Monday, July 13, 2020

How Trading Reviews Build Your Trading Psychology

Trading psychology is a strange field.  We find people offering coaching who show no evidence whatsoever of playing the game or even knowing much about the game.  Can you imagine a swimming coach who works on people's mindsets, but knows nothing about diving technique or how to hit the right water depth in a breaststroke?  How about a golf coach that counsels people about staying calm, but hasn't the first clue about which clubs to use on different holes, how to adjust stance and swing, etc.?


The truth is that, especially for developing traders, a bad psychology typically results from bad trading.  Learning to trade well and working on trading technique is great for the mindset.  

The latest Three Minute Trading Coach video takes a look at traders' review processes and how we can review opportunities that set up in markets.  In that video, I describe one of the patterns I have found most effective in my recent trading.

If you click the charts above (top chart is for Friday's market; bottom chart is for today's), you can see the patterns I review and study.  The pattern occurs in the broad market (ES futures or SPY).  The top panel shows price action and the yellow arrows highlight short-term oversold conditions that are occurring at higher price lows.  The panel below tracks the proportion of volume traded at the market offer price minus the volume traded at the bid, so that we can see buying and selling pressure come in and out of the market.  The arrows on that panel show selling pressure waning, even as the market bottoms.  The panels at the bottom are different ways of capturing short-term overbought and oversold conditions through moving averages of bid/offer volume, RSI, etc.  (Charts created in Sierra Chart).

Viewing and re-viewing these patterns cements them in our mind.  In that way, Friday's review acted as a heads up for trading today's early strength.  As the video emphasizes, the purpose of review is training in pattern recognition.  With enough exposure, we become able to see patterns unfold in real time and perceive solid risk/reward opportunities.

Allow me to add one additional element to the charts and video.  Reviewing optimal execution of the patterns is just as important as reviewing the patterns themselves.  The key to consistent trading is not just finding good ideas, but finding ways to trade them that offers solid reward relative to risk taken.  I don't try to capture exact bottoms of the pattern above.  Rather, I wait to see selling pressure wane and then I want to see buyers start to assert themselves.  The idea is to ride that initial wave of buying and lean against the low for superior risk/reward.  Especially for active traders, the proper execution of the pattern is as important to work on as the recognition of the pattern.  

Just like swimming.  Just like golf.  Working on great execution is key to winning and key to a winning mindset.

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