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Trading Psychology And Trading Non-Setup Bad Trades
When I use the phrase bad trade, I am not simply referring to the results of a trade; a losing trade that is a base method trade is not a bad trade. It's also not a trade that should be a trading psychology problem, the risk of loss from 'some' percentage of method trades has been accepted. I am also not referring to a misread of a trade setup, for instance a trade that was right side base BUT where a left side 'reason' for not taking the trade was missed. To call a trade a bad trade, I am referring to knowingly taking a non-method trade, probably as result of chasing a missed trade, or because of fear of missing a trade. I am calling a trade bad IF: (1) the trade does not have method components that setup-trigger the trade (2) the trade is done at a 'filter point' specifically established to eliminate a trade at that given time. There are 3 typical results from taking a bad trade: (1) the 'odds' result - a losing trade (2) a trade that you get a loss BUT then becomes the trigger of a base setup winner that you don't re-enter (3) a bad trade that wins - further reinforcing the trade that was taken. Unlike a trade journal intended to focus on setup and/or trades to take [shown on the charts as green-red or blue dots] these discussions are intended to be about the yellow dots AND why they are trades to avoid, along with what a base setup would look like. The objective being to develop a 'checklist' of these reoccurring situations-trades to eliminate - because it's the 'odds' thing to do. Consider the chart below AND the 3 yellow dots: (1) pmd - blue line support break (2) pause-break after the triple channel break (3) blue line reject – which of these setups are base and ‘can’ be traded?
yellow dot1: no - you have break1 of a line that is not setup to break AND this is a counter trade. also consider this in the context of the pmd AND our base method trades - where we reverse after there is a pmd-swing failure setup BUT not as a pmd-momentum reverse. Consider The Specific Case
look at the chart AND the dark blue line - at the time of the blue line break i am still trying to hold a 'last' long. i don't want to exit at the blue line which i think is 'too obvious' AND after it breaks - the amount of room to a support point is close enough that i don't want to exit in between. trades that i would have done: (1) blue line-dark blue dot - IF the line hit and retraced to a lower high with mex flow down - then i like the 2nd break of the line as a pmd-swing failure setup (2) blue line-blue dot - IF the line broke AND then rejected as resistance - what is referred to as a shift-reject. yellow dot2: no - i called this a pause-break after the triple channel break BUT so what - it's a breakout chase. additionally look at the 120t below AND the yellow line across the chart as support - AND also note that 'your' break occurred on a ticki low. this is a REALLY bad entry - be sure you are catching yourself from doing these. breakout chasing is a big enough problem BUT to compound it by selling a ticki low right at support is a 'donation' trade. yellow dot3: no - see chart BT-03a below
yellow dot sell: the channel breakout is testing the yellow lines on the 52t-120t charts AND does so with the ticki low which retraces back to the blue line. yes there is a reject - no there is not a failure. IF you sell the yellow dot - you are doing so at support which is actually where the left side up swing resumed - look at the dark blue line-dark blue circle on the 120t. this trade would actually also be into a 52t pmd - look at the ttm and mex extreme AND where it is at the yellow dot. a failure setup would look like the blue line-blue dot - where you would get a lower high into the line break with mex continuing to flow down. Consider The Specific Case red dot sell: done as a pivot entry AND the pmd-swing failure trade - done into/through the triple break of the 2 dark blue dots. note - without this triple break to trade into - i would not have done this pivot entry. IF the red dot is not sold - i would not have had a sell on this chart. green dot buy: support holds as noted - which also gave a management decision of a 2x partial on the sell. there is an indicator reverse AND move back to the blue line. no buy on the first break - then buy break2 as a breakpoint entry WITH mex flow on the retrace to the higher low - you can also see the trade is into a triple diagonal break at the 2 purple dots.
When you look at this chart in hindsight, what do you see - a profitable sell-buy? Does this at all appear to you as a chart that you would have lost money trading? Because this is what I think would have happened to many traders real time, that in an attempt to ensure that they would not 'miss' the trade, they entered too soon and lost money on the retrace-retest. Price does not move in a straight line, price is a continuum of retrace-retest and back and fill. The trading issue becomes, what price is going to retest. In a continuation swing, you look for support to retest as resistance, or resistance to retest as support, what can be referred to as 'stair-stepping', because that is the visual that you see on your chart. BUT don't forget that a continuation swing is a swing that has developed momentum and swing direction - what about the retests as a swing is beginning? IF you are trading the initial breaks, and/or one line breaks of a line, looking for these breaks to then hold on retest and continue in your entry direction THEN you are viewing all price movement as continuation moves when entered, and this is just not the case. We typically see these initial breaks do one of two things: (1) they break back through the line that was traded before establishing a lower high-higher low AND then continuing (2) they retest the lower high-higher low that was made before the break-before the trade entry. Situation 1 is a trade that you can likely hold the retrace, providing that you aren't a trader that exits trades trying to get a breakeven exit, when the trade doesn't go to an immediate profit. Situation 2 is far more difficult for you to hold, both in terms of actual retrace amount and in viewpoint, where you 'feel' that the higher low-lower high won't hold AND your trade will actually reverse back in the previous direction.
Consider The Specific Case WHY do I think this chart would have caused losses? Because I have seen numerous traders enter at the yellow dots AND go flat on the retrace incurring 4-6 tick losses. Something that must be noted, and that you must consider for your trading - are you committed the relevant price initial risk for your trades OR are you trading with fixed amount stops, regardless of how that exit price will 'fit' the chart? I will suggest that IF you are using fixed stops THEN you are going to accumulate numerous losses on trades that could be relevant price held. You are also going to accumulate numerous losses on trades that are entered on the first break, where the retrace-retest hits your stop amount. Consider trade management where you use relevant price holds -vs- fixed amount stops AND then determine IF you are willing to risk that amount for a given trade, before taking the trade. I would think that it would be a better situation, to miss a winning trade because you decided that the initial risk inherent in the trade was greater that you were willing to commit to, than to take stop losses because they weren't relevant to the given trade - especially when you would then consistently see your losing trade become a winning trade after you exited - when the relevant price held. yellow dot1: the trade is entered on the 1st break of the channel inside of dc double dot - also done as an initial reverse of a left side buy -vs- red dot1 where the trade is done on the 2nd break of the channel after a double hold of resistance AND with the ttmf hook. The win-loss on this trade is a situation of 'too soon' trying not to be 'too late'. NOTE: as this swing is trying to develop - the first retest is to the lower high into the yellow dot1 break AND then to the actual break area after the red dot breaks that line a 2nd time. Both of these retraces are typical and 'should' be held. I think most would agree that the retrace after the red dot sell is the 'easier' hold, which is the basic issue between trading 1st time through -vs- 2nd time through. yellow dot2: the trade is entered on the channel low breakout AND when this retraces, especially with the ttm flip, the trade is exited. To begin with there is no setup at this time, this is what is referred to as a breakout chase - a very difficult trade to hold because of the relevant initial risk size, which like this case, is that of the breakpoint entry which was the base trade. Considering that the trader did not do the breakpoint entry, chances are that they have 'no focus' on the blue line AND that this is what the retrace is testing, which does reject along with that of the dc channel - why I have said that the red dot sell 'should' be held. yellow dot3: same situation - 'too soon' to avoid being 'too late' AND a losing trade on the break back through the blue line. Again note what your real time 'thoughts' are likely to be: you have taken the initial reverse of a profitable downswing - better get out of that trade before the swing lows hit AND the loss gets even bigger. Also note your specific entry IF you traded the yellow dot - this is the initial reverse after a pmd BUT is this a pmd-swing reverse combination setup? The answer to this question is no - the trade should not have been done yet for this reason, regardless of the break1 -vs- break2 consideration. The green dot is the buy - a base pmd-swing reverse setup AND should be entered at the blue line - NOT on the break of the channel high from the yellow dot-blue line break, which would be another example of a breakout chase. IF the trader does not do this trade THEN the blue dot is the first continuation trade, a break and hold-reject of the blue line WITH mex flow up on this retrace. Again, enter at the blue dot and not at the channel high breakout. Bad Trade Avoidance Checklist
This is a very important chart because there are two trades that both gain 2 full base partials IF the trades are entered as base setups at the red dot-green dot BUT very well would have been loses instead IF the trader entered at the yellow dots - the 'classic' situation of the trader loses but the method wins - in this case because of entering 'too soon' to keep from being 'too late' AND without committment to the irisk of your entry in the case of yellow dot1-yellow dot3 - which did hold. For myself, I would rather have to take the blue dot buy after missing the yellow dot3 buy AND not getting a retrace back through the blue line to give the green dot buy setup - instead of having to take the 'heat' of holding a trade. Entering 'too soon' because of being concerned that you will be 'too late' is no reason for taking a trade, and inherent in that mindset is also the strong potential for the exit that could have been held.
BT-01A - yellow dot: the trade is a break1 of a non-setup line against a pmd AND in this case right into the floor pivot. IF you take this trade - you are entering against what is a textbook mixed method sell, where 'they' would go short after the pmd-floor pivot reject - at the blue line that you bought. A: IF the mixed method sell continued into this setup, considering that there was a ttm reverse and mex flow was down on the retrace back to the blue line, the blue dot would be a base pmd-swing reverse - the yellow dot buy loser would in essence be done as part of a base sell setup. B: The base setups in this area would be the blue dot break2 of the blue line - this is a pmd failure setup, which we know to be a continuation setup. As well, we know this to be a setup resulting in the failure of the mixed method sell, this failure very often accelerating the continuation. IF the blue dot setup doesn't become available, then the blue line break and hold purple dot becomes the buy. Is this a primary issue with the trader taking the yellow dot buy - regardless that it is referred to as a bad trade - they are afraid of missing the entry which would then make them enter at the purple dot or higher? These are tradeoffs in trading: avoiding a trade that 'shouldn't' be done to get supposedly 'best' price -vs- still getting the same trade entry as a base setup by waiting -vs- having to enter at a 'worse' price because you waited -vs- getting a loser that then causes you not to take a base setup. When this is considered over the larger number of trades, entering a trade because of fear of missing a breakout and/or not getting the best price - the result is going to be a net loss. Consider The Specific Case The yellow dot buy would be a winning trade if the retrace was held. The retrace amount was small enough that I will consider this to be a bad trade winner - however, also note that the same entry was available as a base trade, and that trade went to a profit without having to hold the retrace. Bad Trade Avoidance Checklist
BT-01B - yellow dot: The trade is a breakout chase AND as a floor pivot breakout WHICH is current support to the left side up swing. What is a breakout chase? First, what it's not. I am not suggesting that if you miss your intended entry, and then enter 2-3 ticks 'worse' to get into the trade, that you are breakout chasing. A breakout chase is where you buy-sell the breakout of a line that is currently support or resistance to the direction of your entry. For instance, buy a breakout of a double top - you are breakout chasing. A: The blue line/dark blue line-dark blue dot is the 'odds' occurrence when you breakout chase at the floor pivot - which is increased because this is support to the previous left side swing. IF the red dot initial is not done, you are still flat until you get a setup like the light blue dot after a reject of the blue line AND break2 of the floor pivot. B: IF still flat, the yellow dot is not a channel reject ttmf hook sell - not against mex because that indicates the potential for a higher low AND back through the channel like the blue line. A reject trade 'wants' a failure entry, meaning that besides the reject occurring there is also a break that indicates that the reject has failed. Consider this basis the red dot that was done as an addon. Technically this is against mex BUT there are additional across the chart setup components that allowed this entry - this is also a rsr-mpf. The channel is the right side reject, and if you will take the blue line back left you see the matched price to the support area into the pmd failure continuation AND that when this trade was done, it's also the 2nd time through the line. This combination gives a reject-failure combination that the yellow dot doesn't. Consider The Specific Case The yellow dot would be a winning trade if the retrace was held. What I would anticipate though - the trader who sold the yellow dot may get a base partial depending on fill, and then on the retrace tries to exit at breakeven but probably loses 1-2 ticks. Consider this as a 3 contract trade that gets p1 and loses 2 ticks trying to 'scratch' = +7 -2 -2 = +3 ticks on this trade. After going flat the trade isn't re-entered at what is such a 'worse' price than the exit. The trade management is as 'bad' as the trade entry - trying to 'scratch' a trade is not an exit setup. Just like you wouldn't buy the floorpivot-dc channel, there also isn't an exit at that time. This is the bad trade situation where the retest of that trade location causes an exit instead of base management, causing a loss or in this case a very small gain, and then missing the continuation that turns the trade into a very nice trade. Bad Trade Avoidance Checklist
The trading psychology implications from taking bad trades-from knowingly taking non-method trades, goes further than the obvious, where the trader has to accept that they were the cause of the loss. There are times where the bad trade is a winning trade, however this will still have trading psychology manifestations, as the 'winner' reinforces the continued taking of non-method trades. Trading psychology causes enough problems for traders as it is, do not make create additional problems by becoming a primary cause. Any winning trade that you may occasionally be able to get, is going to be far outweighed by the losing trades AND especially by the additional trading psychology issues that make base method trading become more difficult.
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