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Pelrod
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My name is Phil Elrod and I am a long-time futures trader and a resident of Richardson, Texas. Being a plain spoken Texan, I like to "tell it as it is". I am a short term trader and my method and system is based on technical analysis. I am a former member of the Easy Language group at... More
My blog:
Trading Between the Lines - See the Music of the Market
My book:
See the Music of the Market
  • It's All About Psychology

    It's All About Psychology

    A friend of mine, and would like to be trader, reads my blog regularly and called last evening to complain that I had spent too much time on "that psychology thing" when I should be talking about trading.

    After listening to his spiel for a time, I finally had a chance to respond and told him, "If you ever want to learn to be a trader the first thing that you need to know - and never forget - IT IS ALL ABOUT PSYCHOLOGY!"

    Obviously, he needed elaboration so I gave him my full basic course on trading - Trading 101:

    The market is moved by the mass psychology of all market participants. All the technical indicators in the world are devised in an attempt to predict what that market psychology might do in the near future - based on what it has done in the past. There are no magic indicators that always tell you, with absolute accuracy, what the market is going to do next. But there are technical indicators that reliability indicate to you what the market has done in the past under similar conditions. For the trader that is as good as it gets. So never forget that the market is moved by psychology - and psychology is controlled by human nature and the more you understand about what human nature does in given situations the better you will be at interpreting technical indicators while trading.

    A friend of mine, a bestselling author of books about trading, is Dr. Alexander Elder. The "Dr" stands for medical doctor - more specifically - psychiatrist. Professionally, before he became a well known trader and author he was a master of human psychology analysis. Alex once said, "The crowd may be stupid, but they are stronger than you are." It is one of my most memorable quotes from anyone, ever. Hardly a day goes by that I do not remember that quote, because I tend to be a rational thinker and the market is so often irrational - for a time.

    So if you want to learn to be a great trader you need to understand as much about human psychology as possible - both of the herd - and of yourself.

    Feb 13 2:41 PM | Link | Comment!
  • Being Human

    Being Human

    My last two posts have been on temporary insanity and how it can affect the markets. Before I leave the psychiatrist's's sofa and get back to the trading desk. There is one more psychological phenomenon I would like to discuss. It came to mind recently when I lost more than I usually do on a couple of trades in the E-Mini. I was doing my usual autopsy on those trades to try to figure out what I did wrong and it soon became apparent.

    Before I tell you what the problem was, I must regress a tiny bit and tell you what is involved in the decision making process for a trader - particularly a technical trader like me. There are several charts, of different time frames, and each chart has a variety of technical indicators. Generally, the process of entering and exiting a trade is determined by interpreting these charts. It is not easy at times - particularly when the signals are mixed - and the time frames show conflicting patterns. Such was the situation when I made my two trades that cost me more than they should.

    The reason was pretty simple. My interpretation of the charts was flawed. The reason it was flawed, is that I am human - and did not compensate for it. Sound weird - well, it is pretty simple. We humans look at a situation and tend to see things that confirm our predisposition far more clearly than things that might conflict with our predisposition. Said another way, humans tend to see what we want to see.

    In my trades, I had a predisposition that the market was going up as a result of temporary insanity - and I still believe that. The problem was that I ignored obvious signals that the insanity had not yet run its course - and ignored them - and the market made me pay for it.

    The market, by definition, is always right - even when it is temporarily insane.

    Trading with a good trading system is like piloting an airplane - generally safe - but can be very unforgiving of even small mistakes. I should know this - I have been trading for many years - and for many years I piloted a small airplane.

    It seems like we humans never get so good at anything that we cannot find a way to screw it up now and then. As my parents always said, "Live and learn".

    Feb 12 9:57 AM | Link | Comment!
  • Temporary Insanity Part II

    Temporry Insanity Part II

    Temporary Insanity - Part Two

    Previously I wrote of temporary insanity in a market.

    At the time I used the USDJPY FOREX pair as an example.

    Had I waited two days to write that article, I would have had another, perhaps even better, example of temporary insanity in a market. I am referring to the E-Mini S&P futures contract.

    (click to enlarge)

    Figure 1 E-Mini 25,000 Ticks/Bar - January 27 thru 30,2014

    I have marked the beginning of each day with a white vertical line.

    The principle fundamentals the market must digest and deal with this week are:

    New Home Sales - Monday 7:30 AM CST

    Durable Goods Orders - Tuesday 7:30 AM CST

    FOMC Meeting Announcement - Wednesday 1:00 PM CST

    GDP -Fourth Quarter 2013 - Thursday 7:30 AM CST

    Jobless Claims - Thursday 7:30 AM CST

    You can go to Bloomber.com and view the reports for the above list of events. I will comment on them briefly.

    ON Monday the housing report was not good - and housing has been counted on to move the economy forward. This is not a good sign for the economy as a whole, and for the stock market in general.

    Notice that the E-Mini dropped from around 1790 to about 1768 before rebounding to the high 1780s only to fall again to the low 1770s.

    This indicates to me that the market is nervous. The FOMC meeting is looming on Wednesday and everyone knows (or should know) that this market has been rising because of The FED monetary policies (printing more dollars).

    ON Tuesday, durable goods reported and it was not good - logic would indicate that the market should view this as a negative and retreat a bit (or at least not go up).

    Instead the market chose to rise from the mid 1770s all the way up to 1800 by the end of the 24 hour day.

    The FED is between a rock and a hard place and most everyone expected it to announce another 10 billion "tapering" of its bond buying program (printing more dollars) - and keep is zero interest rate policy (ZIRP) for the foreseeable future.

    The FOMC meeting announcement finally came at 1:00 PPM CST and was pretty much as expected. The FED report mentioned an improving economy (they must smoke the really good stuff at these meetings).

    The market continued a major sell down that had started in the overnight session. The sell down did not stop until the 1768 area.

    Finally, on Thursday, the fourth quarter 2013 GDP reported an increase (a look inside the report reveals mediocre results) and Jobles Claims were higher than expected. But the market started a rise that has it back up into the 1790s as we write this.

    So where is the temporary insanity?

    A short term trader would say that a rise in the market, in face of weak economic data and a forthcoming FOMC announcement that is not likely to be supportive is substantially short of a rational action - and a situation that will be temporary and likely to be corrected sooner than later.

    Tomorrow we get Personal Income and Outlays at 7:30 CST. Unless the government masseur works overtime, I do not see how this report is going to be very good. Of course the market will decide what it wants to do after the report is released - I will be sitting there waiting anxiously waiting to see what the market decides.

    Actually we would venture to say that the current rise in the market may be viewed as a relapse in temporary insanity - and likely to result in a significant retreat in the very near future. But temporary insanity can last much longer than expected - but it is never permanent - because if it were permanent it would not be temporary.

    I personally like these market conditions becsue the volatility presents so many opportunities to make profitable trades. But trade with caution - volatility is a double edge sword.

    Feb 01 2:54 PM | Link | Comment!
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