Confidence to Pull the Trigger Comes from Within

Confidence to Pull the Trigger

Successful trading is all about diligence and hard work and having a winning attitude! Great traders take the trades that were developed with thought and with keen observations that were based on predefined trading signals. This mentality will help you develop the confidence to execute when a trading opportunity presents itself. Lack of confidence and fear are your enemies. Trading on a rule-based system will help you overcome most emotional issues as long as you are trading based on a signal or trigger. Never take action on anticipating the signal. If the rule states to buy when X crosses over Y, you have to wait for the cross rather than anticipating that the cross is about to occur. That is what trigger means: It is a call to action based on a conditional change.

Many experienced losing traders who have come to me for help have a common problem—they try to jump the gun and try to outguess the market. They have this feeling that they will miss the opportunity if they don’t act. By now, you know what a candle chart is; and you have read many times that it is imperative that you wait for the close of the time period for which you are trading to close before acting on a buy or a sell signal. Look at Figure 12.1—the candle on the left may have given an impression that a bullish breakout would materialize. However, keep in mind that unless you waited for the close, it really formed a doji. Imagine getting all wrapped up emotionally, thinking you were missing a great buying opportunity only to experience buying the high of the time period because you failed to be patient and disciplined in waiting for the time period to conclude, assuring you of the buy signal, or of the higher close.

If you anticipate a signal, you might be right; and there are times when you can anticipate taking a trade based on a formulated, educated guess. One such scenario would be to make a buying decision based on what I call a “gap band” play. That is when the market departs too far from the pivot point moving average, which for a buying opportunity would be defined as a potentially overstretched price extreme or oversold market condition. Armed with the longer-term numbers, such as a monthly second support (S- 2) target, I would look to go long but with partial positions; or I would simply scale into a position with from one-quarter up to one-third of my normal lot size or positions.

Here is where it might seem like I would be playing the “catch the falling knife” game, which I am. But when the market has the capacity to make a major price reversal, especially when several indicators line up, such as stochastics warning of bullish convergence, the Commodity Futures Trading Commission (CFTC) Commitment of Traders (COT) report shows a major imbalance, as discussed. Then if the market has been in a long-term downtrend and shows that prices have departed too far from the mean, that is what spotting a buying opportunity is about. That is also when, under these certain conditions, it is appropriate to anticipate a trade. You should cut back on your initial position size and set a risk factor such as a conditional setup if the market, for instance, makes a lower closing low. You can also add a time element, such as “If the market does not reverse in X amount of periods, then get out.” In a situation like this, you could implement a longer-term option strategy, such as buying call options. (I did not go into options in this book because that subject matter was covered in my first book on page 217.) Options are a great investment vehicle that offers traders peace of mind and confidence to pull the trigger in highly volatile and precarious situations, such as picking longer-term tops and bottoms, especially in the bullish scenario just described. Remember, I have stated many times that as traders, we “look for opportunity and then apply a strategy.” That is how we capture potential profits on big reversals.

Anticipating trades is a dangerous game, so you need to take that into consideration. If you ask yourself the right questions, then you can develop a solid trading plan. One such question is, “Is the risk worth the reward?” If it is, take the opportunity.