Wednesday, February 15, 2012

Trigger happy

The English have two qualities that I admire: caution and courage

Caution without courage is timidity. Courage without caution is foolhardiness. A trader needs to develop caution tempered with courage to protect from being swayed by emotions.

The opposite of the trader who fears getting into any trade is the trader who gets into every possible trade. The truth is, the over-trader is simply scared of missing a big move, which he thinks will happen "anytime now". Fortunately, this mistake is rectified very quickly as soon as the trader blows his fifth or sixth account. But by then, he has turned into a fearful trader.

For example, a trigger happy trader may buy the close of b1 reading it as a reversal bar and a strong close indicating a possible bullish trend from first bar (T1B) day. To his horror b2 starts selling right from its open into its close. At this point, he may turn short below b1 or below b2. If he's lucky, he's scalped out and is close to breakeven by the close of b3. If not, he may buy b4, then sell b8 and by the time b11 appears, he is emotionally exhausted, possibly down by a few points for the day and has thoroughly exercised his expletive vocabulary.

The sense of urgency the trader felt as he entered every trade so far is his very undoing. This is the exact feeling a car dealer will try to induce in a customer at the dealership. "If you buy right now, you get this and this" or "tomorrow, we may not be able to work out such great financing", etc.

Without the emotion of urgency, our trader may read the chart differently. For example, if it was presented bar by bar a month later,  since he's not tormented by an urgency to make money, it should be apparent that b1 was a doji and not a reversal bar and its close or breakout does not merit a buy. Similarly, selling below a doji on the first attempt is dangerous.

The over-trader thinks like a gambler. To him any trade has the same chance of success or failure, sort of like betting on red on the roulette wheel. He will bet on every spin since every spin is essentially the same. Traders however, need to think like poker players. Only play good hands and muck poor hands. A  better analogy is to think of trading like hunting. Its insufficient to spot a prey that would make a fine meal. Everything should be positioned for a successful hunt before you risk life and limb to chase it.

The trick to trading successfully is to only take setups that you are certain will work. Its insufficient to correctly read the direction of market movement. In the beginning that may mean you are just watching the market day after day, without taking any trade. This is very important and you should not skip it. What you are doing is removing the fever and developing the patience of a hunter. Over time, you will be able to read patterns where your probability of success is high.

Keep a list of proven setups handy. At any point you feel the urge to enter, ask yourself: Is this a setup I know is high probability? If not, pass up the trade. Its not worth it to find out. If you feel you cannot control yourself, trade it on SIM. But eventually, you need to let it go without even resorting to trading it on SIM. Once you enter, follow your risk management strictly. If it stops you out, so be it. That data goes into your statistical database and is essential to selecting the best setups for you.


  1. Cad,
    Thank you for your blog. This is an invaluable resource for a Brookie!
    I understand all the details in the book as well as your blog. But I am unable to tie it all in a holistic way yet. STill working on it.
    Are there any books that influenced you apart from Brooks ones?

    1. Not really. Brooks said he based his approach from Edwards and McGee. I have read parts of that book but my material is basically Brooks with some simplifications and adjustments for simpler decision making.

    2. How long did it take you after studying brooks methods and trading till you were profitable?

    3. Don't treat trading like memorizing state capitals. Its more like learning to swim or running a marathon. Different folks will take different amounts of time.

  2. Hi Cadaver, I have a question for you, why you did not take the short in bar 76 ?? In my opinion it was a overshoot of trend chanel of ther bars 67, 70 and 76, a expansive triangle an a A2 in the EMA.

    Thanks for your answer and sorry for my English level.

    1. b69 or b72 was possibly a W reversal after which there are no more A2s. Also I avoid entering new trades late in the day since the price action could be unstable and insufficient time to make a decent profit.

    2. OK Cadaver, thanks for your answer.