Tuesday - dollar makes big move up

Why do I get the feeling Paulson is trading Forex today? We've already seen the government is more than willing to interfere with our markets.

Looks like a weak kickback rally today (the percentage moves seems impressive at first glance though). Very little volume. Last day of the month sector rotation perhaps. When the bargain hunters appear after each big move down, it makes me feel like we still haven't hit bottom. When people are thoroughly disgusted with stocks, that will be the time to buy for the long term. The VIX seems elevated lately, probably because of the short selling rule. I think options activity has increased to get around the shorting ban. We don't normally hang out above 30 for several days in a row.

Friday trade - RIMM

I really liked this trade. It ended up being break even, but the setup was good, and if I saw the same setup again I would make the same trade. There were several things that I liked about this trade:

Series of lower highs showing bearish sentiment

NR7 at base of ORL on 15 minute charts with volume contraction

Descending triangle look

Base & Break setup on 5 minute charts

With the strength of the setup this one should have broken out quicker, so I was quick to move my stop to break even when it didn't break as fast as expected. I started seeing some bullish setups in other Nasdaq stocks too. AAPL was putting in a rounded bottom. My one reservation with the setup was the time of day, right before lunchtime which is most often choppy. However on Fridays, I have a theory that traders try to take a half day and stick around until 1 EST. Perhaps this Friday was different with everybody waiting for news on the Congress bailout plan.

Setup:80

A Perfect Day...

...not to trade.

On days like these, setups look like they're going to breakout and they never do or they headfake. We either have indecision or temporary price equilibrium. It looks like we'll print a doji by the close today.

Tuesday trade - DRYS

This was an ok trade considering today's chop. I felt like commodities and oil were going to take a breather today (backed up by their charts of course). The breakout of the inverted C&H was fast and furious, but then it slowed. Once I saw the ascending triangle shaping up, I set a stop at 47.2 in case DRYS broke out of that pattern. It did break and dealt me some slippage. In retrospect I should have just exited the trade when I spotted the pattern but I was encouraged by how linearly POT and USO were moving down. I'm starting to rate my trades from a scale of 1 to 100. I've seen traders use a lettering scheme (i.e. A-, B+), but I think in numbers and this will let me calculate an average setup figure each month to indicate how selective I have been.

Setup: 75

Historic week

That was the most insane I have ever seen the market. I made a couple of mediocre trades this week but I was not in a relaxed state of mind. My trading platform couldn't keep up with the volume, so my quotes kept dropping out and my orders took about 10 seconds to enter. Stocks were moving so fast, I think the possibility of getting major slippage or of a trade not triggering becomes a very real possibility. We set a volume record this week. I can imagine network switches in New York too hot to touch during these times. We're told as traders to control our fear, but there is a time for healthy respect as well. Know your limits and know when to sit on the sidelines. When the VIX gets over 30, the rumors start swirling. The probability of a game changing piece of information coming out increases (i.e. Thursday's CNBC rumors). I also found myself too focused on the fundamentals with a new bailout every day. I couldn't resist reading about every new development.

Anyway, I'm going to try to block out all the financial news this weekend and come back fresher on Monday. I'm not happy with the government's intervention in our "free" markets just like everybody else, but focusing on that won't make me trade better.

Enormous volume

My quotes can't keep up with this volume. These conditions are really good, but it's too frustrating/stressful when my quotes drop out every 30 seconds.

Finding and maintaining the proper mindset for trading

Anybody who has been trading for a while comes to the realization that trading has a lot to do with psychology. When I first started I thought trading was 50% analytical and 50% psychological. Now I think it is about 70% psychological. If you listen or read interviews with successful traders, they never say my trading was awful until I discovered that I should only trade when the RSI is above 20 or some other technical indicator. Breakthrough comes when a trader makes a mental breakthrough or discovers something about themselves psychologically that was hindering their trading. You know somebody has been trading for a while when they start to sound like Phil Jackson!

My win ratio first started to climb when I became more disciplined. It sounds easy--only trade the best setups. In practice though, sitting and watching charts for 6 and a half hours without making a single trade is difficult at first. Discipline takes energy. I find that my most impulsive trades come on Friday after I have been careful the whole week, and my discipline starts to wane. For a while I was getting in the habit of trading. I was making a trade or two per day. I always told myself, maybe I won't trade today, but it's hard to trick yourself into thinking that after you've traded 5 days in a row. If you find yourself in a trading habit, it is helpful to restore discipline by just watching the market for a day. You need to be able to watch good setups come and go for a day without any regret that you just missed out. Notice how much more clearly you see things when you aren't trading. It is easy to fall into a trading mindset, frantically searching for the next trade that is going to make you money. I try to stay in "impartial observer" mode until the last second when I need to actually pull the trigger and enter the order. What it really comes down to is clearing your mind of desire.

• From craving (attachment) springs grief,
• from craving springs fear;
• For him who is wholly free from craving, there is no grief, much less fear. (Dhammapada Sutra. In Narada Maha Thera, The Buddha and His Teachings.)

I'm not a Buddhist or anything but I find this philosophy very interesting. I'm sure you have heard that you need to control fear and greed when you are trading. Well this shows that fear can come from craving. So it follows that if you can keep your desire to make money in check, then you can restrain fear. I remember in Market Wizards, one of the traders said as soon as he started to trade with a certain material object in mind that he wanted to buy, his performance plummeted. So his craving probably resulted in fear which interfered with his objectivity. Have you ever made a trade that didn't work out and then when reviewing the setup, it looked totally different than what it looked like at the time you initiated the trade? I know I have. This is a sign of lost objectivity.

Once you find the proper mindset, you must maintain it. It is normal for human emotions to fluctuate of course. You need to find a way to get yourself relaxed and into impartial observer mode. For me this was aided by listening to relaxing music, it could be different for you. Once you find the proper mindset, I think you will discover that your trading improves greatly.

Tuesday trade - DRYS

I've mentioned before that I like to have several reasons to exit a trade. I also like to have several reasons to enter a trade. When I see a setup taking form, I try to gather evidence that the overall market is going to trend in the direction of the trade. Tuesday was nice because there was no question I wanted to be short after the second day in a row of the S&P bouncing off of the 50 day MA and the tepid reaction in the US to the Frannie bailout. In the middle of the day, XLF was setting up an inverted cup and handle and the QQQQs looked to be forming a short term double top. I also look at similar stocks in the same sector. I liked how DRYS didn't bounce off it's morning low as much as stocks in related sectors like POT, showing relative weakness. You can also see how little volume there is in the bear flag, and that the volume is declining. I try to put the odds in my favor as much as possible. This also gives you more confidence to stay with the trade. I exited this trade as the Nasdaq was hitting the previous day's low, DRYS was nearing 50 (strong support), the dojis were showing high volume (sign of covering?), and I was starting to see green on the tape. It's not every day I nail the exit, so I was happy with this 4R trade.

Oil - relationship breaking down?

This graph shows how oil has moved more in step with the market over the last few days. Notice how today, oil formed a bit of a double bottom right before the Nazdaq did the same. Normally, oil has an inverse relationship with the market. I can explain this in a few different ways. One explanation could be that the employment report last week and the Fannie and Freddie bailout (not a backstop any more) far outweighs the daily fluctuations of oil. Another explanation is that the sentiment about oil prices could be changing. Normally, lower oil means the consumer will have more discretionary income which is a postive for an economy based largely on consumer spending. But the biggest fear lately is that we are going to experience a worldwide recession, not just a U.S. slowdown. So lower oil might now remind traders of slowing global demand, which will have more impact in the long term. The third explanation is that all of this is just a coincidence. I'll be watching this over the next week to see if this new relationship continues.

Wednesday trade - DRYS

After 3 months of watching breakouts fizzle, I became very quick to take profits. Wednesday morning was very choppy so I was in quick profit taking mode. I saw that DRYS was slowing at 65.5, and my 3R target was 65.4. The one thing I failed to recognize was the Head & Shoulders pattern in the indexes. So instead of 7R I got 2.2R. Now that the volume has returned to the market I will have to be slower to take profits, and expect stocks to run a little further. I still haven't come up with a formal exit strategy, but I have several ideas in mind.