It is Sunday February 22nd with a weekend report and review.

The S&P 500 bounced off the previous low set on November 20th last year. It did close up off of that low which is good. I have been hoping the overall market can hold on for a while before it continues down, but what I want does not matter to the markets. It would be wise, to learn from that point of view. When you trade, don’t try and impose your will on the markets, by your strong directional bias. The market does not care about what we think, it is going to do everything it can to fake you out and get you to establish a position in the wrong direction.

The S&P 500 is currently at the bottom end of it’s range. Usually, when that happens you will get a bounce off that bottom. At this point there is really no way of knowing how big a bounce it will be. I suspect that it would be enough to make up a bit of the drop that we have recently experienced the last week. This rally, if we get one,  is what I would call a retail rally. What I mean by retail, is this is usually not the smart experienced money. A double bottom is a very basic chart formation and it looks to me like this may hold over the next couple of days.  It could turn into something more significant, I hope, for the country’s sake.  The Dow actually broke down over 100 points below it’s November low. Sometimes that can be a sign that a short term rally will come. It broke just enough for investors and traders to bit. Now we shall see, if the market turns.

One interesting thing that many people do not know is that the Dow has recently had some changes in the stocks that make up the 30 companies in the index. It seems that any stock under 10 dollars per share has been taken out and replaced by other companies that have higher share prices. This will change the index values and not really give us a true representation of the market. Its like playing cards and you know you are going to loose with the hand that you have and so you just get a new set of cards and see if those work better for you. Seems a little shady and misleading to me. There has been a lot of that going on these days. On another day, I will have more to say about what is really going on in the markets and economy. Believe me, there is a lot more than meets the eye on this one. I have been following the stock market, politics and world events for over 25 years and there is a story here, but for another day.

                                                               TRADING LESSON: Trading Without Bias

When you establish a position in your mind, that the market should do this or that and when price action is saying something different, you are about to get burned. Fortunately my stops are small and my losses are thus small as well. When you have 2 or 3 stops in a row, you just need to stop. It does not matter what is going on, you are out of rhythm with the markets. Until you let a little time go by and focus on what is actually happening, only then will you begin to see the light. A little time is the best medicine for this scenario. If you still do not get it right, you need to stop for the day.

I have a rule, that if I am down more than my daily goal, I need to take a break, no matter what. After that break, when I come back if I go down in equity by double daily goal, that day’s trading is over, period. I came up to this point once this week and my next trade had to be right or I was going to have my first losing day in months. Fortunately, I waited until I found a high percentage trade and built my equity back up from there, one trade after another.  That bears repeating, one trade at a time.

Many people will try and make up negative equity by getting it back all at once. I do not advise this. If the patterns present themselves, then take the trade, but you may even want to decrease your size for a short time until you know you are back on track. Once you have yourself in tune with the markets again, you can then resume your normal trade size. I would throw in taking small breaks during your come back, to insure you are not getting overloaded or burnt out. A fresh mind can do wonders for your P&L.

This one rule can save many traders from blowing their account out in such a short amount of time. If you don’t stop, it then becomes compulsive negative behavior and that will ingrain in you very bad habits, which you may never break until the market has broken you.

If traders followed this one idea and have the trading discipline to adhere to it, the percentage of successful traders would go up by a wide margin. But human nature as it is, we know through studies of trader psychology that most people will not change. They will insist that they know how to trade these markets and they had just gotten a bad break here or there. Well, if it was not this day’s bad breaks or next week’s mishap, it will be something else. The market has a way of cleaning out all of the weak hands. Whatever their problems are, it will find them and exploit them, until it breaks you. That is the hard cold facts.

Now on the other hand, when you are aware of this force and plan and train for the days that the market is trying to take you down, you need to fight back. How do you do that, you may ask? Well, it first starts out by having a trading plan. You would be surprised how many people do not have one. Second, you will need a trading journal. This helps you record for yourself, if you are following your trading plan with what you are doing right and what you are doing wrong. If you can identify what you are doing wrong, then you can take steps to change and/or improve. When you are doing things right, that also is very important, because it is establishing in you consistent trading behavior that you will need to fall back on when things become difficult. You need to have a plum line, something that is constant, your trading plane.  Everyone’s trading style is different, because we are all different in our personalities.

Trading involves emotions, that is what brings most people to make a buying decision or not. The struggle of bulls and bears during the trading day is all about personal convictions for most people. We need not get caught up in the struggle, but knowing that it is going on is vital in positioning ourselves in front of that emotion. When we do that, we will be able to ride small waves of movement or (emotion) and capture profit from that. The markets have proven themselves to be consistent because people are creatures of habit. They seem to do the same things over and over again. We just put ourselves in the position to capitalize on that predictability.

More coming tomorrow

Vince