by Guest Columnist, Kenneth Reid, Ph.D
Hi… this is Dr. Kenneth Reid from HawkeyeMindset.com
Like tennis, trading is a game of errors. In other words, our success is generally self-limited. The fewer errors we make, the better our outcome.
If your trading method has a potential 60-70% win rate, but on 2 out of 10 trades you execute poorly, it will be difficult to make money as a trader.
So it pays to strive for perfection in those elements that are under our control, since randomness plays such a large role overall.
One of the most common issues traders face is a collection of behaviors I call the “First Mouse Syndrome.”
One reason is that First Mice tend to be excitable and they enter trades too early. It could be from greed, fear of missing out or just plain impulsiveness. Impulsiveness is usually driven by an over-reliance on intuition and an under-utilization of a technical method.
Premature entries lead to taking “heat” because the market has not yet developed internal coherence. The more push-back we experience, the more defensive we get. This leads to micromanaging trades and tightening mental stops.
Unfortunately, this almost always works against the trend trader. The key to trend trading is to give the market sufficient room to breathe once a trend is established.
The Hawkeye Trend and Stops indicator is designed to do precisely this. However, with the three speed settings, you have some discretion in how you apply this indicator. Because first mice prefer to get in early, they will typically set Hawkeye Trend to ‘Aggressive.’
If you find that you are getting stopped out of good trades, you may be experiencing the stop hunting games that typically occur in futures and forex near key support and resistance levels. These games trap and punish First Mice.
The irony is that responsible First Mice stop themselves out willingly because they have been taught to manage risk with relatively tight stops. They want to “keep losses small and let winners run.” But 1 wrong + 1 right = Zero (a breakeven trader, at best.)
If you are getting stopped out and then find that the market often reverses and goes your original way, it may help you to think like The Second Mouse.
The Second Mouse gets the cheese by simply waiting for First Mice to be stopped out before taking action.
First mice tend to get stopped out when the first pullback fails. For example, if they shorted, the market quickly makes a new high and stops them out. . . and then the downtrend resumes.
If they went long, the market makes a new low and stops them out. . . and then the uptrend resumes.
This process creates the common ABC countertrend patterns that occur within trends. If your stop is too tight you will get stopped out on the A-leg of the ABC. If this is happening for you, consider adjusting Hawkeye Trend and Stops to the Conservative setting.
Moreover, it’s usually not a good idea to use mental stops to manage positions in a trend. Chances are you will react to random noise, micromanage your trade and choke it off.
You can watch a free video that discusses the First Mouse Syndrome by following the link below. It’s the latest video in the Hawkeye Mindset Mastermind Breakthrough program, which gives you highly practical weekly videos on trading psychology. Check out HawkeyeMindset.com for more information.
Download the free video sample here:
To learn more about volume and volume spread analysis, and to see more examples and live trade setups be sure to join me in the next free LIVE Hawkeye Demonstration Room held every Wednesday. Open to all. Click this link for more information or to join us in class.
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Hawkeye Traders, LLC