Turning fear levels into testable rules with a psychological matrix

A matrix for coding market emotion

A psychological matrix is a defined set of emotional market states that can be observed, measured, and turned into testable trading rules. It is presented as a way to convert subjective market emotion into defined states that can be coded as studies, flow charts, indicators, or complete trading procedures.

Statistics are treated as classified numerical milestones. Knowledge is treated as the ability to analyze those observations and apply them to the right side of the chart.

Fear as the primary modelled emotion

Fear is isolated as the primary emotion to model. Anger and anxiety are treated as secondary self-preservation responses that appear after a trade goes wrong or a winner is exited too soon.

Fear is located near extremes of price. It is described as driving fluctuations around an average price that matter for entry and exit timing.

Primary and secondary fear levels

The matrix defines three primary fear levels: bull fear, point of balance, and bear fear. It also defines four secondary levels: overbought, bull bias, bear bias, and oversold.

Bull fear is a rising-market state in which buyers chase participation and short sellers rush to cover. Bear fear is a declining-market state in which sellers chase participation and buyers rush to exit. The point of balance is the indecision zone between bull fear and bear fear.

Mapping fear states onto price structure

High-to-high relations are used to mark the shift from bull bias to bull fear. Low-to-low relations are used to mark the shift from bear bias to bear fear.

The mean of those two levels locates the point of balance. That point of balance is treated as a mean of the two fear-derived levels.

A four-bar fear pattern as one procedure

A four-bar fear pattern is a short candlestick sequence used to mark a fear-state transition that can be coded as a complete signal procedure. The sequence was coded as a mechanical system.

The procedure was initially checked with no stops and without optimizing the rules to the test sample.

How the rules were checked

Long single-market tests over 10 or 20 years are contrasted with grid testing. Grid testing evaluates a rule set across many markets on limited history per instrument instead of optimizing one contract over a long single-market sample.

That grid is typically described as about 25 futures markets and 200 stocks, with only a few years of data per instrument.

Chart examples of four-bar fear signals in coffee, soybeans, heating oil, and the Canadian dollar were used to argue that the original exit rule was too tight and left unused follow-through on the table.