When Your Analysis is Wrong – A Lesson in Trading Psychology

Last night, I was looking for the market to react and begin to head lower today (see last post below).  That analysis turned out to be wrong. How do you salvage a trading day when your analysis turns our to be flawed?

In truth, there are many days that my nightly analysis turns out to be wrong, or, more correctly, the market doesn’t do what I anticipated the night before. It took me a while to learn this, but the fact that my analysis turns our to be wrong is okay. Marty Schwartz was instrumental in teaching me about wrong analysis. He had been a net losing trader for about a decade. When he turned the corner and became one of the most profitable commodities trader of the 1980s, he attributed his turn-around to accepting the times when he is wrong. He said,

“Before, admitting I was wrong was more upsetting than losing the money. I used to try to will things to happen. I figured it out, therefore it can’t be wrong. When I became a winner, I said, “I figured it out, but if I’m wrong I’m getting the hell out, because I want to save my money and go on to the next trade.” By living the philosophy that my winners are always in front of me, it is not so painful to take a loss. If I make a mistake, so what!”  — from Market Wizards

This is an excellent attitude and one I try to adopt.

2014-08-18 ES 9 & 3K TickSo, let’s see how to do this in the context of today’s trading. Clearly, the market rallied strongly in the Asian and European sessions breaking yesterday’s high on sizable volume. You can see this on the 9,000 Tick Chart. Look at the volume on the wave up at A. I circled it in blue. This was a big clue that the market was not going to be weak today. There is no sense in standing in front of a train.

So, we shift our gears. One of the great values of having a game plan coming into the market is that if the market is doing what you expected, it’s great. But if it isn’t, that’s great, too, because you also know what the market is doing. Think about that. This is the real value of a game plan.

The market drives up through yesterday’s high on strong demand. Shortly after the US session opens, the market is still holding gains, shows a lack of supply, and has a spring (3,000 Tick chart at green arrow).  That’s our cue to go long.  Nice trade.

The take-away message is to remain mentally flexible. If we have to be right, we wind up fighting the market on days like today. That’s no way to trade.

Webinar Today

T & BI just finished the slides for today’s webinar on Tops & Bottoms. There are 60 slides covering how to read a top and how to read a bottom.  I think you will like them.  We will have a thorough discussion on market tops and bottoms, including the all important structural characteristics, how markets behave in these locations, entries, use of the Weis Wave, bar-by-bar reading of tops and bottoms, recent major tops and bottoms, and much more.

Join us tonight at 5:00 Eastern time (New York time zone).  We will run about two hours, maybe a little more.  Everything will be recorded.  Come learn how to read the next top or bottom by clicking on this link: Tops & Bottoms

Coordinating Time Frames

One of the key skills in trading the markets by its own action is the skill of understanding structure.  Someone recently told me that they look solely at price and volume; they consider structure irrelevant.  I can’t understand that attitude.  To my way of trading, using structure is essential.

A good example of how structure plays a significant role in trading occurred on Thursday, just prior to the big run up ignited by the record low European Central Bank rate cut.

The ECB Trade

2014-06-07 ES 9 & 3K TickWhen looking at structure, it helps to coordinate more than one time frame.  In the charts, we are using the 9,000 and 3,000 tick charts.  Tick charts have certain advantages over time-based charts (like, for example, a 5-minute chart), most notably the advantage of compressing overnight data into an easily readable format.

By coordinating the two time frames, we can see that the market was in an up trend and at A, the market returned to the supportive level of the 2-Day high.  Volume on the 9,000 tick chart showed a drying up of supply at this structural market point.  Since the 3,000 tick chart was oversold at this level, a trade could be confidently initiated to the long side as the market began to turn up.  Traders who leaned against structure and the indications of supply and demand at a key point made a perfect entry on what turned out to be an almost 20-point run up.

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Rally Dying?

Or is it just a pause?

2014-02-12 ES DAily & 27K TickAs we await another winter nor’easter here in southern New England we are trying to stay warm and figure out what the likely next move of the market will be and how much snow we will get.  The weather seems easier.  It’s been very cold here lately.  I awoke this morning to one degree above zero (that’s -17.22 Celsius).  It’s what we call pretty nippy. The ground is covered with about a foot of snow from last week and we are expecting another foot of it tomorrow.  That’s the easy part.

The market has been up for seven days in a row.  That’s a pretty good run by market standards and shows the strength of the rally.

The was obvious narrowing of range in today’s market with pretty good volume.  It suggests some supply is hitting the market.  We see a little today selling on the 27,000 tick chart (on the down wave marked A–larger than any recent down wave, though not terribly substantial), but then the correction simply went sideways.  So far, the supply has had little effect.

The key for tomorrow will be today’s high (1823.25).  I’ll be watching this level closely tomorrow along with the snow.  An intraday upthrust or a lower high should bring out greater supply.  This will be best seen on the Weis Wave.  If it does, watch for the market to make a run down to the 1805 to 1800 level, or lower.  I see this as having the higher odds.

The market could also try to rally higher after pushing up and through yesterday’s high, or spend more time going sideways.  All three of the scenarios outlined here are expected to be influenced by the supply seen to the left of the chart that occurred during December and January (red arrow).


Big Morning Up

The S&P futures had a good run up this morning.

2014-02-06 ES 3K TickJust before the US Open, the market tested the overnight lows (T) and took off.  You can see the demand that came in off the US open, confirming the test (D1) and indicating the overnight high would break.  The short pause here had light downside volume, opening the door for buyers to come in, and they did (D2).  Buying extended some 20 points off the morning low before dying out.  So far, the market is holding its gains.

Live Trading Tomorrow – Free Event

Tomorrow, I’ve been invited to join David Weis in a live trading session starting at 10:00 AM Eastern Time.  It is being hosted by TradeGuider, and the event is free.  I’ll be there for a couple of hours, and hopefully, we will have some good trading.  You can register for the free event at this link:  Free Live Trading: Friday, Feb. 6 at 10:00 AM ET