I am back. For a bit at least. I want to say something about ego, emotions, and thoughts and the psychology of them as they relate to trading. I here people say “you must lose your Ego,” “stay humble” “control your thoughts” trade without emotions..be like a machine” First off, the market does not know if you are humble as mud pie or an egotistical bastard. Second, you are human you cannot stop your thoughts. Your brain uses 20% if your bodies energy and IT’s job is to generate thoughts and you, nor I, can stop it from doing so. Even while we sleep it is at work. What we can learn to do is to entertain or not to entertain the thoughts it produces. We can choose to not dwell on them expecting them to soon pass much like a cloud that floats across the sky. Third, we are humans. We cannot somehow divorce ourself from our emotions. We are not an unfeeling machine. Furthermore, the market knows nothing about what you are feeling at the moment. Nor does it care about your feelings. Your personal elation, anger, sadness doesn’t change the auction. To sum of the above: the market doesn’t know if you are humble or egotistical. It doesn’t know what you are thinking about any given trade. Nor does it know what you are feeling. It doesn’t even know if you are making money or losing money. You and your broker may know but not the market in general. Furthermore, it simply doesn’t care. You are insignificant to it. The market is composed of institutions battling it out trying to take money from each other. We retail traders just get caught the middle of all the fray. The market is a big auction. Nobody, not even the institutions can know all the variables. Institutions can and do win and lose and do read the auction right and do read PA wrong. Our job as retail traders is to have a system that works for us enough to extract $$$ from the market. Next, we need to learn to discern what is going on in this big auction that is in front of our eyes. Then we need to determine which side is winning bears or the bulls. The idea is to join lockstep in with the winning side and jump out when the other side shows they now have the upper hand. As far as psychology goes we need to learn our individual weaknesses and strengths and how we can change them, better them, and capitalize on them. We have to learn how we can live with our ego, thoughts, emotions as they relate to our trading. How we can better utilize them and deal with them in such a way that they “help” us in our trading. Your mind is powerful. Thought are powerful. Emotions are powerful. Ego is powerful. None can be eliminated. Neither can they be controlled. Neither can they just simply be laid aside like a brick. But we can all learn how to live with them and manage them in such a way they become can become a (plus) in our trading. Some of the most egotistical bastards have made boatloads of money trading and some of the most humble meek traders are still waiting for their boat to come in many years later.
Here is a trade I took a few minutes ago I thing might illustrate some of the things just mentioned in my last posts. Why would I average down? Just look at who is winning here. The bulls are! It is not shown on the first chart below but the market had been in a bull channel on this first 5m chart. On this 5m chart price broke out the top of the channel. It then tested the BO point (top of the channel). Then reversed up. So, a successful BO north of the channel. We can expect more move up in this case (likely 2 legs at least). So, I went long on my first contract @ 5609.50. Ignore the orange marker of 4 contracts. That was an exit from 4 contracts of a previous trade with some good profit. I want to showcase this last trade. Four bars later we get a rather large bear bar. Do I panic and sell out? Do I hold? Do I scale in by averaging down? What do I do? The answer is found in discerning who is winning here. The bears or the bulls? Looking at a bigger part of the chart to see the larger context is helpful. Or going to a larger TF. In this case I am posting a second 5m chart with more bars to compare with the first chart with. So, we can see what the larger context looks like. In this second chart we are looking at this from an overnight/full session chart (i.e. 24hr chart.) Look to the left in that second chart. Price broke above that channel on the 5m chart. Who is controlling the auction? The bulls are! Bull channel for hours on this second chart. In addition, in the day session after that first failed (FBO) south of the channel then the test of the second BO (top of the channel) it has been bulls ever since. Then a strong two-legged move up to the top of the bar where I made my first long entry on. When we get that PB bar four bars later (where I average down at) I have to look to the left and ask myself 1) Do I really think this bear bar is going to undo this bullish entire bullish move that has been going on for hours on this second chart? If the answer is no then I can be confident adding to my losing position. 2) Next, I need to ask myself do I really think this bear bar on both charts, that this bear bar will erase this strong two-legged strong bull leg that began after the BO test point (top of the channel...see both charts). That two-legged move is represented by the thicker green line on both charts below. If my answer is no then I can with even more confidence average down. So I average down by adding another contract. Where is the proper SL placement. At the bottom of that last 2 legged bull move. That is, at the bottom of the test (near top of the channel in that second chart). So, I add and I wait. My emotions made try to discourage me or they may try to elate me. My thoughts may provoke fear in me or they may tell me you likely got a winner. But if I am being objective, it should be obvious who is in the control of the markets here. So, I have my trade on, my stop loss placed, I can take a walk, fix a cup of coffee or a smoothie, and just simply wait for things to pan out. The market has shown me that the odds are in my favor. The best indicator of coming PA is price itself. Bulls are winning so I go with them. I take my exit and profits 10 bars later. How was my R:R? Well not so good on my first entry. It went 4.75 points against me to capture 2.75. My second average down. OK R:R it went 2 points against me to then capture 5.5 points. Mind you I will not average down on just any trade. The contexts, larger and immediate, have to support doing so or otherwise I am just guessing and likely taking on unnecessary risk. In this case bulls are winning. Green light says go. So, I bet I can average down and make some dinero. Thoughts will flood one's mind. When I have to wait 10 bars later to see the profit doubts can creep in. During that wait fear can try to grab hold of ones thinking. Emotions can get aroused since SL is far away. However, if I look at the what price is telling me about the bullish/bearish players are at, then these thoughts and feeling are there but of odds favor they are there for nought because the BULLS ARE WINNING. And in the end I WIN! Of course, the market can do the complete opposite. Bears could start winning right after my entries. The thing is the odds, by far, favor the bulls. So, I can be confident in my positions. However, should I be wrong and the market heads south I know how to get any loss back. I will exit ..reverse double-up and go with the south wind ..so to speak. It is just that odds favor I will have a winning trade. So, I am playing on those odds by averaging down. Whatever the market does after my exit doesn't matter. I got my win. I grabbed what the market handed to me and I can always enter in again!
You were basically buying the pullback in an uptrend, so your rationale for averaging down is perfectly acceptable. Just don't do that in a downtrend and hope everyone would understand.
I maintain a high win rate. I grab what the market gives me. I take my win. I enjoy it with my emotions! My mind is at ease! When I properly read PA I pat myself on the back. It bolster my feelings, my confidence, and my ego. BUT see the market knowsbnothing about my thoughts and feelings. So, I just follow what Mr market is doing as the institutions battle it out. Everyone is trying to get slice of the pie. I just need a crumb or two! But I then I get ready for the next trade. Unfortunately, I had no time for the next trade. Too busy annotating this chart and making calculations. Look after what the market did after my exit. So, after my exit somebody tell me who was continuing to win? Bulls or bears? Why? How do you know this? What proof is there which side is winning? What do the candlesticks tell you about who is winning? And if you were me would you enter back in long? If so, what bar would you enter on and why? If I had entered again after my exit should I consider averaging down on PB's? Why? Look where price is staying in relation to the MA's.
Yes, that is correcto. In a downtrend I would be adding to my losing short positions certainly not going long. In such a scenario you could say I was averaging down in a downtrend, but the key is I am doing it in the right context. CONTEXT IS WAY MORE IMPORTANT THAN ANY SINGLE TRADE SETUP! But they are all three important. Contexts both larger and immediate, and the setups.
If you were looking I had little disagreement on that FX thread with PPC where he pointed out my mistakes on my chart as he saw them. He saw a red-light. “No professional trader would go long on that fourth trade on that chart in FX thread.” That was basically what he said. However, I saw a green light to go long. And I was right and he was wrong. Wrong about market direction that is. I can tell you why he was wrong in his read can you? Not to disparage him as we are all learning and trying to do our best. But it may be useful to look at each of our arguments on that chart and try to detect why one of us was right and the other was wrong. It could be educational? That said, I have had plenty of wrong reads as I was learning PA. I try to learn from them but at times it is difficult. Old habits/beliefs are hard to break and re-wire. Here is that link with that chart. The link is the thread should you care to look at it and should you care to share why you think he read wrong and I read right. In essence, what he said in his yellow annotations on my chart were not so wrong in themselves but IMO he made a crucial mistake. If you have a mind to look at it and tell me what you think his mistake might have been. Not to disparage him but to “see” something there in our exchange that we can learn from. I do wish him the best in his trading …maybe saying that won’t tick him off …I guess we will see….. https://www.elitetrader.com/et/thre...ult-to-make-money.380610/page-14#post-6008199
Very intresting comment about context. And as relates to context i believe you primarily run a 20 EMA on a 5 minute chart. Can you speak to why you prefer the 5 minute chart over the 1 minute? That choice amazes me given you scalp tiny time frames. And your choice of 20 EMA on a 5 minute served you very well today, but the EMA on a 1-minute chart that will plot most closely to a 20-period EMA on a 5-minute chart is a 100 EMA as shown here below. https://gyazo.com/ad30518c60308748dfb4c68f79fece8b Maybe i need to rethink context, chart times and moving average settings.
I too am interested in your take, @volpri, on differences between the 1 and 5 minute. Personally, I do not see PA play out as well on the 1 min ES with regards to the cycle of BO, PB, channel, TR. I think it is a little erratic and I see a lot more sharp moves. Im also a firm believer in fractals, so this surprises me. That being said, I do have a small 1 min chart (about 100 bars) on my screen because I think it helps with context of the 5 min
Well, I think both you and PPC were right. The price was in a DOWNTREND. But once it touched the lower channel, you sensed that it might have been the BOTTOM (which it turned out to be).