Minding your P's & Cues (Positions/Planning and Market Cues)

 

In this post, we'll delve into the facets of trading from an unconventional perspective. My guiding principle has always been "structure precedes execution". 'Minding Your P's and Cues' encapsulates the importance of managing your positions and cues, derived from structural sequences, to maintain a comprehensive understanding of trading activity. This management extends beyond merely maintaining risk within the market; it also considers how that risk physiologically impacts you, affecting your ability to manage or even engage with the trading activity at hand.

Here is the roadmap for our discussion:

1. The Body's Response to Uncertainty in Trading
2. Planning for the Purpose of Interacting with Market Activity
3. Preparation Outside of Market Activity
4. Live Responses and On-the-Fly Adjustments

 

The Body's Response to Uncertainty & Trading:

 

Intraday trading precipitates a cascade of neurological and physiological responses, all of which greatly influence decision-making, especially in situations that require deciding between securing profits or minimizing losses. Successful trades ignite the brain's reward circuitry, which includes the ventral tegmental area, nucleus accumbens, and prefrontal cortex, resulting in dopamine release and eliciting a sense of gratification (1). This rewarding feedback encourages the repetition of profitable strategies and heightens risk-taking behaviors.

 

However, the principle of loss aversion—an evolutionary bias favoring threat avoidance—leads traders to frequently secure profits prematurely, even when further gains are possible (2). In contrast, unsuccessful trades stimulate the amygdala, which activates the sympathetic nervous system and the hypothalamic-pituitary-adrenal axis, escalating stress levels and inducing a compromised ability to manage risk (3). This heightened stress response significantly influences the decision to cut a losing trade. Cognitive biases such as the 'sunk cost fallacy' can muddy the waters, causing traders to hold onto losing positions in hopes of a reversal (4).

 

Understanding these physiological and neurological responses is crucial, as they are integral to the trading decision-making process. Emotional regulation, risk perception, and awareness of cognitive biases are consistently at play (1). This understanding, combined with a clear inventory structure, allows for informed planning. If the structure remains nebulous in your process, it is advisable to seek guidance. Once a plan is crafted, assess the market activity and act within the planned zones, recognizing these as "risk ranges" rather than single fixed points. This mindset can help temper the activation of stress triggers.

 

Several factors can attenuate an overactive sympathetic response, which can drastically affect traders' decision-making. These factors can be classified into three categories: pre-emptive measures, live sequences, and preparatory steps.

 

Pre-emptive Measures:

1. Regular physical exercise has been found to reduce stress and anxiety and help regulate the amygdala’s response. Smith et al., (2018) revealed that physical activity mitigates stress-induced amygdala activation. (1)
2. Mindfulness-based stress reduction (MBSR), a program utilizing mindfulness meditation, can alleviate stress and anxiety. Research shows that MBSR reduces amygdala reactivity to emotional stimuli. Regular mindfulness meditation assists individuals in becoming more aware of their emotions and responses, improving their ability to manage stressors. (2)
3. Sleep deprivation typically enhances amygdala reactivity, underscoring the importance of maintaining good sleep hygiene to regulate amygdala responses and reduce the impacts of stress. (3)

 Live Sequences:

1. Deep diaphragmatic breathing fosters calmness and focus by stimulating the parasympathetic nervous system, thereby countering the stress response. (4)
2. Progressive Muscle Relaxation (PMR), a technique involving the tension and subsequent relaxation of various muscle groups, induces immediate relaxation and mitigates the physical symptoms of stress. (5)

Preparation:

Returning to the fundamentals of session planning helps to alleviate FOMO anxiety and concentrates attention on areas of interest. During a planning session—and while visualizing the live auction entering an area of interest—consider the following questions:

3. What activity do I anticipate in this area? Is it occurring?
4. Where should my risk limit be when entering this area?

In the preparation phase, the goal isn't necessarily to mitigate physiological responses but rather to preempt their necessity. Establishing a framework beforehand helps to reduce the likelihood of sympathetic activity. Nevertheless, if such activity does occur, the strategies mentioned above can be employed to either surmount or lessen its immediate influence.

Planning for the Purpose off Interacting with Market Activity:

As previously stated, the principle of "Structure Precedes Execution" is crucial. Let's delve further into this topic. There inevitably arrives a point when one recognizes and understands the existing structure, including its boundaries and the suitable exit point. It's important to identify the structure and begin refining and enhancing it.

A significant question rises: why do people blow accounts on days with minimal rotation? A potential answer is that they might struggle with structuring or understanding the existing framework. Recognizing this shortfall is vital and, once identified, it should be rectified.

Furthermore, guidance from a prominent social media account recommending positioning, yet failing to articulate associated risks and offer clear information about entry points, raises concerns.

Let's be candid, as traders or scalpers of futures, we all work within varying timeframes. A lack of clarity about when an approach is failing, or a deficiency of transparency serves as a red flag. My experience leading zoom sessions has taught me one vital lesson: one must understand where their interest lies, recognize when a situation is favorable (and act accordingly), and acknowledge that predicting the trajectory or extent of a trade is virtually impossible.

"Structure Precedes Execution" is a fundamental principle. Yes, you may encounter stop losses on your journey. However, believing in a foolproof, effortless solution is detrimental. Aim to enhance your session planning skills, manage emotions through strategic planning and bracketing, and only participate when it coincides with a setup.

Where should you start?

1. Understanding the Opening Range:

a. Is there a challenge in breaking through one side of this range?

b. Are we gaining momentum outside the range, generating single prints?

c. Which party benefits more from each upward and downward rotation?

2. Behavior of the Overnight Session:

a. Does a prominent Low Volume Node (LVN) [or more than one] reveal noticeable initiative activity on the volume profile?

b. Did the overnight session test the lower/higher structure that responded appropriately leading into the open?

c. Where are we positioned relative to the Overnight High/Low at the opening?

3. Opening Print and Volume Profile:

Based on the opening print and volume profile, are we developing a symmetrical Gaussian curve, or are we beginning to leave LVNs? If the market has developed LVNs toward the end of the session, where is the value? This acts as the settling point for inventory for the subsequent session.

4. Success in Breaching Prior LVNs:

After the open, have any single prints or LVNs from live activity (or from the prior session) been traversed? If so, this could suggest a sense of balance, otherwise, a unilateral move in price response may persist.

These points, while not exhaustive, serve as key starting blocks. Each trader has unique prerequisites for trading; these don't invalidate others but provide different perspectives on the activity. Reducing and maintaining constant variables is crucial for a reliable understanding of activity. My emphasis on the volume profile stems from its utility in my approach, but it's not the sole method. I'll continue to share insights based on the stringent variables I evaluate.

Preparation Outside of Market Activity

As detailed in Section 1, a combination of consistent physical activity, mindfulness-based stress reduction (MBSR), and managing sleep deprivation sets the groundwork for enhancing one's capacity to assess and judiciously filter planning aspects of preparation. While these elements have been elaborated upon, it's equally crucial to take into account extrinsic stressors that occasionally disrupt daily life. These may include dealing with the grief of losing a loved one, navigating relationship or professional conflicts, or addressing anxiety triggered by various external events.

 

Addressing and resolving these stressors, which were not previously discussed in Section 1, is integral to maintaining the clarity of analytical processes when interacting with the day-to-day environment, itself a physiological stressor. Neglecting to do so could impair judgement, create irrational justifications for risky exposures, and potentially accelerate a negative trading spiral.

 

Suggestions for preparation beyond market-related activities include:

1. Establish a sleep schedule that allows for consistency in your rest pattern. Strive to unwind and prepare for rest on a regular basis, irrespective of the actual amount of sleep obtained.
2. Plan designated times for physical activity and adhere to these time slots. Given the fact that the market operates more hours than not, it's vital to resist the tendency to prioritize screen time over physical movement.
3. Allocate small, manageable blocks of time for breathing and grounding exercises. These exercises should be conducted before making judgements pertaining to structural planning.
4. If you are in the midst of grieving, dealing with relationship disputes, or handling work-related tasks that induce anxiety, take a break from market interaction until these issues are resolved. The sense of calm and resolution derived from addressing these concerns head-on will foster clearer thinking during your analytical processes.

 

My personal routine, for instance, involves devotional reading and reflection. However, everyone is different and might prefer alternative approaches. The key point is to have a systematic process that fosters mental organization before contending with multiple stressors.

Live Responses and On-the-Fly Adjustments

It's unrealistic to believe that engaging with the live market and taking on risk wouldn't elicit any physiological response. Emotions, largely governed autonomically, are often beyond our direct control. Common situations include:

1. "I passed up the trade because it felt too risky, even though all necessary elements were present." This is a scenario where many traders succumb to FOMO, or the Fear of Missing Out, and impulsively pursue a trade entry outside a predefined risk zone. What's essentially happening, beyond emotional responses, is that you're allowing yourself to accept a broader risk, which often leads to retrospective thoughts like, "upon reviewing this trade, I should have..." By identifying a zone of interest, observing the desired response, and opting for a rebid or reoffer, you are effectively assessing the situation before making a move. This approach helps curb FOMO and trains you to operate within the boundaries of defined risk.
2. "I adjusted my stop because I believed it would work out." This situation ties back to the importance of defined risk. Once the trade deviates from the set parameters, it should be an indication to exit. Although re-entry is always an option, there's no definitive way to predict how much further the trade will move against the initial position.
3. "I took my profit too soon." Assigning a specific target to your entry helps manage risk regardless of the outcome. In the context of multi-lot sequences, it's certainly advisable to secure some profit as a risk management measure for the remaining position. This approach also opens up the possibility of repositioning at the origin point, given that the market behavior aligns with the initial trade hypothesis.

 

In Section 1, we explored the concepts of deep diaphragmatic breathing and progressive muscle relaxation as tools for managing intense physiological responses. Let's now delve into how these practices operate in relation to the topics we've just discussed.

Box breathing, alternatively known as four-square breathing, serves as a simple, yet effective technique that aids in stress management and enhancing concentration. This method works to harmonize the autonomic nervous system, a key regulator of automatic physiological functions such as heart rate, digestion, and salivation.

The autonomic nervous system consists of two main subdivisions: the sympathetic nervous system, often linked with the 'fight or flight' response, and the parasympathetic nervous system, which is tied to the 'rest and digest' response.

During moments of stress, your sympathetic nervous system activates, resulting in increased heart rate, elevated blood pressure, and heightened levels of the hormone cortisol. While beneficial in immediate response to danger, chronic activation of this system can contribute to health concerns such as anxiety, depression, and cardiovascular disease.

In contrast, box breathing triggers the parasympathetic nervous system, aiding in the neutralization of the stress response, slowing of the heart rate, and reduction of blood pressure. This, in turn, can support you in regaining control, calming your thoughts, and facilitating more rational decision-making, even within high-speed environments.

Research lends credence to the stress-dampening benefits of measured, slow breathing techniques. For instance, a study conducted by Ma et al. (2017) discovered that slow breathing exercises could lessen psychological stress and adjust cardiovascular functions, promoting a decrease in heart rate and blood pressure (4).

Additionally, a review by Zaccaro et al. (2018) suggested that slow breathing exercises, performed at approximately six breaths per minute, could shift the balance between the sympathetic and parasympathetic systems, alleviating stress and anxiety while enhancing cognitive performance (6).

The efficacy of box breathing aligns well with these findings, indicating its usefulness as a straightforward, practical tool to mitigate stress and encourage focus in rapidly paced environments.

Here is a demonstration of box breathing: Assume a seated position and begin by slowly inhaling through your nose for a count of 5 seconds. Hold your breath for another count of 5 seconds, followed by slowly exhaling through your mouth for a count of 5 seconds. After exhaling, hold your breath once more for a count of 5 seconds. This cycle constitutes one "box breath". This cycle should be repeated as a multiple based upon individual needs for regulating the heartrate.

Intraday trading is a complex undertaking that requires individuals to grasp not just the fundamentals of risk, entry, and planning, but also to comprehend the physical and physiological effects involved. This understanding is essential to foster the most conducive environment for the assimilation of market-generated information and effective trade management.

 

References:

(1) Smith, J. C., Tart, D. S., Focella, E. S., Loftus, A., & Amir, N. (2018). Attention bias modification reduces neural correlates of response monitoring. Biological psychology, 135, 1-7.

(2) Desbordes, G., Negi, L. T., Pace, T. W., Wallace, B. A., Raison, C. L., & Schwartz, E. L. (2012). Effects of mindful-attention and compassion meditation training on amygdala response to emotional stimuli in an ordinary, non-meditative state. Frontiers in Human Neuroscience, 6, 292.

(3) Yoo, S. S., Gujar, N., Hu, P., Jolesz, F. A., & Walker, M. P. (2007). The human emotional brain without sleep—a prefrontal amygdala disconnect. Current Biology, 17(20), R877-R878.

(4) Ma, X., Yue, Z. Q., Gong, Z. Q., Zhang, H., Duan, N. Y., Shi, Y. T., ... & Li, Y. F. (2017). The Effect of Diaphragmatic Breathing on Attention, Negative Affect and Stress in Healthy Adults. Frontiers in psychology, 8, 874.

(5) Vancampfort, D., De Hert, M., Knapen, J., Wampers, M., Demunter, H., Deckx, S., ... & Probst, M. (2011). Effects of progressive muscle relaxation on state anxiety and subjective well-being in people with schizophrenia: a randomized controlled trial.

(6) Zaccaro, A., Piarulli, A., Laurino, M., Garbella, E., Menicucci, D., Neri, B., & Gemignani, A. (2018). How Breath-Control Can Change Your Life: A Systematic Review on Psycho-Physiological Correlates of Slow Breathing. Frontiers in Human Neuroscience, 12, 353.