Fear and Greed

Markets are said to be efficient when fear and greed are kept in balance. Market bubbles occur from excess greed and bubbles burst and over correct out of fear. The recent oil and commodity bubble was brought on by greed and the ensuing correction was excessive out of fear.

On a micro level, day traders have to deal with emotions of fear and greed everyday in their trading. Fears of losing and missing out are basic. The fear of losing usually leads to tight stops that may cripple the trade before it has time to develop and the fear of missing out usually comes in the form of abandoning the entry rules in order to chase stocks that are ripping.

Greed usually manifests itself by being swept away with a winning position, thinking it's going to keep ripping and turn a mediocre day into a big winner. Dreams of this nature can cloud the trader's perspective and force him (her) to throw trading rules out the window.

The most realistic approach to trading is to aspire for consistently profitable trading results by applying focused and disciplined trading rules. A disciplined approach to trading rules will help the trader manage entries and exits, thereby relieving the trader from acting purely on the emotions of fear and greed.

A 50% win/loss ratio can be a very profitable business if the trading rules are consistently adhered to. As long as winners run at least 2:1 over losers, and preferably 3:1. But every trade has to meet certain pre-defined criteria and the trading rules have to be applied in a consistent and disciplined manner. If either or both are missing from your trading plan, your trading results are likely unsatisfactory. If this rings true for you, the beginning of a new year is a good time to start elaborating the criteria and the rules.

A reader submits the following: BTU: Entry on the break of the 11:45am candle which is an inside NR7 bar. It was also basing under the round number $28.00 and it looked liked it tested the PDH a few times. Target just ~ $29.00. Action went sideways for most of the afternoon until a nice little jump at around 2:30ish. Had a decent profit but gave most of it back because it never reached my target. In retrospect I should of at least partialed after the 3 WRB.

Okay, I'm not sure why the target wasn't met, because the Esignal chart shows that it was tagged. I would just like to emphasize the need to sell into strength and you should plan the exit as price approaches the target for example exit at $28.95 as opposed to exactly $29.00.

The entry is good NRIB (NR7) at the base of PDH. The long basing period may have contributed to a sense that price could go higher than the initial target, however, we have to stick to our trading rules - 3WRBs, Fib. targets, whole $ dollar levels are all areas of profit taking and/or consolidation. Take at least a partial. If price consolidates and wants to move higher, there's nothing to prevent you from adding back.

Made a similar play in ACI and I was wondering if it is stupid to do that since they are basically in the same space as each other. They were pretty much moving in lockstep.

Not stupid at all. I often trade pairs because it's much easier to manage two positions in lockstep than not. Always good to find ways to capitalize on sector strength/weakness.


The GG trade is mine. I took a partial at $28.00 after a small profit because it was an obvious support level. In my heart, I had a good feeling that it would eventually go lower, but price is pre-disposed to consolidate at obvious support levels, whole $ levels, fib. targets, 3 consecutive red bars. I'm being repetitious on purpose. The key take away is sticking to the trading rules to protect profits. Price could have easily reversed at support and retraced.

As I said above, there's no reason not to get back in if price consolidates and wants to continue in your direction. This GG consolidation is a thing of beauty - a series of lower highs on a flat base with the 3 MAs (5, 20, 50) squeezing into a tight formation. Burn this 1 min. chart to memory.

I re-entered full size, partialed again when price stalled at the half $ and exit as price approached the whole $ level on capitulation volume.