Category Archives: trading psychology

Trading and Constant Change

Constant trading change

stock market analysisOne of the biggest causes of stress for futures and commodity traders is not adapting to changing market conditions. Many traders get used to the market behaving a certain way and learn how to trade specific patterns that repeat during these periods of time. The market then changes and the trader encounters problems adjusting to the different in the way the market is trading.

Often times after markets exhibit strong trends for few weeks to months, the market enters a choppy sideways range bound trading range. During this period of time many traders successfully trade reversal patterns with uncanny degree of accuracy, because the market is consistently trading in a tight trading range. The trader has a good degree of success and develops strong confidence in his trading abilities. Then the market begins a trending phase and the trader gives back everything he lost trading reversal patterns and gets discouraged about his abilities as a trader.

Markets are living entities in constant change and the key to trading survival is to learn to recognize change and adapt. Traders who are rigid in their thinking and do not change when the market begins exhibiting different characteristics, will undoubtedly suffer the consequences of being out of tune with the market and will make things even worse by forcing their ideas and projecting on the market what they believe the market should be doing instead of taking clues and adjusting their trading style to work in the environment that the market is providing at the present time. Often time’s traders find it difficult to change their approach because their old approach to trading has worked well for extended periods of time.

This behavior often occurs in different business industries and day trading is not immune from it. To give you an example, I have a good friend who is in the real estate business. He began his career in the early 2000 when the real estate market began a bull run. Over the next six years he became very successful and developed a method of getting new clients by making 50 calls each day 7 days per week to different people he knew.

This was his strategy for getting clients, he was diligent in his phone calls and his method worked. Forwarding things to late 2006, my friend had not closed a single escrow in several months, he continued calling 50 people per day but the results were completely different, no one was interested in buying homes. My friend incorrectly concluded that he was doing something wrong and that he was no longer a good real estate broker.

When to Avoid Trading

When to avoid trading

bear bull stock marketThere are certain times of the day that a day trader should not have a position in the market. These are times when the market is exhibiting unusually high volatility that is either due to the time of day or because the market is digesting information.

Either way, these periods tend to create heavy levels of volatility that can cause the market to create random price swings that can create unnecessary risk to your position.

Many traders like trading during these times specifically because the market exhibits such volatility, but the direction of the volatility is highly unpredictable so in effect the trader is gambling that the report or announcement will be in the same alignment as his position.

I highly discourage anyone to trade this way, it is extremely risky and it’s pure gambling on the outcome of the report and how the markets interpretation of the report at that particular moment.

Some traders rationalize this as a trading strategy, however since the information being released is completely unknown and more importantly the reaction to such information is even more random than the information itself, it is the same thing as going to a casino and trying to figure out if a roll on roulette will be red or black.

Most professional traders avoid having an open position either 5 minutes before or seven minutes after any major fundamental news and announcement report is released, this is called the 5 minute trading ban.

Most fundamental reports tend to be released at the same day of the week and generally at the same time each week or month.

The quickest way to find out if there is a report or announcement that will be released later in the day is to turn on CNBC for about 15 minutes before the opening bell.

The financial news station usually announces through out the day when what report is scheduled to come out and what time the report is scheduled to be released.

Another way to find out if there is an economic report or announcement that is scheduled to come out later in the day or the week is to go to econoday.com.

You can see a full calendar of all the scheduled fundamental news reports and announcements that are scheduled weeks in advance on this website.

There is the economic calendar section that you can go to from the home page. Once you click on the calendar, you may see a red star next to a particular report; if the red star is present it’s considered a market moving announcement.

More Trading Psychology for Futures and Stock Market

Impact of Trading Psychology On Futures Trading and Investing

stocksAccording to scientific research, a person’s perceived control over the outcome of a specific situation or event is the largest factor in psychological stress. While, people in reality have a lot less control over their life than they really lead themselves to believe, most people psychologically believe that they control much of what happens to them. The spouse of a trader has no control over markets, trading results, or monthly income and is forced to accept this truth.

Since most traders even those who have been in the business for decades have good months and bad months, the stress that the spouse experiences may often times come out and cause tension between members of the household. Many times I’ve heard from traders who dread coming home after a losing day, fearing accusations and negativity from a stressed-out partner.

To solve this problem, the futures or commodity trader needs to take responsibility for these perceptions and do everything possible to make their spouse feel secure about the family’s financial future. The best way to deal with this problem is head on, this will relieve the largest portion of the stress. When the spouse sees that you are concerned about the same issue they will feel more relaxed and calm knowing that you are aware of how they feel, this is the first step.

The second part is creating a budget and the discipline to follow it so that during loosing periods and winning periods the spending is about equal. What many traders do is set aside a portion of their monthly income into a special account.

traders financialThis account becomes a back up fund, when a losing month occurs; the trader takes the difference that was lost from the backup fund and when the trader has a winning streak he puts a percentage of his winnings back into the fund. This way the trader brings home a consistent flow of income, something that makes it easier for the spouse to budget and plan; this creates more certainty and predictability about the future and will help your spouse relieve stress and feel more confident

Many people in creative businesses such as art and entertainment who do not have consistent monthly income create backup accounts to help create consistency and predictability during slow times in their careers.

The second biggest reason for disharmony between traders and family member is loss of common interests. Believe it or not as simple as it sounds, trading can be very emotionally absorbing. Most traders, especially successful ones have a high degree of concentration and focus and are constantly absorbed by markets. It creates problems precisely because the absorption in trading prevents the trader from fully participating as a partner and parent. Over time, that can only lead to conflict and resentment. It is in such a situation that spouses then find it difficult to be supportive of their partner’s needs and challenges.