Wednesday, September 16, 2009

Using structure to reduce brain chatter

In most of my posts I've talked about the psychological aspects of trading that affect me (and no doubt many others). Everything I write is from personal experience. I'm not teaching; I'm relating. I'm thinking out loud. But you are welcome to read along. We all learn indirectly from the experiences of others.

"Psychology" is a big buzzword in trading. What the hell does it mean? Have you ever really mapped it out, or have you just experienced what it made you feel like? Anger, confusion, hopelessness, bursts of giddiness, King of the world, emotional roller coaster highs and lows both of which lead to mental exhaustion. "Fear and greed" is not really just an old, tired cliche. There is a battle within our minds designed to help us cope with the UNCERTAINTY of the chart in front of us, and the FEAR that this uncertainty creates.

We are all well tuned in to the importance of having money, or not having it. Money is literally life or death. It amplifies the importance we place on the uncertainty and the fear. (If you are new to this blog, read some of the prior posts of the last couple weeks. Ziad has some important posts too that all relate to this). "Trading psychology" refers to both the adverse effects of the battle in our minds as well as the "proper" psychology side of it, sometimes called the "traders mindset". So psychology is not a bad word. It's more an indifferent word to me. To me, the effect of the psychology has to be minimized. I would rather not have to think about it. (sigh) When trading becomes boring instead of roller coaster highs and lows, we are on the right track. How to do it?

I understand the effect that fear (I'm not afraid to use the word) has on me in trading. I understand how the market works. Inconsistency and uncertainty are necessary components that make the market function. I further understand that just reading about it (say reading the same explanation over 1,000 times) is useless. I can read it, and understand it, but I can't solve it by reading a book. One way I CAN cope with the uncertainly, and thus the fear as well, is by creating some structure in the charts that minimizes it. The structure is designed to both help me get an edge in the market as well as minimize the contradictory brain chatter that can fuel the fear. In effect, by organizing my charts in such a way I am trying to create as many "black and white" (no grey area vagueness), or "Yes/No" situations as possible.

Understand here that my particular methods of creating structure aren't the point. YOUR trading plan is different than mine. You can use the general idea here to help yourself. I'm sure you already do this in some form. This blog post is a review for me to help me in my trading. You can read what my style (daytrading) and premise is by clicking on my name to the right in order to put the following in context.

1) The most important work I do every day is draw out the price created support and resistance levels (S/R). These are the levels the market, in its prior day(s), has told me in no uncertain terms were levels of contention. I know from experience they will be levels of contention again on the first day they are hit after being created. They will make good entry and exit points. So I start out each day with a chart showing a bunch of horizontal lines on it. That's my roadmap for the day. I am most interested in what price is doing when it is right around those lines. About 80% of the time I will not take a trade in the middle between those lines. That's pretty much a black & white thing for me. My brain can relax a bit when price is traveling between the levels, which is the majority of the chart. No brain cramps in trying to count fractal waves for me. Before the day even starts I already have a decent idea of where I will and won't take trades. I will watch the market all day in order to determine its TENDENCY, but I won't be sitting there with my hand on the mouse pointed to the order entry window all day wondering if I should do something or not. It is usually "not". And so the chart has already been divided into manageable segments before the open. I only need to zero-in on little snippets of it.

2) Moving average crossover. I use a moving average crossover to tell me if I can go long or short. It's not an entry signal, it's just a "Yes/No" toggle switch on my smallest chart...the entry chart. If the shorter ema is above the longer that means I can ONLY take longs. If reversed, I can ONLY take shorts. Black and white. That eliminates some thinking for me. It also prevents me from trying to buy a bottom or sell a top, things I don't need to be risking my money on.

3) A move outside a Keltner Band. I put a Keltner Band on my middle chart (3 times bigger than the smallest chart). No trade can be considered unless price has popped the upper or lower band first. No exceptions. A Keltner band puts a mathematical boundary around the price bars. Breaking an outer band requires some price momentum. I require (not just need) the momo before I can look for the trade. It's another "Yes/No" toggle switch. Nothing vague about it.

4) Using my biggest timeframe (3 times bigger than the middle one) for major price-action setups. I will watch for HL's and LH's, and double bottoms and tops here. As a final determinant as to what direction I should be trading I will look to see if this chart is still making HH's (or LL"s), or has now printed a LH or HL (or double bottom or top). If it hasn't changed directions then I shouldn't reverse my Long/Short trading bias either.

That's pretty much it. Just some mostly mechanical things to keep me trading in the direction the market is showing me it wants to go. The specifics aren't relevant to anyone but me. It may not even make sense to you. That's not the point. All of it requires little thinking and is designed to keep me from shooting myself in the foot...and to keep my thinking organized. That IS the point. As Ziad has said previously, we have to look at every little thing in the context of the bigger market. One of first "ahaa" moments I ever had was when I read a trading forum post from a guy who said the awakening for him was when he started concentrating on "setups" (as he put it) instead of triggers. The difference is that setups are showing where the market wants to go whereas triggers are specific indicator based entry signals that can show up almost anywhere. But you can only take the triggers when the setups are right as well. That's what I'm accomplishing here; getting myself pointed in the right direction first. Creating some structure on my charts helps transform the chart from a bunch of squiggly lines to a more understandable picture. Anything that makes it more understandable is going to reduce the uncertainty, and thus fear level.


  1. Thanks Jorge. The idea is to have a discretionary trading plan (because I think they are the most profitable) but at the same time reduce the thinking to certain points in time where it can be focused and not have to stress my brain (out-think myself) all day long. I will let the plan use its mechanical parts to point me in the right direction first.

  2. HI Ym, E-mini and ZIAD... Great post YM i really believe on what you are saying.

    I have a question for ZIAD that i Hope he can help me with.

    Ziad I have been on demo for a year now, learning everything on my own, watching the market and trying to find my style, This is by no means easy.

    My question is, DO you believe or think that trading for a firm or a prop firm will help me achieve more consistency on trading?

    I have done my best to find one but here in Spain it is not easy to get into the few firms that hire, Now I look to move to chicago, london or NY but to get into a firm is pretty hard and since i dont have a working VISA my only chance would be to go to graduate school, apply and have some luck !!! i don't know what to do, since i think that what makes a trader IS the market watching it, learning from it, not going to grad school.

    Thanks guys, if anyone else wants to comment on the topic i really appreciate it


  3. Hi Daniel,

    The answer to your question of whether a prop firm will help you become more consistent is YES and NO, in my opinion.

    On the one hand if you find a good prop firm that has a good mentoring program and really cares about developing long-term career traders, then yes they can definitely help you a lot as you'll be learning from successful traders and this can not only hasten your learning curve, but also teach you things you may never discover on your own.

    The caveat is, however, few firms have truly good mentoring processes where the older traders really help you out and let you learn from them. I traded with a prop firm for a few months where all the good traders spent their time trading and didn't have time to help out the younger ones. That's not a good situation to end up in.

    But where it gets really tricky is that even a firm with a great mentoring program may not help you out that much. Why? If your style does not mesh with theirs and they're teaching you to trade their way this might not work well for you.

    So the ideal situation is to do research and find a firm that trades instruments and a style that you could see yourself enjoying to trade, and also make sure that this firm has a good longer-term mentoring program and a profit-sharing scheme (so you know that they'll only benefit if you do, instead of just charging you commission to trade there).

    Regarding the work visa issue, that's the problem I ran into to in the beginning and partly why I eventually went out on my own. The grad school thing may not help you as you may not be able to work at a trading firm when your status is student, and then when you graduate, "trader" is not one of the occupations that usually gets work visas easily.

    Your best bet might be to try to learn from an interactive online mentoring process, where you watch real traders trading and teaching in real-time. LBR Group (Linda Raschke) offers a good one for you to check out.

    Anyhow, best of luck with everything. I know it's not easy, but hang in there and keep focusing on your goals and you'll find a way to do it.



  4. Thanks a lot for the Help ZIad, I asked you because nowdays it is pretty dificult to find an excahnge to be part of since everything is now in chicago , NY and London...Having read your comment I would like you to clarify me some things

    1) Did you learn something working with traders or most of your experience and learning process was done on your own research?

    2) Do you think that focusing On ONE instrument is the best bet?

    Thanks Ziad

    Just out of curiosity.

    Do you live in the US?


  5. Hey Daniel,

    1) I learned pretty much all on my own experience wise. However, I structured my trading principles and ways of thinking about markets around those of successful traders whose style interested me, who were generously sharing how they trade online. The biggest influence on my trading has been Dr. Brett Steenbarger ( The way I enter and exit is based on my own experience and style, but the way I think about markets in principles was learned largely from studying his site. I also learned a lot of basic stuff from trading books. All of these things give you direction, and then direct experience makes real learning and success possible. You have to experiment to find out what works for you. What I did was to imagine myself as the trader I want to become and asked myself "How would I be trading if I were my future successful self?" How would I like to trade ideally?

    2) Focusing on one instrument or several is a personal choice. It depends on your style and personality. I don't think there's a right or wrong answer. The shorter term you are however, the more likely that you'd do better being a specialist on one instrument.

    And finally, I live in Dubai.

    Good luck with everything,


  6. Thanks a lot for the help Ziad i really appreciate it. How do you deal with the issue of having just income from trading? i mean psychologically it is hard having to pay bills and get money out of the market.

    Thanks again


  7. By the way is there any specific book that you can recommend me, just in case i haven't check it out since i have read several books, courses etc.


  8. yeah it's definitely hard, especially when you are going through a period of drawdown, as I happen to be now. But what I try to do is look at it as a challenge... that's what it's all about! To be able to do it despite the pressure. I mean look at sports. There could be many athletes that could perform great if there wasn't public pressure with everybody watching them and criticizing them, but it's only the great ones that can do it despite the pressure. For them, what would be the enjoyment and challenge of doing it without pressure? Most of the challenge would be gone. So I just try to reframe it positively like that.

    As for the books, someone asked me that I think on my first post that I wrote and I gave them a list, so check out the past comments to that post and they should be there.


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