The psychology of trading can be difficult and requires traders to sometimes go against the grain, notes Jeff Greenblatt.

This week I want to continue our discussion about trading from psychologically difficult places on the chart but also an important shift in market psychology. Last Wednesday you’ll recall the futures started selling on the dovish Federal Reserve announcement concerning interest rates. Seasoned traders know its not the news event that is important but the reaction to it.

We’ve been told the market is getting a free pass to go higher because of the dovish Fed stance since Chairman Jerome Powell came along and said there would be no new rate hikes this year. If that’s the case, why did the market start selling after the announcement?

Obviously, the interest rate saga is getting old and boring. The Fed froze its tightening regime but was not ready to suggest rate cuts, especially with stronger GDP and jobs numbers. That’s the reality of the situation. Most of you know about a book written in 1841 by Charles Mackay called “Extraordinary Popular Delusions and the Madness of Crowds.” There it was the next morning I saw an article on the CNBC website that stated markets sold after the Fed because traders were disappointed Powell didn’t mention a rate cut.

A rate cut? They were serious. Didn’t they just tell us the market is getting a free pass because they won’t be raising rates any time soon? Isn’t the market back at all time highs? Didn’t some money manager just a couple of weeks back mention on the same CNBC website it was the selloff from October through December that helped us avoid a recession? Didn’t Q1 GDP come out above 3% and didn’t the unemployment rate set a 50-year low?

Why do they need to cut rates when the market is going parabolic? In normal times in late stage business cycles, that’s precisely when they hike rates. My view was since the market baked rates in the cake it was ready to move on to other issues like poor Google earnings and the Chinese trade drama. That’s exactly what happened as the President announced over the weekend, he was ready to hike tariffs (not interest rates) on his artificial deadline this Friday.

The market is moving on and the issues confronting us as the four-year cycle gets close to maturity will continue to wake the market up from its complacency. The question is whether you will be ready.

What is the single most important issue confronting the intermediate level trader as he/she seeks to go to the next level? We could talk about a series of bubbles throughout this century and many mistake a one-way market for skill. That’s true. I’ve heard 90% of the people lost 90% of their money when the bubble of all bubbles popped in early 2000. But let’s take this deeper. Our brains are wired for pleasure, not pain. That’s why aspiring traders only take trades in places that are psychologically comfortable on the chart. People wait for the move to confirm, then get in at the worst possible risk/reward ratio. The market then comes back on them and they get caught like a deer in the headlights. It’s happened to all of us at some point in our development. But the idea is take trades in places that are psychologically difficult. You know that because you see where most moves originate. But knowing and doing is two separate issues. As traders we play the ‘if only’ game. If only we could’ve figured out how to get into a certain move at the right place and time. That’s the catch.

The question is how to do it? Feeling the fear and doing it anyway doesn’t work. People don’t like having to operate under a such stress. That’s what drives most aspiring traders out of the business. What is the solution? It’s a process of renewing your mind to recognize and develop conviction to turn fear into excitement by learning to recognize opportunity.

How do you do that? I’m sure there are many ways but I know of one. Here’s a recent example from heating oil. We had a move off of the low and a high at 2.0540, which was a 31% retracement in 32 bars from the prior high. I thought that setup would get a retest of the bottom and quite possibly a new low for the pattern. Instead it got near the low and decided to turn up in a place that is likely too far for people looking for an ordinary retracement. In this case the square out vibration was the ‘tell’ where the market told its intention only if you know what to look for. The price at the low is 2.031 after the 31% retracement (see chart).

31% retracement

You can see it’s a perfect bullish engulfing candle on the reversal where the bulls get the upper hand. We also know that by not picking the bottom after a second or B wave test of the low if it did go, it could be a third or C wave up, which is the best part of the move.

Kairos revealed the tell. By recognizing these tendencies, we can renew the mind from fear to excitement. Yes, you’ll still get butterflies taking a trade like this. It is a process of adjusting the mind to recognizing these tendencies and it doesn’t happen overnight.  Here’s a secret. Professional athletes and performers on Broadway also get butterflies. It’s a healthy respect for the institution or in this case realizing the market is much bigger and doesn’t know we exist. But you can be rewarded for getting into flow with the market (in this case the key influencing number is 31) and not getting in after the move becomes obvious.