There’s a lot of great information about Trading Psychology.  One person whom I have a lot of respect for is Dr. Brett Steenbarger.  His blog has been instrumental in developing a proper trading mindset over the years.

Apply Trading Psychology for consistent profits

So, after a single negative trading day last week, I’m back strong… I had an idea about what the market could do today based on some longer term charts.  Just to reiterate, I don’t care what happens intra-day on the monthly, daily or 60 minute chart.  But it gives me a good high level overview that can create a nice objective bias.

How we apply Trading Psychology in our professional trading group…

As I mentioned in our trading room this morning, you have to use trading psychology by learning to think one or two steps ahead of the market.  Basically, look at trading like a chess game.  Here’s what that means to me…

When I’m looking to get in a trade, I want to see the trade hit my target before I even get in the market.  If I can’t see the potential for the trade to work out, then I just sit on my hands.  Doing this gives me really strong conviction in my trade, and the confidence to hold for the target. 

A few students asked me how to develop a strong trading psychology and the ability to “think two steps ahead of the market”.  And the simple answer is this: practice, repetition, and burning those damn images into your mind.  You have to be able to close your eyes at any given moment and “define” a winning trade in your own mind’s eye.  I think about this stuff so much that I dream about it… dead serious!  And in some dreams I can actually feel the emotions and physical sensations of what it’s like to be in a trade.  If you gain control over trading psychology, then your day to day decisions making in the live market will become so much easier!

Learning to manage your trading psychology and mental state game is a process

There are no short-cuts…  Only dedicated study to develop your craft.

After a profitable trading morning session,  I decided to take the afternoon off to enjoy some time in downtown Buenos Aires, Argentina.  And as I was sipping on some “cafe con leche”, the markets were going into a state of panic and confusion.  Within 30 minutes the DOW fell about 1,000 points, which dipped below 10,000 (around $9,869), then capitulated back up to $10,520 for a loss of $347.80 (3.2%) on the day.

I can only guess as to why it happened… CNBC says there was a mistake made by a Citibank trader, who’s fat finger hit “B” for billion, instead of “M” for million, which assisted in a huge sell-off in Proctor & Gamble’s stock.  Also, there’s been a lot of talk about the financial crisis in Greece and other European countries.  I think all that mess, mixed with emotional selling and stops being hit, sent the market into a frenzy.  

Cramer was live on the air when the Proctor and Gamble sell-off hit.  Historically, I haven’t been a Cramer fan, but I gotta hand it to him.  He made a very timely call live on the air to buy PG at a $49.25 bid, and in less than 3o seconds it was back up to $60.  I’m sure a few quick traders made an easy six figure profit.  Here’s the live Cramer video.

Over the past couple of weeks, I’ve been talking about why we should see a some downside moves in the markets.  As I’ve mentioned on the Emini Academy Blog recap videos, we’ve been in an extremely over-exuberant bullish run since early February of this year.  We’ve seen both retail and institutional investors buying the hell out of the market, which we knew could not be sustained forever.  And as we approached the 61.8% retracement of the bear run from 2008 and 2009, we put in a nice head and shoulders reversal pattern.  We also saw professional traders get net short on the futures markets toward the end of March (another sign that a reversal was coming).  And as the retail investors were buying into resistance, the pros were selling down to support, which made for some nice oscillations and increased volatility.

I think today was a wake up call for people who had a unreasonable bullish bias on the markets.  In only a few short days, we saw the market dip to lows of the year, taking out a lot of stops on the way down.  Who knows what will come out of this craziness?  I’m sure we’ll see some investigations, speculation, and maybe even some regulation… but for the time being, I’m going to stay focused on what I do best and stick to my intra-day trading plan, and let the news anchors stress about where the markets are headed.

Stay profitable, disciplined, and sharp…

Until next time.

- Chris Dunn
E-mini Day Trader & Founder of the Emini Academy