The Importance of Context in Trading and Trading Psychology

Here's an interesting market display from Sierra Chart.  It is a Market Profile-style depiction of volume traded at each price in the ES futures over the past seven trading days.  The grey regions represent the value areas for each day; the magenta line represents the point of control, and the green areas represent volume traded above and below the value area.  Thus at one glance we can track the red arrow on the most recent day and see where we are currently trading relative to recent value, whether buying/selling volume can take us above/below the point of control and above/below the value area, whether volume is increasing or dying out as we move out of the value region, etc.  In short, the display places current market activity in context, helping us understand the meaning and significance of moves that are occurring.

Many trading problems occur when we lose sight of context and become so focused on short-term price action that we get run over when the larger picture predominates.  For instance, we may see the market moving lower in the short run and chase the move lower, missing the fact that the selling is on reduced volume and is unable to establish value lower.  When the market snaps back to the point of control, we get whipsawed out of that short term trade.

It's interesting that many trading psychology problems also occur when we fail to put our activities in proper context.  We can become frustrated by three losing trades in a row, failing to appreciate that, with a hit rate near 50%, this is bound to occur often to active traders.  Similarly, we can become overconfident or underconfident based upon our recent trades and thus lose sight of well-established rules for setting stop loss points.  Reminding ourselves that we are not as bad as our most recent losses might make us feel and not as good as we might feel after a win is also establishing context.

So much of trading psychology is possessing the mindfulness to process the larger context before acting on and reacting to the most recent market and trading events.

Further Reading:

Training the Brain for Mindfulness

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