This is a 5-min chart of the EUR/USD using the CMC Markets platform, and offers a glimpse of how I trade with 5-min charts. Price action is useful and universally applicable because it can work on most counters and most timeframes, even if the products do not have volume. 

This was quite a decent trading day, with 1 scratch trade and 3 winning trades. I started trading at 3pm, which is the time when European markets turn active, but had to end the day early (closed out everything by 6pm) because of dinner plans. 

Today was pretty much of a ranging day, which was why I employed a trend channel strategy, using price action to pinpoint the precise entry and exit points. The day started off with a bull flag which failed, forming the start of the channel and providing the setup for the next entry. After that, it was pretty much trading within the range.

One thing to note is that although the bull flag failed, its projected target was hit almost to the precise tick later in the day, showing that classical chart patterns can be traded in different ways, as part of a more advanced price action setup.

Program Graduates: Please refer to the Synapse Forum for real-time postings and more in-depth discussion of the setups.

Loss aversion bias was developed by Daniel Kahneman and Amos Tversky in 1979 as part of the original prospect theory. Basically, it suggests that psychologically, the possibility of a loss is on average twice as powerful a motivator as the possibility of making a gain of equal magnitude.

In short, it suggests that people woud prefer to avoid a loss to realizing a gain.

Loss aversion can prevent people from cutting losing trades, even when they see no prospect of a turnaround. Some industry veterans have coined a diagnosis of “get-even-itis” to describe this widespread affliction, whereby a person waits too long for a trade to rebound instead of cutting their losses. This is dangerous because the best response to a loss is to cut it fast and move on to a better trade.

Similarly, loss aversion bias can make traders dwell excessively on risk avoidance when evaluating possible gains, since dodging a loss is a more urgent concern than seeking a profit. When their trades start to show a profit, loss-averse traders hasten to lock in profits, fearing that, the market might reverse itself and rescind their profits.

The problem here is that exiting too early to protect gains severely limits upside potential. This prevents traders from catching the big moves.

What is the best solution for this?

This is where the importance of the stoploss comes in. If a trader is disciplined, and has a preset stoploss point, the trader will exit a losing trade once the stoploss point is breached. This removes any blind hope of a rebound, and by squaring off positions, it puts the trader in a neutral frame of mind to enter the next trade, and at the same time frees up the capital for it.

“Win as though you were used it to, lose as if you enjoyed it for a change.” – Ralph Waldo Emerson

Today, we were invited to give an exclusive seminar to the members of STATS (Singapore Technical Analysts & Traders Society), where we shared our prototype of the Trader Blueprint. With a focus on price action and psychology, we shared how to nurture a new trader into a professional via our blueprint for success.

This included 7 important attributes starting with the letter “M”, which are all required to become an excellent trader.

  1. Masterplan
  2. Market
  3. Method
  4. Money
  5. Mindset
  6. Mastery
  7. Mentoring 

Many people spend their whole lives searching for the holy grail of trading, but fail to realise that the method is merely one of the 7 M’s. That is why we created an all-rounded program to focus not just on a proven methodology, but also include the other aspects of trading.

Stay tuned for our upcoming seminars!

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For program enquiries, please email info@synapsetrading.com

Confirmation bias refers to a type of selective perception that emphasizes ideas that confirm our beliefs, while devaluing whatever contradicts our beliefs. This can be thought of as a form of selection bias in collecting evidence to support certain chosen beliefs.

For example, you may believe that more red cars drive by your house during the summer than during any other time of the year; however, this belief may be due to confirmation bias, which causes you to simply notice more red cars during summer, while overlooking them during other months. This tendency, over time, unjustifiably strengthens your belief regarding the summertime concentration of red cars.

 

 

To describe this phenomenon another way, we might say that confirmation bias refers to our all-too-natural ability to convince ourselves of whatever it is that we want to believe. We attach undue emphasis to events that corroborate the outcomes we desire and downplay whatever contrary evidence arises.

For traders, this is dangerous because traders who are entrenched in their opinion will only actively seek out information that confirms their opinion, while ignoring those that do not. This is especially true for traders who rely heavily on indicators, since many indicators will give conflicting signals, and it is not hard for a trader to find those indicators which support a chosen viewpoint.

Another hazard comes in the form of marketing gimmicks and market gurus, who like to make a lot of (absurd) forecasts based on their “sure-win” trading method or system. To newbie traders, they may appear to have a very high success rate, mostly because people want to believe the guru, hence they will celebrate his successful predictions while ignoring his less-accurate (or completely off) forecasts.

What is the best solution for this?

Once again, objectivity is necessary to see both sides of the coin, and the best way if you want to test if a method works is to record every signal (whether it is a gain or loss), and not just record those instances where it worked, while ignoring those times when it did not.

“It is the peculiar and perpetual error of the human understanding to be more moved and excited by affirmatives then by negatives.”

– Francis Bacon

 

The selloff continues in the US markets, as the Dow and S&P 500 dropped for a fifth day, with the pullback coming on the cusp of earnings season. This slide marked the S&P 500’s worst day since December 8. The declines were the largest losses this year in terms of both points and percentage drops for each of the three major U.S. stock indexes.

All S&P 500 sectors ended solidly lower, with industrial and materials names suffering the biggest drops. About 80 percent of shares listed on the New York Stock Exchange and the Nasdaq Stock Market ended lower.

Concerns about European debt have resurfaced and could be a catalyst for further declines as the yields on riskier Italian and Spanish debt climbed. Alcoa climbed 5.4 percent to $9.82 in extended trading after the aluminum maker reported its quarterly results.

The CBOE Volatility Index (.VIX) jumped 8.4 percent to 20.39, and was up for the eighth straight day, its longest streak of consecutive gains in nearly nine years. At its session high, the VIX touched 21.06 – up almost 12 percent for the day.

From the chart of the S&P 500, the next level of support is around 1,340, which would represent a correction of about 5.7% from the high. Today’s selldown could be the first leg of a 2-legged pullback which usually follows such a wedge pattern. This bearish spike has changed the nature of the market, confirming the one-sided bearish sentiment.

Avoid going long for now, but get ready to do so when the selling wave ends. Be aware of the major news events, and stick with the trends. ”May the odds be ever in your favour”.  xD