At this point, I believe in the trading method but not in me the trader. I know I have the tools to identify good trades, but the lagging component is ME. It’s about psychology of execution. I hesitate on entering good setups. I exit too soon not wanting to lose my paltry paper profits. I jump in at the peak of momentum not wanting to miss out. I don’t see the trees through the forest.
I have learned so much from the Green on the Screen blog and the other traders that blog about their experiences with the method (especially Welcome to the Gutter). Also now from seminars and chat at Investor’s Underground. While I have struggled even in my paper trading, I’m having light bulb moments every other day and I’m having so much fun. There will never be a day where I can’t learn something new about trading tactics, technical analysis, and everyday life lessons from it as well.
Enter the Fear and Greed Day Trader blog. Scott trades high-priced ETFs like Muddy trades gutter stocks. Muddy often jokes that his approach is “caveman” trading, but Scott, the Fear and Green Day Trader (FGDT) makes it even more stripped simple, if you can believe it. Beyond the price of equities they trade, FGDT does put way more at risk on trades ($150K vs $3K) and he will go “all in at times” (one thing I won’t be adopting) – the two approaches are very similar. And the FGDT blog has a big focus on trading psychology.
Below I pull out quotes from a series of articles on his blog and link to them.
FGDT preaches on turning off CNBC and absolute focus on trading. Strip your charts to candlesticks, volume and moving averages. Embrace the probability of your set ups, but leave emotions for other endeavors. His philosophy is summed in the subheader of his blog:
He breaks down the essence of good trading psychology in a post called “The Secret”:
I’ve been trying to get my paper trading to be like going to the batting cages, the point of which is illustrated here:
Musicians, athletes and traders are all involved in activities that lend themselves to repetition… When you do the same thing over and over again hundreds and thousands of time it can become a reflex action. You don’t need to think about what to do, you just do it like a race car driver reacting to a patch of oil on the track. It gets to be instinctive.”
He talks about the important of discipline and relates to healthy living (I had a good week, by the way if you remember my resolution posts):
Being disciplined to maintain a healthy weight through exercise can become a transferable skill to being a disciplined trader. If you can’t stick to a simple plan of regular exercise how can you expect to be able to be really disciplined in other areas?”
One word of advice was really applicable to where I’m at right now:
He has the same simple three rules to trading that every sensible approach advocates, and #3 is what I’m going to focus on in the immediate future:
2) Cutting your losers is one of the most important aspects of trading. Unless you have an unlimited pile of money to fritter away you must admit you’re wrong and exit the trade. If you don’t you will not have enough to remain in the game. End of story.
Momentum is easy to spot long or short once you now what to look for:
1. A rise or drop in volume after a trend.
2. Longer or shorter candles
3. Markets and stocks moving in sync with each other.
4. Price acceleration/deceleration.”
theory behind momo trading is:
I know that profit taking will happen after long trends, pops, drops etc. Trading the probability of a reversal after a extended uptrend when the candles are getting shorter, volume is dropping off and the overall markets showing the same is only taking the view that gravity usually takes effect and that the stock will drop.”
He implements the strategy by:
It’s best then to approach trading this way;
– the probability that trends will reverse.
– predict nothing except some movement will occur.
– recognize what the charts are telling you.
– act on this information in a timely manner.”
Last, I think the best nutshell statement that made me it all click in my head:
Look at my edge. It’s not some super secret, undefinable mystery. Green candles mean a stock is rising. Red means they’re dropping. Long candles means lots of momentum. Shorter candles mean less momo. Check out what the overall market conditions are doing. When I see a convergence I make my play. What’s your edge?”
When I found this blog (hat tip Complacent Panda), I stopped everything I was doing and read every article on his right column.
I’m going to eliminate distractions when I trade. I’m going to focus on candle sticks, volume and moving averages – taking off the other indicators on my charts. I am going to use almost exclusively the 5 minute chart for monitoring stocks (using 15 minute for determining the trend and support/resistance and 1 minute for entry and exit timing). I am going to keep practicing, over and over till I have dreams of trading. Physical exercise will make me a better trader. I’m going to pull the trigger when I see it, every time. I’m going to let my winners run.
I’m going to combine the Muddy method with the Fear & Greed Day Trading approach. It looks promising.