Traderitis is obsessive trading with bad habits.  Not every day is a good day to enter new trades, regardless of whether you are an intraday trader or a position trader.  Compulsive trading means that you have lost your objectivity and are gambling.  Usually this follows a string of losses when the trader is desperate to prove they can trade and are trying to gain back losses.

Anytime you take a loss, you need to stop and consider why the loss occurred.  Perhaps it was a bad market day, unexpected bad news, or you made a mistake.  You need to analyze what went wrong so that you can correct any mistake on your part and avoid making the same mistake twice.

If you have a series of losses, then you need to stop trading for at least 1-3 weeks, go do something else and let your emotions settle down.  Once your head is cleared, which normally takes about 2 weeks for most folks, you can go back and study carefully each trade and determine what went wrong. 

It could be that you simply didn’t calculate risk versus reward and went in on a trade that had very high risk. Or you forgot to check market condition, which would have told you the market was poised for a sudden reversal, or you didn’t check angle of ascent and support levels.  You have may placed your stop too tight for the trading style you were using and so you got whipsawed out of the trade, only to see the stock move up while you were not in it.

Each of these errors is easily fixed if you know that you have made them. So first take time to cool down your emotions, then study what you did and learn why you had a loss instead of a profit.

Not every trade will be profitable but you should strive for at least a 75% success rate on a consistent basis.

News recently had sentiment indications.  As a review, sentiment indicators are only viable at extreme market conditions.  They tend to lead at extremes but are useless the rest of the time.  The news media is a sentiment indicator and the statement that caught my attention was:

 

“Market Meltdown: Futures point to more selling after one of the roughest weeks for Wall Street in years.” CNN.  This indicated that the market was ready to bounce.

First of all, there have been plenty of dumps in the market and this certainly wasn’t the roughest week in years.  Second, futures (at 4:30 PT) were flat and oversold, below the fair value for the indexes.

And the momentum sell short scan was at 640 which is way above its average even during the bear market of 2000-2002.  Red BOP was showing on the Dow which also is a leading indicator of oversold conditions. 

The Dow has been the favorite of the odd lot investor and small investor and small lot retail trader in the past several months.  Smart money is trading against these market participants at this time.

 

So sadly, the uninformed investors who got in too late on the buy side are going to start selling in panic while smart money starts buying or buying to cover.  A shift occurred recently with the market bouncing moderately.  This is how you read sentiment indicators and use them as leading indicators. A leading indicator leads price and the market by several days to several weeks.

 

The tricky part of selling short is that gap ups at market open which are caused by pre-market orders of buy to cover.  They can create candles that overlap, often by significant amounts.  The overlapping of candles due to gap ups can wreck havoc on tight profit gains.  It is wiser to either sell at the end of the day, following the lead of the smart money out of stocks, or plan for the gap ups. 

 

The other tricky part is not to get greedy but to be happy with profits and not try to hold for the lowest low exit.  Sometimes you will get out at the lowest low but most of the time attempting to do so will cause you to be in a big bounce and actually lose more profits than if you had exited earlier. 

 

Trading the sell short side of the market requires more practice because price does not behave the same as for the long or up side of the market.  There is far more overlapping of price, far more gap ups followed by more selling, and more wicks and tails during the run. 

 

Black candles tend to be longer than whites for the most part, especially in the beginning of the run. Downside action is swifter and shorter duration.

 

Always remember: even though the market is going down right now, we are still in a long term bull market. 

There is plenty of confusion among traders between velocity moves and volatility action.

 

Volatility is not a good thing. It is the choppiness with prices moving up and down during the day. Volatility wreaks havoc as it creates the whipsaw price action that causes small losses to day, momentum, and swing traders. This is volatility and it is very difficult to trade.

 

Velocity is when a stock moves in one direction with strength or energy that persists throughout the day and through several subsequent days. Instead of a trading range of up and down price action, velocity moves have strong moves up followed by brief consolidations.

 

So volatility has a peaks and valleys trendline going sideways, whereas a velocity move is a stair-step trendline, intraday and day to day.

 

We have a decidedly volatile market at this time; it is sideways and scan numbers surging over 700 confirms this. Yes the bias is still to the downside, but the energy is much weaker and less strength to the downside. 

 

Caution is advised for short term traders during volatile, aka choppy markets. 

 

Red BOP on the Dow is still showing up and is a leading indicator that the downside is overextended and will not continue for any lengthy duration.

 

One of the interesting things to watch for is the fact that the up-tick rule was eliminated by the SEC on July 6th, 2007. You will recall that when our founders were in New York in May of 2005, the NYSE and SEC had implemented an experimental program to see if it was viable to eliminate this 76-year-old ruling. The SEC is a methodical and careful organization and took their time in evaluating whether or not the uptick rule was still needed in today’s current market.

 

It had been originally initiated after the 1929 crash and the many years of lackluster market performance that followed. It was believed at that time, that short sellers had added fuel to the collapse of the market and that adding the uptick rule would lessen the short seller impact on falling stocks.

 

Since this is the first correction phase we have had since the ruling on the uptick, it is probably that the larger down days we have seen are partially due to the lack of the uptick rule. However, the impact is minor and with 2 years of study by the SEC, this lack of an uptick rule should not be a major factor.

 

The uptick rule was not a factor for any style of trading with the exception of intraday traders. So most of you never worried about this rule and do not need to worry about its demise either.

Martha Stokes, C.M.T. has always said that making money in the market is easy; it is learning how not to lose money that is the hard part of trading. To that end, when you find yourself in the surprising and often disturbing position of having made a whole lot of profits, or more profits than you expected, in a very short time and you are feeling overwhelmed, you need to remember some basics:

 

Stop trading for at least a few days to a week. This sounds ludicrous, but our experience with students is that those who follow this rule keep their big gains and those who do not, lose them back to the market and then some. The reason behind this is emotion. You are in a state of emotional flux, and you are not thinking logically. You are thinking: boy I’m brilliant! Boy I’m invincible!  Boy am I going to be rich! Well sure. But not at this moment. At this moment you are overly exuberant and irrational and not trading wisely. So take a few days to cool off. The market isn’t going anywhere, and great trades will present themselves over and over again. There is no end to this trend of good picks, lull in the market, then good picks again. So stop trading and get yourself under control again.

 

While you are recovering from the shock, and yes it is “shock and awe time” for most beginners as well as veterans when this happens, you need to do a couple of homework assignments. First, go back to the DVD’s and review the “financial self-worth” section. And this time, please follow the instructions and actually do the tasks asked. We know that most of you scoff at this when you first go through the DVD training and do not do this section but ignore it. So when you get this sudden surprise in your lap, then go do this task. There is a method to the madness and again, those who do what is asked, continue to make great profits.

 

Next step is to write down your goals, set your established self-worth income and then try to increase it. Traders are their own worst enemy. You are not battling the market, or the market makers, or other traders. You are in battle against yourself. Every single person on this planet has a self-made invisible ceiling for the income they feel comfortable with. This subconsciously sets income “roadblocks” and keeps people from making more money—and it makes them lose money in the market. The reason is “fear of success”; too much success too fast creates panic and fear because you are now utterly out of your comfort zone. If you really truly want to be successful in the market, you must have written goals. These goals must be very specific and detailed. You must define your comfort zone and continually push the parameters upward to increase your ability to make more profits. Otherwise you will stagnate and not increase profitability.

 

Most people refuse to do the goal writing because of “fear of failure.” They are so afraid that they are not capable of reaching those goals that they do not try. TRY; write down realistic goals and adjust them as you see the need to. Once you do this horrible task of setting goals, you will find that, well, wow, you do achieve your goals or most of them.

 

Trading is 50% skill, understanding your trading style, using proper strategies for the current market, etc…and 50% is controlling emotion, which is goal setting, keeping centered and calm, discipline in your trading rules, determination that you will keep working until you are successful, maintaining your personal parameters while expanding them, and using logic rather than emotion.

 

Most beginners do not allow themselves enough time to learn, explore, and discover their trading style and then learn to apply the trading strategies. They rush the paper trading and practice aspect as they become impatient or greedy.

 

Most advanced traders become complacent and do not set high enough goals, or they lose their patience and rush to try every new gimmick that they hear about rather than sticking to a set of rules and parameters that they work to improve every day. 

 

Impatience is a trader’s worst enemy. At some point in time, if you stick with it and work to improve, you will be profitable, and often beyond your expectations. When that happens, get this out and reread it.