Friday, January 22, 2010

The Psychology of Trade Execution

The recent post on trade execution emphasized a perspective in which one trades with the market trend, but executes trades in a countertrend fashion.

Thus, for instance, a trader would be selling the market today given multiple signs of weakness following yesterday's breakout move, but would enter those trades on market bounces. Even on a short-term basis, a trader can wait for moves to positive NYSE TICK before entering the trade on the short side.

While this is easy in theory, it can be more challenging in practice. Having the discipline to wait for buyers to come into the market before you sell (or vice versa) means that you cannot chase trades. Nor can you give in to the fear of missing market moves.

Could the market extend in the direction of the trend with you not aboard? Absolutely. If, however, you are operating from a vantage point of plenty rather than scarcity, that is not a threat. The odds are with you if you're not selling short-term oversold markets or buying short-term overbought ones. If you miss a leg of the move, you can always position for the next one.

The one thing we can control when we trade is whether we take on risk and how we assume that risk. The ultimate edge that a trader possesses is the ability to play the game only when the odds of success are favorable.