ADD-ON TO MY FIRST ARTICLE ON TRADING PSYCHOLOGY

Apparently, the "handcuff" idea is catching on like wildfire. I'm getting e-mails from random people, tweets from all over and all sorts of shit from people from everywhere. If you haven't read the article on the 4 Stages of Learning, you should.

I'm not joking. People are actually doing it, but they don't know when it's appropriate to do so. If a trade is going against you, that does not automatically mean handcuff yourself (or walk away from the computer). You have to do it under the right circumstances, or you will suffer substantial losses for no good reason. You will subject yourself to unnecessary, avoidable, and unforgiving pain.

What are these "right" circumstances? Here they are (I didn't think people would actually be doing this, so I have to write this article to put out a warning):

1) The trade must be working the moment you put it on. If a trade goes against you immediately, then your timing was off. Re-evaluate the situation. If you have to close the position, then close it and re-enter on a better set up, long or short.

2) The trade must be a swing trade. My "handcuff strategy", if you want to call it that, cannot be used for day trades. The buffer just isn't there. And, when I say handcuffing, I'm talking about walking away from the computer as well. After the trade is working, then the handcuffing prevents you from prematurely walking away from a trending trade.

3) I don't want to call it a strategy, so I'll just call it a disciplinary method. This method works when you take advantage of a trend, and helps you withstand countertrend reactionary rallies. Everyone hates seeing paper profits disappear, but if the technical trend is intact, then you need to take the pain to realize the gain that comes after it.

4) It is highly likely that if you "fail and fold", then you would be doing so immediately before your gains are realized. It's not a mystery that sometimes the moment you sell or cover, the trend reverses back in your favor. The trend changes under the maximum pain threshold.

5) I do not encourage handcuffing yourself to a metal pipe, or in real-life examples e-mailed to me: your bedpost, your table, your bookcase, your doorknob, lock yourself in the closet, etc. How is it possible to do some of these things? Did you cut a hole in one of the bookshelves? Goodlord. I suggest walking away from the computer with a stop loss set in place due to the extreme dynamics of the market's volatility and MUI - market under the influence (of news).

6) Make sure the set up is right. If the set up is right, then #1 is taken care of, and you don't have to read the rest of this. If it is an impulse trade without a proper entry or exit plan, then you deserve a large loss. Don't think that the market is your friend and she'll just give you money whenever you want it. Trust yourself, not the market, not any one else.

Let me tell you something. I only administer the handcuffs under the most appropriate and dire circumstances. Yes, my methods are extreme and unconventional, but under the most dire circumstances where a person cannot control his behavior on his own, then there must be intervention. We all have habits, some people have really weird ones, but we all have habits and we all know how hard they are to break.

Psychologically, I believe that trading is the most difficult profession in the world. Trading goes against every natural human emotion. Oh, how difficult it is to remain unbiased and neutral when on a winning streak and to hold fear, anger, and sadness at the gates during a losing streak. I know it's tough, and we've all been there. You may be there right now. Let me offer you a story.

6 years ago when I was 18, I remember losing over $10,000 (don't know the exact amount) in a stock I can't remember. It was a stupid mistake and I don't remember what mistake I made from the long list of mistakes I made, but it was big. Maybe I just blanked it out because the pain was too great. It was the worst day of my life (at that time). I became reckless, tried to drink everyday, didn't want to see any friends, and it affected my school work at the military academy that first semester.

Lucky for me, the discipline and other virtues I picked up there along the way strengthened me and allowed me to continue on. I was at the 'make it or break it' stage where you either continue on or quit. If I did not go there, I think I would have quit, honestly. The money was a big deal, but the psychological damage was extremely devastating. The experience still leaves chills in me and I have to pause as I write because the effects have been so great on me. I don't remember the stock or the price, but I will never forget how I felt.

It seemed like I changed into another person. I was devastated. Now that I think about it, I fell into the death spiral. It was a hellish nightmare. I hated myself for being so stupid. How could this have happened to me? Well, it's simple. I was human. I did the humanly thing and I made every mistake that traders made. I don't produce double-digit monthly gains (on most months) because I'm "good". I came from a road full of disappointment, regret, and losses, and that paved the way for me to improve myself. I made the choice to become a professional trader long before I became one.

I was talking to a friend one day and he thought I never lost any money and was full of shit. Fucking wrong son. I lose money all the time. You can't make money without losing money in this business. You will never win 100% of the time. You will lose. Accept it. If you hate losing, then you should quit trading immediately. Sorry, but it's not for you. I learned to embrace my losses. I view it as Ms. Market warning me that I'm doing something wrong. If I don't follow what she says, then I will be disciplined with God knows what.

Ms. Market loves to give you warnings, but she also helps you out and gives you hints. These "hints" are the high probability trading set ups you should be looking for. She's trying to give you some free money. Are you listening to her or are you distracted by something else? We want to accept her gifts, but sometimes our emotions get in the way. We may not see the hints, or we may be afraid to take action.

Take the losses early on and learn from them. I like the whole blog idea or keeping a trading journal because it allows you to document what happens in the market and in yourself every day. If you don't keep any record of some sort, then you are guaranteed to make the same mistakes over and over again. Keep a journal or writing in a blog should part of every trader's after-hours review process.

The turning point came when I overcame a very disappointing beginning. I made it a goal to improve myself. People find it a surprise that I read over 100 books a year, but it's not a surprise. Sometimes fear can come in handy. I feared the worst, which was a total wipeout and probably quitting. Improving yourself slowly bridges the gap between making trading a hobby vs. making trading a professional career and a business. It's a process that develops over many years.

The rest is history. I went on to kill the market every year after that, producing triple-digit gains for the past 3 years. Once you have a strong foundation, the market cannot stop you. Only you can stop yourself. Building that foundation comes only with self-improvement.

MARKET COMMENTARY (2-26-09)

Yesterday, we approached the congestion area. All three major indices are now inside the critical congestion area, a sort of 'make it or break it' type of intermediate-term level.

Long-term channels are marked by the purple lines. The COMP has penetrated and is comfortably above the upper long-term channel, however the Nov low-Jan/Feb consolidation level provides resistance. The COMP's volume remains level, stable, and without drop off. The DJIA closed slightly into congestion. March's volume cannot be rivaled by any other month in the DJIA's entire history. The SPX entering congestion can be seen in the 2-month close-up below. Targets are marked with a red box.


The 100-day MA has become a critical level because the SPX & DJIA have not met it since June 2008 (August 2008 for the COMP). Many indicators indicate increasing overbought situations, but I won't initiate committed short positions until one of those advanced distributional sell-off days (ADS) occur. Shorts who shorted early, even the strong hands, are feeling intensified pressure at this point, and I can assume that many of them are folding their cards as each day goes by, unless they shorted months ago.

*All figures are for the DJIA, except 2000 (COMP) and 2007 (SPX)

In addition, during these times, I like to breakdown each sector and analyze them individually. All are either in continued uptrends (XLK, XLI, XLP, XLY, XLB) or in bullish consolidation patterns (XLF, XLE, XLU, XLV). Since all sectors are not moving in tandem, it is contributing to the large number of indecision days and large intraday swings. The ascending triangles have a higher chance of breaking out to the upside, while the sectors in continued uptrends are threatened with a pullback as they enter/or are approaching congestion zones.

MARKET COMMENTARY (2-25-09)

A few things. Don't forget about GDP and Jobless claims coming out today at 8:30AM EST. The GDP consensus is -6.6% with a range of -6.9 to -6.2. The previous reading was -6.2%. Claims are expected to come in at 650K with a range of 640K to 670K. The previous reading was 656K. There will definitely be some movement today.


As for the market, there are a few things to point out. First, the COMP is above the 100-day MA, something it wasn't able to accomplish since August 2008. The DJIA and SPX are not there yet. The WTF pattern, which allowed the market to bounce, occurred at the bottom end of the up channel, 3PM as usual. Beyond SPX 800 lies major congestion which is the area where we consolidated for a month before the major gap down.

On the 6-month SPX chart, obviously there are a lot of lines. This may indicate that the market may be boxed in. There are more support and resistance areas than usual. Immediate primary support is at 800 and immediate primary resistance is at 825. The secondary support level is at the 50-day MA or the upper boundary of the bullish broadening wedge, around 790-795. Secondary resistance is at the 100-day MA (for the SPX) at 840 and then the upper long-term channel at 850. Those are the levels to be watching.

This video has nothing to do with stocks, but it the coolest animal video I have ever seen:

MARKET COMMENTARY (2-24-09)

Nothing has changed, and I won't be trading until my conditions are met:

1) Long: healthy, low volume pullback and successful bounce off of support for entry.
2) Short: initial breakdown on stronger volume and a weak bear flag for entry.

I am making investments in several non stock market related ventures and they have occupied my time more than I have anticipated. In addition, I am finalizing everything for my 10-day vacation in Cancún, Quintana Roo, Mexico (coming up in 10 days). I deserve one anyway. As a result, I have not traded for many, many days, nor do I plan on doing so until one of the above two conditions are met. That is all.

MARKET COMMENTARY (2-24-09)

On my Thursday post, I explicitly stated that the market was forming a bull flag and that we had additional room for upside. Well, here you go. I also mentioned the coveted Force™ spike in that post. A +7% day is an example of a very powerful Force™ spike. If you didn't read that post, then that's your fault. Charts do tell.

Another thing: On my Wednesday post, I outlined the very distinct possibility of bullish broadening bottom wedges forming on every major index. We broke out of that pattern (sky blue lines on the 6-month charts). Don't say I didn't say anything. Once again, charts do tell.

I have my own personal beliefs about the Geithner plan, and I don't have very nice comments to say on it or to him, so I won't say them. Just be aware that there is no magical solution to a problem that was created for several decades. The purging of our financial and credit systems will take many years and it will not be solved immediately. Apparently there are many people that like to think so, but if you use some common sense, it's not possible to fix something like this "quickly".

Forget the political rhetoric from Obama, Geithner, etc. Obama has zero experience in economics and the financial markets. I doubt he even personally traded a single stock. Not to mention, all the cronies in his cabinet existed while the problem was being created into a bubble in the first place, and no one in a political position of power did anything meaningful in their power to stop it. Times were too good, and the economy was flourishing. Or so they thought.


On the 45-day chart, you can see the green channel drawn for the current rally since there is enough data to do so. The rally continues until it ends, basically. Currently, there is no indication of advanced distributional sell-offs (ADS). The down days that we've experienced are minor distributional corrections (MDC). There is no way I will be adding longs here and since there is no indication of an imminent breakdown, I cannot add shorts here either (as swing trades).

I'll be back in long when we get a healthy correction or short if I sense a sell-off. If you haven't read my weekend article, you definitely should.