Regret is an ugly word. Regret can lead to remorse which manifests itself as we sit and stew about the action (or inaction) that we regret. The most common secondary emotion from regret is anger. “How could I be so stupid!” “What was I thinking?!” and other such phrases are commonly heard. I’d like to focus on the inaction of trading that leads to regret as it can lead to low probability trading.

Kahneman and Miller did research on what’s called counterfactual thinking. Basically, individuals imagine the opposite of a current event and contemplate what might have happened. The psychological impact of contemplating a result that is better than the actual event itself causes feelings of frustration, grief, anger, or insecurity. We’ve all looked at charts and seen the trades that “got away” even though we knew about the potential. We’ve all sat and wondered why we didn’t take the trade, it’s easy to point out mistakes and criticize. Times like this are when your future performance as a trader is at the proverbial fork in the road.

I’d argue that it’s more damaging to a trader’s belief in their skills/system when a “big winner” is noticed after the fact. As an example, let’s say a stock was on my watch-list and I’ve been waiting for a high probable setup to trigger. A bit of good news comes out and the stock gaps up over my entry point by a few pennies and thus the opportunity is missed. The next day I’m looking through my watch-list and I notice the stock I barely missed had a nice 4% increase without my participation. The thought of what could have been is more damaging to the psyche than say 3 max loss trades in a row.

That sucks, no question, but if it gets in your way and clouds objectivity then the real damage can occur.  Having a well defined trading plan and following it objectively with discipline goes a long way to keeping your emotions in check. Most importantly, you’ll also be able to focus on the task at hand and over time the thoughts of what could have been will be fleeting. If you trust your system and follow your trading plan then opportunities will present themselves again. If you remain objective and not dwell on the missed opportunity, you’ll be ready.

Thanks to Dr. Phil and Justin for throwing this together, I enjoyed it. Not sure why I sound like I’m in the shower as my camera/mic are high quality and my office is not that big. At any rate, this should give you a better understanding of what I do and why. Let me know if you have any questions.

How many of these statements could be used to describe your trading ?

• Indecision, difficulty recalling and organizing details required for trading
• Poor time management, losing track of time
• Procrastination
• Avoiding trades that require sustained attention
• Difficulty initiating a trade (paralysis from analysis)
• Difficulty completing and following through on trades (cutting losses and letting profits run)
• Difficulty managing multiple trades
• Difficulty shifting attention from one trade to another (get caught up in the “should have, could have” rhetoric)

If you answered yes to 6 or more of the above statements, odds are you may struggle with ADHD. These statements above are the criteria that a counselor/psychologist would use to diagnose you. The only difference is that I replaced the word “task” with “trading” and added the parenthesis. A well defined trading plan can lend itself to keeping ADHD in check during your trading. Find yourself, then trade.

Trading plans are designed to help maintain focus and manage emotions, not eliminate losses.

The Bullish Percent Index (BPI) is a unique way to measure market breadth. The BPI is calculated by dividing the number of stocks in a given group (S&P 500 for this example) that have given a buy signal via Point and Figure charts, by the total number of stocks in that group. The group is overbought when the BPI is above 70% and oversold when below 30%.

What I found interesting was that the BPI is giving overbought signals at levels that haven’t been seen since the summer of 2007. I’m not suggesting that the S&P will drop like it did back then, because we are not experiencing the same catalysts as back then. What this data does tell me is that this rally off the March lows, which has been suspect since day one by so many, is truly impressive.

I’d never take a trade based off of this indicator by itself, or any indicator by itself for that matter, but the parameters for buy/sell signals are as follows. Buy signals occur when the BPI falls below 30% and then reverses up by at least 6%. Sell signals occur when BPI rises above 70% and then reverses down by at least 6%.

I had mentioned that I was re-reading one of my favorite authors/books this week, Kenneth Gergen’s “The Saturated Self-Dilemmas of Identity in Contemporary life.” I first read this book back in graduate school over a decade ago and the internet was all the rage as the dot com bubble was about to burst. A medium such as Facebook, Twitter, and LinkedIn weren’t even around and trading, for the most part, was still done by picking up a phone and contacting your broker.

Gergen talks about the concept of a saturated self wherein one is increasingly engaged in relationships—real, virtual, and even imagined. When you think about all the distractions we each face in today’s world, he was way ahead of the curve here. One of the terms Gergen coined is Multiphrenia: The condition, largely attributed to technologies that increase social contact, of being simultaneously drawn in multiple and conflicting directions. I’ve dealt with traders who get caught in such a trap and their trading suffers as a result.

My suggestion was always the same—unplug. Have you ever had difficulty with a piece of electronic equipment, called tech support and they say something like “unplug the power source for 30 seconds” and voila! the issue has fixed itself? Amazing, I know, but how do you unplug from trading?

• Take a break and walk away from the computer
• Turn off the TV
• Stop reading blogs and books about trading
• Turn off Twitter
• Go exercise

When you come back and sit down at your trading desk odds are good that a fresh prospective has been gained. Oftentimes we as traders rely on too much “stuff” when it might be best to revert back to the basics. If you’re still in a fog, then perhaps an extended break of a day or more is needed.

As a follow-up to the break I like to remove all the noise from a price chart and just focus on the price action alone, nothing else. Regaining objectivity by removing the deluge of noise that can so easily enter our lives is not easy. In fact, much like an addict, withdrawals can and do occur. If that is the case for you then I’d suggest some self-journaling to better understand why that “need” exists.

Personality can be defined as a dynamic and organized set of characteristics possessed by a person that uniquely influences his or her cognitions, motivations, and behaviors in various situations. One such situation is trading and the basis for the personality assessment that I created called the MAP (Market Awareness Profile).

The Big Five factors of personality are broad dimensions of personality and have been a staple in personality theory since the 1960s. I chose to use this model for the MAP for the same reasons I chose it when doing my doctoral dissertation—reliability. The five broad domains discussed in the model are:

• Openness to change
• Conscientiousness
• Extroversion
• Agreeableness
• Neuroticism

In a series of posts over the next few months I’m going to discuss not only these broad dimensions, but the six facets that accompany each of the dimensions. For this post I’ve decided to start with extroversion as most people are familiar with it and have probably believe they are or have been called either an extrovert or introvert.

Extroversion and introversion are most typically viewed as being on a continuum and that each of us reside there, somewhere. The important thing to remember though is that we can fluctuate during different periods of our lives. As an example, I may be an extrovert when trading and an introvert while riding on the train to work. Introversion is not the same as being shy. It is more of a choice than a fear of social encounters. I may choose to be alone on the train so that I can focus on a task versus being alone because I lack self-confidence and a belief that I could contribute at a social level.

In trading, an extrovert may be more inclined to take risks and thrive off trading with “an edge” whereas an introvert may be more prone to an aversion of risk. Both can be debilitating to trading success if not kept in check. This task is often hard to do alone and one of the reasons why traders who are held accountable by a “boss” are more likely to be successful versus going it alone and unchecked.

One of the more defined facets of the extroversion scale is assertiveness. High scorers on this facet are more likely to approach trading with confidence, as they do life. The key is to not let this turn into over confidence as the market has a way of humbling those that do.  Odds are good that these traders will attempt to buy bottoms and sell tops. They are less inclined to have a trend following system or strategy which would require patience.

Low scorers tend to not fight the tape and trade with the flow and follow trends. They are more likely to use a conservative system or strategy that buys/sells only after confirmation of a break of resistance/support. Odds are good that fundamental analysis is a part of their system as well and that price action is typically left for larger time-frames such as daily and weekly periods.

Obviously, as stated earlier, we will find ourselves employing a strategy or following a system akin to those just mentioned. We may also have experienced several different strategies and systems and still feel as though the holy grail is out of reach. On the other hand, perhaps we’ve found a system or strategy that fits our personality and the marriage is one of success. If you are at that point, congratulations! If you are not quite there, patience, perseverance and the insight gained from a personality profile could lend itself nicely to the journey.

Now if you read this post and think it’s a bunch of crap, I offer this. Hundreds of thousands, if not millions of people are aware of moving averages and have heard and/or tried a system based upon a cross of the moving averages. In fact, there are some well known systems that are out there for anyone to use and some traders have proven to be quite successful using them. Why then is it that so many people fail at being a successful trader with all these proven systems out there? I’d argue that a big piece of that puzzle is the baggage (personality) that we each bring to the market.

I’d further argue that if you’ve been lucky enough to weather the markets for a period of time that you have tried several strategies and systems. Perhaps you’ve found one that fits your personality and you’ve found success. How much time, money, effort and other resources were spent to get to where you are now? If you’d only known then what you knew now, you could have saved so much. That is why I believe having a good idea of what you’re wired for in life can and does impact your trading. With that knowledge, you can save valuable resources and get to where you want to be more efficiently.

Moving averages are great indicators as they smooth out the sometimes volatile price action. There are numerous variations of moving averages such as simple, exponential, volume weighted, and others. Moving averages are probably one of the widest used and accepted technical indicators out there. What’s interesting is trying to understand why people use the different moving averages and what they’re thinking as price is at/near that particular moving average. Having this information can be invaluable in helping to define parameters of a potential trade.

Here’s my take on some of the moving averages I monitor. I use these moving averages to help me better understand the thoughts of those that use that particular moving average. I also use some of these for my own trading system, mainly the 5-day SMA, 50-day SMA and the 200-day SMA. Keep in mind I’m using the daily candles and thus the periods would be days.

5-day SMA: Probably the shortest time-frame I use of which I owe the use of it to Brian Shannon.  The 5 SMA is basically a week in the market and you’ll tend to see a lot of momentum traders using it as an entry/exit. As an example, I may gete long a name that has either just broken the 5 SMA or is slightly above it and just broke out of resistance. I’ll use the 5 SMA as a stop. Once this period is broken, I’ll more than likely be moving on to the next name.

13-day EMA: considered by me for many years as the swing trader’s moving average. Its measure is close to two weeks in the market and because it’s exponentially weighted the most recent price action takes precedence.  This EMA is used for entry/stops so when price action approaches there should be decent support/resistance. I have a scan that looks for stocks that have touched their 13 EMA from above and I run it nightly.

20-day SMA: The short-term trend indicator that is used by swing traders and monitored by most every market participant. At its simplest, this is a monthly moving average for the daily candles. The 20 period is widely used as a signal to enter trades when stocks close above it and exit when stocks close under it. Longer-term traders that don’t mind holding positions for several months use this period. It’s also a widely used moving average for covered calls. (I also us a 20 period sma on an intraday 15-minute candle and love it).

50-day SMA: This is my “line in the sand” as I prefer to own stocks that are above their 50 SMA and be short stocks that are under their 50 SMA. Easier said than done, but the 50-day is a widely used SMA and therefore provides decent support/resistance. I can expect that if a stock approaches the 50 SMA from above that it would find support and bounce.  Similarly, if a stock approaches the 50 SMA from below I’d expect it to provide some resistance.

200-day SMA: The institutional moving average and the most widely watched moving average. Institutions are believed to keep an eye on this level and prefer owning stocks that are above the 200 SMA. Not always the case, but the 200 period is definitely a level to provide support/resistance.

The key for me, with regards to these moving averages, is to confirm breeches with volume. As an example, if a stock blows down through the 200-day SMA and the volume was significantly above average then I know odds are good that most everyone sold/exited a long position in that name. Odds also favor that several new short positions were entered as well. What I’d look for next would be a test of that 200 SMA to see if it is newly formed resistance and if it is, then odds increase the stock moves lower. Volume, once again, would be key as the pullback to test should be lighter and then pick up as the low of the day the breech occurred is violated. Seeing such price action would confirm my thesis that odds favor a move lower and I’d look to sell premium at/near that level.

The best thing to do with moving average is to put them on a price chart and then look to the left to see how the stock interacts with it. Perhaps you’ll see that over the past 3 years the 50 SMA has provided excellent support for XYZ and it just so happens that XYZ closed above the 50 SMA after testing it a few days earlier.

Here’s a thought. It doesn’t matter why we rallied like we did off the March lows, but what really matters is what happens now. According to Bespoke, this most recent rally (using an up trending 50SMA) was the seventh longest since the S&P 500 has been around. I had no idea.

I do know that when adversity presents itself it’s what happens next that proves the heart of a champion. Historically, the three months following a break of the top ten streaks of that rising 50-day moving average, the $SPY had an average gain of 3.08%. Out of the nine times this has occurred, six were winners. The average of the three losses was -1.99% with the largest coming in 1986 (-3.80%). As an options trader I recognize that the odds suggest that we move higher. As an educated trader I also know that current circumstances in the market today are unprecedented and that alone trumps the odds.

I don’t know if we move higher or lower from here but I do know what to look for in the price action to help me gain an edge. I’m also prepared, as a proactive trader should be, to act accordingly when the opportunity presents itself. I love the opportunities the market presents on a daily basis and look forward to each trading day knowing that I’m prepared to participate. Some times I win and some times I lose, but I always use risk management and that allows me to come back and play the greatest game ever.

Retail sales will set the tone early tomorrow followed by consumer sentiment, but it’s the close that I’ll be watching. Will the recent bullishness, suggesting a gap fill of 2/3 in the $SPY hold going into a three day weekend? Combine that with option expiration next week and all the geopolitical events occurring and there’s definitely cause for indecision on the bulls part to hold or lock in some profits.

Hard to believe it was only a week ago that the SPY looked to be headed for a test of the 200MA and then bam! The 13EMA is what I’m watching to see if it will be defended again by the sellers as it was on both the 2nd and 3rd of February. If tomorrow’s close is above that (108.36) then a gap fill becomes almost a lock for me. I’ve been short the Feb 1025/1015 put spread and the 1215/1225 call spread in $SPX for nearly 4 weeks now and have watched that like a hawk lately. That’s not my favorite thing to do, and I’ve had to hedge it once this cycle thanks to the price action last Thursday and Friday.

As I look back at the Feb cycle I sold that spread on the 11th of January which just so happened to be near the highs. While I got a lot of premium for the calls, I did not take in much on the puts. Greed could have overcome me and I could have written closer to the money strikes, but I stuck with my system and it paid off. I’m looking to get a 7% return this month in the fund and that’s nice. Especially when you combine that with the 4% gain for the Jan cycle.

There’s lots of research out there about business failure and for the most part, the same could be said for trading. Here’s a list of the 10 most frequented catalysts for business failure:

1. 78% lack a rigorously-developed business plan keyed to the realities of their market, including sufficient research on the business before launching it.
2. 73% fail because the owner is wildly optimistic about projected sales, break-even point, and capital required.
3. 70% fail because the optimistic owner believes he/she can wing it on important issues with which he/she is ignorant, and ” can’t afford ” to hire the expertise to get it done right the first time.
4. 63% of new business owners simply don’t have the required business experience to make a success of the enterprise.
5. 82% lack cash-flow management skills. They don’t understand the importance of controlling cash flow.
6. 79% launch with a bright idea and little or no capital.
7. 77% don’t have a rationally-developed pricing model for their products or services.
8. 64% don’t have a clue as to how to aggressively promote their business, nor do they understand its importance.
9. 55% don’t understand their competition, or assume it can be safely ignored.
10. 47% rely too much on one customer/client.

Notice that the number one cause of business failure is the lack of a plan and we’ve all heard the old adage of “if you fail to plan you plan to fail”, but what about trading? Yep, if you don’t have a plan, then you are more likely to fail at trading.

No matter where you are in your trading, take a moment here to ask yourself if you are treating it as a business. For a select few, trading is a business in the sense that it’s their only source of income while others treat trading as a large part of their income but also draw upon other areas. The key is that you treat it as a business.

Here are a few considerations for you as you begin to design your trading (business) plan:

Use capital that you don’t need to live off of; whether it’s an old 401(k) you’ve rolled into an IRA or a small portion of your savings. Just make sure that you don’t need the capital in the next two years. Doing so removes a lot of the emotional attachment that can come from investing money that is “needed” or that can’t be lost.

Clearly defined, yet practical goals that you’d like to achieve. Defined to the point that you have some mile markers along this journey that will allow you to make sure you’re actually progressing.

Go in knowing that you’re not likely to replace your income in six months. If it were that easy wouldn’t everyone be doing it? A nicely defined portfolio tracking spreadsheet should serve as a great visual.

Choose a period for review and have someone else check your business plan and make sure that its sound. This person should be a mentor, someone whose been there and done that. Just make sure that you review and make adjustments as needed.

Treat your winners as income and your losers as a business expense. In any business you’re going to have both. Any good business has more coming in than going out so couch the winner/loser verbiage into income/expense and change your mindset.

Don’t be afraid to seek the help of others. There are both free and paid resources out there that can give you a “leg up” in the markets. Don’t go it alone (see #3 above)!