Trading Psychology

Every time I "blow up" I get to work on both my model and my psychology. I try to find tweaks to the model that would have given me a more definitive signal. For example the problem this time was that at the start of the Friday session the model was saying to be short at the close. But that was based simply on one of the stochastics I follow (slow(5,3)) crossing over (which is one of the sell rules when we are overbought - a state where the stochastics are above 80. But if the market rallies that signal is negated. And that is exactly what happened. So based on that indicator there was no sell on the close signal at the end of the day. But I have other indicators to signal when to sell in the overbought state. One of them is based on the forecast of the stochastic for the next day and its moving average. Direct forecasts of the stochastics are generally poor indicators - not a lot better than a random walk in the one step ahead forecast. But when there is very strong momentum in the market they have enough time to eventually give the correct forecast. Anyway, I tweaked this indicator and backtested it and this seems to work much better. It is saying sell on Friday's close. So overall I would say one could take a short position but cautiously.

But the other half of the story is that no indicator said I should go short before the market close on Friday! My impatience in wanting to be contrarian and bearish as soon as possible is what got me into a classic bear trap when what I saw as a head and shoulders formation over the last three trading days did not play out as expected. So the other half of the work that needs to be done is on my psychology. There are lots of good resources in print and online on trading psychology. These are some of the websites I know about:

The Other 2%
Afraid to Trade
Trader Feed - Brett Steenbarger's website.
Trading Psychology - Bruce Hong's website.