Trading the Zone - by Mark Douglas

Greetings,

If you have read some of my past posts, you would be aware of my 'fear of trading' issues. Slowly but surely, I am trying to overcome this through discipline and action. I know that I will eventually become extremely successful as a trader. As far as I am concerned, it is not if – it is when. At present, I am in the period of pain, the school of hard knocks! To become successful, I need to get over myself!

I have started to read ‘Trading the Zone’ by Mark Douglas. I purchased this book, along with his first book, ‘The Disciplined Trader’ about 8 months ago. The Disciplined Trader was my first introduction to trade psychology. A tough read, but an eye opener all the same. Trading the Zone looks to be an easier read.

There is one section of the prefix (page xiv) that I am compelled to share with you.

“Those Traders who have confidence in there own trades, who trust themselves to do what needs to be done without hesitation, are the ones who become successful. They no longer fear the erratic behavior of the market. They learn to focus on the information that helps them to spot opportunities to make a profit, rather than focusing on the information that reinforces their fears.

While this may sound complicated, it boils down to learning to believe that: (1) you don’t need to know what’s going to happen next to make money; (2) anything can happen; and (3) every moment is unique, meaning every edge and outcome is truly a unique experience. In any case, you wait for the next edge and appear to go through the same process again and again. With this approach you will learn in a methodological, non random fashion what works and what doesn’t. And just as important, you will build a sense of self-trust so that you won’t damage yourself in an environment that has the unlimited quantities the market has.”

This is my ultimate goal as a trader – The expanding trade account and the monetary award will be the result.

Thank-you for your time today,

Cheers - David

Trade Review - WHR

On 1/12/06 I was kicked out of my WHR trade for a loss of 150.92 (20.73%) including commissions.

I had entered this trade on 1/9/06 and as explained on my last post, I felt that I had made a mistake. The day after the post (01/11/07) the stock closed making a nice shooting star formation for the day. (A shooting star has a small real body at the lower end of its range and a long upper shadow.) Coupled with the prior day’s price action, the stock appeared to be at the mid point of an evening star reversal. To complete the formation the stock would need to close deep into the first period’s (01/10/07) body. In addition to this the STO gave me a cross over with my other indicators showing a downward direction.

Seeing this, it renewed my feeling that even though I entered early the stock was starting to turn. Close to the end of the days trading session, I proceeded to update my contingent stop order to ‘sell at market if last was higher than 86.83 (1/11/06 high), but I entered 6.83 instead… Well no need to say what happened - Instantly stopped out. BUGGERR, Another trading mistake! Looking at the following days trading action, this mistake saved me approximately 10% on my loss. Lucky this time!

Lesson Learned – Check your order before you commit! It worked out in my favor this time, but next time it could cost you a SHITE load of profit!

Look below for the chart. The red circle shows the approx place where I exited the trade. The red oval is where I was kicked out of the trade! On a side note, the stock appears to be at resistence. My guess is that it will fall to around $85.00 before continuing up again.

Trade Details

Entered: 01/09/07 1 WHR MAR 90 Put @ 7.10, stock at $84.69

With Commisison (in & out) total investment: $735.90

Exit: 01/12/07 @ 5.90, stock at 85.90

Trade duration: 3 days

Loss/Gain: -$150.92 (20.73%) Incl. Commissions

Trade Rating 5/10

Best advice... let it go, learn your lessons and move on!

See you later - David

Happy New Year & New Trade - WHR

Happy New Year. This blog has been a bit of a ghost town for the last couple of months. I have no excuse for it other than time. With the new born and the family being here from Oz for December things have been hectic!

I made three trades since my last post. Here is how they went.

Entered COF JAN 2007 80 Put on 11/2/06 - Stopped out on 11/27/06 for a loss of $67.92. I was anoyed with this loss. I modifed my stop order (FOR SOME DUMB REASON) to a a contingent order based on bid... The next day I was promptly kicked out at open!

Entered AEOS JAN 2007 50 Put on 11/30/06 - Stopped out on 12/4/06 for a $185.92 loss

Entered JEC JAN 2007 90 Put on 11/30/06 - Exited trade on 1/8/07 for a $554.06 gain

In the comming weeks, I hope to complete an analysis of my 2006 trades (all 12 of them :)) and post them on the blog in some sort of 'Take Stock of 2006' blog post series (sorry about the plan on words). Most of it is on paper - I just need to feed it into the machine!

++++ New Trade++++

I entered WHR just prior to the last hour of trading yeaterday (1/9/07). It has been on my watchlist for some time. It appeard to be in a channel from September, started to weaken at the beginning of December. After the dramatic mid December fall, I waited for the bounce up and entered the trade on the basis that the stock was making lower highs & lower lows. It looked to be making at a new lower high at resistance and starting to turn. Volume was below average for the day. I ented the trade @ 84.69, .40c below my resistance line. The stock closed @ 84.71. I was happy with my entry.

Entered 1/9/07
Stock price $84.69
Buy to Open - 1 Contract - MAR 90 Put @ $7.10
Total Investment 710+25.90 (commissions in & out) = 735.90
Break Even $82.90
Target Stock Price - $81.00
Option Target Price +/- $10.00
Stop @ $87.15 - 5c above 12/15/06 high

Here is the chart.

Today being the next day, I believe that I may have made a mistake entering this trade. The reason is that I relied soley on my trend lines to tell me when to enter, but did not look too closely at some of the indicators for conformation. Looking at them now I am a little uncertain. They do not apprear to confirm the expected move down. I prefer to see them all pointing down with cross overs on the MACD & STO. I clearly do not have that here. Today's price action is also worrisome. The stock busted through resistance. I will be watching this trade closely tomorrow.

We will see how it goes - David

FMOC Interest Rate Announcement day… I think I am mistaken

Quick Post - I don’t know how I came to believe that FMOC interest rate announcement was today, but it is not. Come to think about it, I sometimes don’t know what planet I’m on. My mistake may have caused me to miss my entry window on some of my trades… I will know tonight.

Lesson Learned – Get Your Facts Right!

Cheers - David

Watch List

There are a number of stocks that I have on my watch list that are giving me buy signals (both bullish and bearish) that I have been waiting for. The include ARE, BSC, CMI, GS, MTW, PFE. However, today is not a day for me to enter any trades since it is the FED anouncement day. I have been burned on the last two and promised myself to wait until afterwards. The problem for me is not the anoucement it's self, but my in ability to react prior to the market close. AGN, FTI, FCX, MRO are also on my 'Pending' Watchlist.

I am still in my COF trade - I am watching it closely.

Cheers - David

New trade - COF

I entered into a COF Jan 07 80 Put position for $5.60 on 11/2/06. The stock had been on my set-up watch list since mid October 2006 when it retested the 200dma. The stock originally came to my attention when reading Tim Knights blog. I liked what I saw and added it t my list.

I was patiently waiting for the stock to give me a cross over signal on the STO (occurred on 10/27) and MACD (occurred on 10/30), and a breakdown below the 21dma on high volume (occurred on 10/31). For some reason, I did not look at the COF chart on 10/31 (missing the final buy signal) and 11/1 ( a 2nd high volume down day). I entered the following day. On the day of entry, it took me an hour to pull the trigger which facilitated me buying my put at the bottom for the day (a bit late, don’t you think!!!)… A contingent stop order was set at 79.00 based on resistance and allowable loss for a trade.

Look at how the trade is currently progressing, my indicators are showing that a short term reversal maybe on the way, however, I am going to see if the 50dma holds as resistance.

Lessons Learned on this trade so far:

1. Get over yourself and just pull the trigger. Trust your analysis and follow through

2. Check your watch lists daily. Looking at this trade, the stock had already moved 5-8% before entry.

Cheers - David

Back online!

2 months have passed since my last post. My world has been upside down getting use to having a new little one in the house, but things are getting better. I must say that having a child is one of the greatest experiences one can have. I see that one of my life’s future achievements will be to watch my kids (one so far) grow up and some day have a life and kids of their own.

As for trading, it has taken some time to get back into the mix. I paper traded for the month of October with some mixed results. I found that my winning trades outnumbered my loosing trades but my results were inconsistent. After reviewing these trades, I found that my results were inconsistent for the following reasons:

1. Entering the trade in anticipation of a price move (that obviously did not occur) – This caused me the biggest dollar loss in 2 trades – What a big waste of money!!!

2. Entering the trade too late – Chasing a trade that had already made its move.

3. Not exiting a trade when I was happy with the gain or my indicators were showing an imminent short term reversal - I think that I missed about 30% additional across the board profits because if this.

4. Mistakes – Being too hasty with my analysis and entering a trade based on what I wanted to see, not what the chart was telling me.

5. Staying in a loosing trade too long when the stock moves against my position - This is a tough one. I like to set my stops above support and resistance which means that my stop could be a couple of dollars above my entry point. As it relates to my option trading, I could loose half of the contract value before being kicked out. OUCH! If I am going to trade support and resistance, I need to work on the timing of my entries

6. NOT TRUSTING MY ANALYSIS & HESITATING TRADE ENTRY – This is my killer. I entered late and missed some nice price moved because of this (number 2 occurs). Overcoming my own fears is the only solution.

Cheers - David