken out. Thanks for tuning in! Next week will finish off the 3 Part series of Identifying Market Manipulation! To stay up to date on any cutting edge Market Manipulation tactics be sure to subscribe.
-Shane Guth, Director of Smart Money Course
To view the Smart Money Course please click HERE
As of 7/28 2014 the GBP/AUD pair has been accumulating on a massive scale leading up to the major news that we have got in the coming days. The news includes the following: EUR German Price Index, USD Gross Domestic Product, USD Rate Decision, EUR German Unemployment Rate, EUR Consumer Price Index, Followed by USD Non-Farm Payroll & ISM numbers. These are all high moving news events, that will push the markets in most every pair due to the large amounts of traders that will be active these days to get a piece of the action.
The way to go about trading this particular set of circumstances is to look beyond the overall direction it seems to be floating towards, and instead trying to identify the belief being created here by the Market Makers. Where are the active highs and lows? Which ones have they pushed through already? How would a person in a long feel about their position? How about a short? Identifying how emotions are moving in the market is key to forecasting a profit release (Click on the picture for a bigger view).
What we can see here is a snap down shortly into the accumulation phase followed by a slow accumulation to the upside. Notice in the picture shown the most recent candle has a wick that comes right down to the middle of the accumulation zone, then starts backing off to head long again . Small details like this can make the difference in our analysis of the market and how a move might play out.
As the week unfolds, watching for these signs the Market Makers have left can reveal the true intention of the Market. There will no doubt be plenty more manipulation leading up to the news events mentioned above, however with the right mindset and fair assumptions you can be on the right side of each of them. Stay tuned for more market analysis as the week unfolds.