What Makes it Difficult is the Emotion in your Mind

First, here is how Mike Gibbons at Breakout Watch sees the markets:

Although the major indexes slipped this week, they did so on lighter volume indicating consolidation rather than panic selling. The slippage was caused by a resurgence in oil prices as the recently improving dollar resumed its fall. The consequent rebound in energy stocks cushioned the losses in the large cap DJI and S&P 500 indexes while the smaller cap NASDAQ and Russell 2000 relinquished the leading role they have played for the last six weeks. Nevertheless, the Russell 2000 found support at its 200 dma level on Thursday while the NASDAQ, which is again below its 200 dma level found support at the 50 dma level.

The week's trend was reversed on Friday as oil fell by over $6 a barrel and the dollar recovered. Adding to the good news on Friday was rumor of a probable capital injection into Lehman Brothers by the Korean Development Bank. Oil prices are likely to continue to fall as the 'geopolitical risk premium' abates as the tensions subside in Georgia. Supplies are also improving due to the reopening of a pipeline throughTurkey and OPEC is expected to increase production by 1.4% next month.

If energy costs continue to fall, we will see a reduction in inflation and the US consumer will have more disposable income to support economic sectors outside of energy. This augers well for a continuance of the current upward trend.

Second, from an Advanced Mentoring student "journalling" his trades and emotions, a well kept study in what thinking occurs:

Hi Floyd,

I know you are fishing today and I am not expecting a response.

I am just going to use this forum as my journaling for today. Feel free to respond if and when you would like. Actually, there is no need to respond at all. I just want to get my thoughts down and have you read them as well to give you an idea of how I think. I hope you enjoy the weekend.

When I saw the futures up this morning...I was feeling a bit angry to be honest. Thoughts like..."I should have held my position" ran through my head. I noticed that I WAS ALLOWING these feelings of regret to cause me anxiety - which was effecting the way I was interacting with Christine and the girls. I did not like how I was feeling. Especially when the futures hit 90+...then I began to get even more irritated b/c of the potential profit that I "could" have taken home. I tried to remind myself that the futures could have been down just as easily and that I should be grateful for what I did have. That helped a little.

After an unpleasant conversation with the phone company, a trip to the bank and some more chaos at home...I was feeling itchy to trade. I felt that if I won some money it would make myself "feel better." (a very dangerous place to be).

By the time Christine took the girls out, the market was up 180+ points and I was sitting there (a bit perturbed b/c I missed the profit) and I was ready to find some kind of edge to trade.

"What should I do?"
"Bernanke's comments were not too bad...not too good either."

Reuters:

"Stocks finished the week on a strong note, but the lack of volume suggested there was little conviction behind the buying. Moreover, despite the strong finish, the major indices concluded the week with a loss."

Hey Floyd...

At about 3 pm...the DOW was still sitting around 11,600 and I was "convinced" that it was going to fall back down to the mid 500's by the end of the day...I decided to scalp some puts towards the end of the day. I bought the Sept. 600 put for 14.00...Unfortunately...I never closed the deal and she finished up at about 13.40...I decided not to take the loss and to let her ride over the weekend preparing to make a second buy if I have to...

I know this was not a signal of yours therefore I realize that you most likely would not have played this option at this time...BUT...On a scale of 1-10...how good or bad would you rate this play?

Still looking for the 11,800's before downside?

Besides oil and the dollar...what is making this market move up?

Have a great weekend!

Michael
"Can I scalp a few cents here and there?"
"I should have held my calls"
"Can I find an edge to trade?"
"Will we hit our high DOW projections?"

These are what I was pondering.

I sat there and watched the market sit still at around 180+...since the DOW did slowly rise after Bernanke spoke and being that the futures were still over 200+ (I don't even though if that is significant or not...to me it was)..I felt as though the market was poised for more upside...

So what do I do...I purchase 10 AUG. exp calls for 2.20...about 7 minutes later...I could have sold them for 2.60 and made a quick $400...Instead...I waited another half hour only to watch the market slowly drop...I ended up selling them for 1.80 and losing $400...I was not a happy camper. A few things were bothering me...

#1 - I was saying to myself..."Floyd would probably not do this"
#2 - "I should have took my 40 cents when I had the chance"
#3 - "You know better than to hold an option like that for too long...time decay is much to fast on the last day"

#4 - ON THE ONE MINUTE CHART...I RECOGNIZED A NICE ROUND DOUBLE TOP FORMING...WHICH WAS A GOOD INDICATOR OF SOME DOWNSIDE POTENTIAL...PLUS MACD WAS SHOWING BIG TIME DIVERGENCE.

The charts were showing edge to the downside...yet I just sat there and waited. Eventually...after I took my $400 loss...I stopped sulking and came back to my senses. I then said to myself..."why don't you get in on the downside?"..."If you are so sure of your technical analysis...why not just get in?"

My response..."Because I'm only sure when I DON'T ENTER THE TRADE!" I felt that if I did get in the trade...it would reverse on me...Like the market has a personal vendetta against me.

So I watched...and it kept slowly falling...just like I predicted it would. And it got me more irritated.

So I said to a quick prayer to God...I asked for a calm spirit...I apologized for acting like a jerk this morning and I asked God to help me see the market for what it is...not what I think...

When I came back to the screen...a thought came to me..."This is probably just a 50% Fibo retracement like the other day. I used my charting tool on the OEX and the DOW...and noticed that both were a significant distance away from the 38-50% retracement line. I felt as though that I still had a good edge so I bought 10 Sept. puts for 14.90 (expensive play...but was only for a scalp). I used the theoretical pricer on my broker platform and at the 50% line of the OEX...price was projected to be at 15.50. I placed my sell order and waited.

About 12 minutes later...I sold for 15.50...a nice $600 profit...canceling out my $400 loss earlier and leaving me with $200 profit on the day.

A few things that stuck out to me:

1. I have to admit that I was a bit frustrated when I place the second trade and I may have been trading out of anger and risked too much money. I don't know if I would have had the guts to take another $400 loss...I may have left my $14,900 out there for a while with the hope of downside...If I am going to use that much for a scalp...I would like a better edge. Even so...I did not feel as uncomfortable as I did with the first trade. I actually felt more uncomfortable with my first trade of ($2200) b/c of the time decay. I don't want to trade options on the last day of expiration anymore.

2. The OEX did bounce off of the 50% retracement line and move to the upside which made me feel even better about my technical analysis. Plus my exit price was pretty much dead on. That made me feel good as well. If I had a some pair of balls I would have purchased some calls after the bounce....BUT...I was glad that I had a profit for the day and I just didn't want to take any more risk. My brain needed a rest. At this point...I would rather not trade and make no money vs. trade and have a chance of losing. I just wasn't feeling in the mood.

3. I noticed that the 50% retracement on the OEX was actually the 38% on the DOW...something I need to remember for the future. They are not always the same...when in doubt...take the shorter target.

I feel pretty good about myself today. I've learned some good lessons. My goal is to feel good about myself all the time...regardless of winning or losing. I noticed that the good majority of trades that I've ever placed so far (using technical analysis) are often times correct. The problem I have is taking profits. I tend to take them too early when I should have waited OR not take them quick enough. Today...I waited too long on the 1st trade and took profits exactly when I was supposed to the second time. So I'm getting there...my goal is to just keep taking profits...leave money on the table and not look back.

It was a good day.

Should I try to grab one more trade before the bell? We may have a double top again!!"

Floyd comments: This trader is learning himself well. Note the emotional struggles as he watched the market, began to trade using the alert as a tool, not the full endgame, and began trading from his knowledge.



Third, we hit profits on each of our new signals last week. Every signal could have been bought and sold profitably.
What makes it difficult to achieve is the emotion in your mind as a trader as to "what should happen" or wanting the "validity of fact" to prove why something is occurring. On Friday our open Sept590C hit 15.48 in top sells, and the Sept600C was also profitable.

This last week especially I noted many subscribers "writing to confirm". Worrries about futures, or the FEDS, or what they had "read", confusion over "how soon will the market hit the tops you suggest", etc.
Trading is interpreting facts and other traders emotions.

NOTE: Level 3 and Advanced Mentoring subscribers: the password protected area of our website has many new videos that Terry took of Floyd teaching the market. Take the time to study and learn from these videos.
There is also a new Dow article, 35 pages of training on how Floyd projects the Dow, available FREE to all Advanced Mentoring and Level 3 subscribers.