THE MARKET’S PERSPECTIVE
For the most part, a typical trader’s perception of the risk in any given trading situation is a function of the outcome of his most recent two or three trades (depending on the individual). The best traders, on the other hand, are not impacted (either negatively or too positively) by the outcomes of their last or even their last several trades. So their perception of the risk of any given trading situation is not affected by this personal, psychological variable. There’s a huge psychological gap here that might lead you to believe that the best traders have inherent design qualities in their minds that account for this gap, but I can assure you this is not the case.
Every trader I’ve worked with over the last 18 years has had to learn how to train his mind to stay properly focused in the “now moment opportunity flow.” This is a universal problem, and has to do both with the way our minds are wired and our common social upbringing (meaning, this particular trading problem is not person-specific). There are other factors relating to self-esteem that may also act as obstacles to your consistent success, but what we are going to discuss now is the most important and fundamental building block to your success as a trader.
THE “UNCERTAINTY” PRINCIPLE
If there is such a thing as a secret to the nature of trading, this is it: At the very core of one’s ability 1) to trade without fear or overconfidence, 2) perceive what the market is offering from its perspective, 3) stay completely focused in the “now moment opportunity flow,” and 4) spontaneously enter the “zone,” it is a strong virtually unshakeable belief in an uncertain outcome with an edge in your favor.
The best traders have evolved to the point where they believe, without a shred of doubt or internal conflict, that “anything can happen.” They don’t just suspect that anything can happen or give lip service to the idea. Their belief in uncertainty is so powerful that it actually prevents their minds
from associating the “now moment” situation and circumstance with the outcomes of their most recent trades.
By preventing this association, they are able to keep their minds free of unrealistic and rigid expectations about how the market will express itself. Instead of generating the kind of unrealistic expectations that more often than not result in both emotional and financial pain, they have learned to “make themselves available” to take advantage of whatever opportunities the market may offer in any given moment.
“Making yourself available” is a perspective from which you understand that the framework from which you are perceiving information is limited relative to what’s being offered. Our minds don’t automatically perceive every opportunity that presents itself in any given moment. (The “boy and the dog” illustration from Chapter 5 is a perfect example of how our own personal versions of the truth are reflected back to us.)
This same kind of perceptual blindness happens all the time in trading. We can’t perceive the potential for the market to continue to move in a direction that is already against our position if, for example, we are operating out of a fear of being wrong. The fear of admitting we are wrong causes us to place an inordinate amount of significance on information that tells us that we’re right. This happens even if there’s ample information to indicate that the market has in fact established a trend in the opposite direction of our position. A trending market is a distinction about the market’s behavior we can ordinarily perceive, but this distinction can easily become invisible if we are operating out of fear. The trend and the opportunity to trade in the direction of that trend don’t become visible until we are out of the trade.
In addition, there are opportunities that are invisible to us because we haven’t learned to make the distinctions that would allow us to perceive them. Recall our discussion in Chapter 5 of the first price chart you ever looked at. What we haven’t learned yet is invisible to us, and remains invisible until our minds are open to an exchange of energy.
A perspective from which you make yourself available takes into consideration both the known and the unknown: For example, you’ve built a mental framework that allows you to recognize a set of variables in the market’s behavior that indicates when an opportunity to buy or sell is
present. This is your edge and something you know. However, what you don’t know is exactly how the pattern your variables identify will unfold.
With the perspective of making yourself available, you know that your edge places the odds of success in your favor, but, at the same time, you completely accept the fact that you don’t know the outcome of any particular trade. By making yourself available, you consciously open yourself up to find out what will happen next; instead of giving way to an automatic mental process that causes you to think you already know. Adopting this perspective leaves your mind free of internal resistance that can prevent you from perceiving whatever opportunity the market is making available from its perspective (its truth). Your mind is open for an exchange of energy. Not only can you learn something about the market that you previously didn’t know, but you also set up the mental condition most conducive to entering “the zone.”
The essence of what it means to be in “the zone” is that your mind and the market are in sync. As a result, you sense what the market is about to do as if there is no separation between yourself and the collective consciousness of everyone else participating in the market. The zone is a mental space where you are doing more than just reading the collective mind, you are also in complete harmony with it.
If this sounds a bit strange to you, ask yourself how it is that a flock of birds or a school of fish can change direction simultaneously. There must be a way in which they are linked to one another. If it is possible for people to become linked in the same way, then there will be times when information from those with whom we are linked can and will bleed through to our consciousness. Traders who have experienced being tapped into the collective consciousness of the market can anticipate a change in direction just as a bird in the middle of a flock or a fish in the middle of a school will turn at the precise moment that all of the others turn.
However, setting up the kind of mental conditions most conducive to experiencing this seemingly magical synchronicity between you and the market is no easy task. There are two mental hurdles to overcome. The first is the focus of this chapter: learning how to keep your mind focused in the “now moment opportunity flow.” In order to experience synchronicity, your mind has to be open to the market’s truth, from its perspective.
The second hurdle has to do with the division of labor between the two halves of our brain. The left side of our brain specializes in rational thought, based on what we already know. The right side specializes in creative thought. It is capable of tapping into an inspiration, an intuition, a hunch, or a sense of knowing that usually can’t be explained at a rational level. It can’t be explained because if the information is really creative in nature, then it is something that we wouldn’t know at a rational level. By definition, true creativity brings forth something that didn’t previously exist. There’s an inherent conflict between these two modes of thought, that the rational, logical part will almost always win, unless we take specific steps to train our minds to accept and trust creative information. Without that training, we will usually find it very difficult to act on our hunches, intuitive impulses, inspirations, or sense of knowing.
Acting appropriately on anything requires belief and clarity of intent, which keeps our minds and senses focused on the purpose at hand. If the source of our actions is creative in nature, and our rational mind hasn’t been properly trained to trust this source, then at some point in the process of acting on this information, our rational brain will flood our consciousness with conflicting and competing thoughts. Of course, all of these thoughts will be sound and reasonable in nature, because they will be coming from what we already know at a rational level, but they will have the effect of flipping us out of “the zone” or any other creative state of mind. There are few things in life more frustrating than recognizing the possibilities evident from a hunch, intuition, or an inspired idea, and not taking advantage of that potential because we talked ourselves out of it.
I realize that what I’ve just said is still much too abstract to implement on a practical basis. So, I’m going to take you step-by-step through what it means to be completely focused in the “now moment opportunity flow.” My objective is that by the time you’ve read this chapter and Chapter 7, you will understand without a shred of doubt why your ultimate success as a trader cannot be realized until you develop a resolute, unshakeable belief in uncertainty.
The first step on the road toward getting your mind and the market in sync is to understand and completely accept the psychological realities of trading. This step is where most of the frustrations, disappointments, and mysteriousness associated with trading begin. Very few people who decide
to trade ever take the time or expend the effort to think about what it means to be a trader. Most people who go into trading think that being a trader is synonymous with being a good market analyst.
As I have mentioned, this couldn’t be further from the truth. Good market analysis can certainly contribute to and play a supporting role in one’s success, but it doesn’t deserve the attention and importance most traders mistakenly attach to it. Beneath the market behavior patterns that are so easy to become fixated on are some very unique psychological characteristics. It’s the nature of these psychological characteristics that determines how one needs “to be” in order to operate effectively in the market environment.
Operating effectively in an environment that has qualities, traits, or characteristics that are different from what we’re used to requires making some adjustments or changes in the way we normally think about things. For example, if you were to travel to an exotic place with certain objectives or goals to accomplish, the first thing you would do is familiarize yourself with the local traditions and customs. By doing so, you would learn about the various ways in which you would have to adapt in order to function successfully in that environment.
Traders frequently ignore the fact that they may have to adapt in order to become consistently successful traders. There are two reasons for this. The first is that you need absolutely no skill of any kind to put on a winning trade. For most traders it usually takes years of pain and suffering before they figure out or finally admit to themselves that there’s more to being consistent than the ability to pick an occasional winner.
The second reason is that you don’t have to travel anywhere to trade. All you need is access to a phone. You don’t even have to roll out of bed in the morning. Even traders who normally trade from an office don’t have to be in the office to put on or take off their trades. Because we can access and interact with the market from personal environments that we are intimately familiar with, it seems as if trading won’t require any special adaptations in the way we think.
To some degree, you are probably already aware of many of the fundamental truths (psychological characteristics) about the nature of trading. But having an awareness or an understanding of some principle, insight, or concept doesn’t necessarily equate to acceptance and belief.
When something has been truly accepted, it isn’t in conflict with any other component of our mental environment. When we believe in something, we operate out of that belief as a natural function of who we are, without struggle or extra effort. To whatever degree there is a conflict with any other component of our mental environment, to the same degree there is a lack of acceptance.
It isn’t difficult, therefore, to understand why so few people make it as traders. They simply don’t do the mental work necessary to reconcile the many conflicts that exist between what they’ve already learned and believe, and how that learning contradicts and acts as a source of resistance to implementing the various principles of successful trading. Getting into and taking advantage of the kind of free-flowing states of mind that are ideal for trading requires that those conflicts be thoroughly resolved.
THE MARKET’S MOST FUNDAMENTAL CHARACTERISTIC
(IT CAN EXPRESS ITSELF IN AN ALMOST INFINITE COMBINATION OF WAYS )
The market can do virtually anything at any time. This seems obvious enough, especially for anybody who has experienced a market that has displayed erratic and volatile price swings. The problem is that all of us have the tendency to take this characteristic for granted, in ways that cause us to make the most fundamental trading errors over and over again. The fact is that if traders really believed that anything could happen at any time, there would be considerably fewer losers and more consistent winners.
How do we know that virtually anything can happen? This fact is easy to establish. All we have to do is dissect the market into its component parts and look at how the parts operate. The most fundamental component of any market is its traders. Individual traders act as a force on prices, making them move by either bidding a price up or offering it lower.
Why do traders bid a price up or offer it lower? To answer this question we have to establish the reasons why people trade. There are many
reasons and purposes behind a person’s motivation to trade in any given market. However, for the purposes of this illustration, we don’t have to know all the underlying reasons that compel any individual trader to act because ultimately they all boil down to one reason and one purpose: to make money. We know this because there are only two things a trader can do (buy and sell) and there are only two possible outcomes for every trade (profit or loss).
Therefore, I think we can safely assume that regardless of one’s reasons for trading, the bottom line is that everyone is looking for the same outcome: Profits. And there are only two ways to create those profits: Either buy low and sell high, or sell high and buy low. If we assume that everyone wants to make money, then there’s only one reason why any trader would bid a price up to the next highest level: because he believes he can sell whatever he’s buying at a higher price at some point in the future. The same is true for the trader who’s willing to sell something at a price that is less than the last posted price (offer a market lower). He does it because he believes he can buy back whatever he’s selling at a lower price at some point in the future.
If we look at the market’s behavior as a function of price movement, and if price movement is a function of traders who are willing to bid prices up or offer them lower, then we can say that all price movement (market behavior) is a function of what traders believe about the future. To be more specific, all price movement is a function of what individual traders believe about what is high and what is low.
The underlying dynamics of market behavior are quite simple. Only three primary forces exist in any market: traders who believe the price is low, traders who believe the price is high, and traders who are watching and waiting to make up their minds about whether the price is low or high. Technically, the third group constitutes a potential force. The reasons that support any given trader’s belief that something is high or low are usually irrelevant, because most people who trade act in an undisciplined, unorganized, haphazard, and random manner. So, their reasons wouldn’t necessarily help anyone gain a better understanding of what is going on.
But, understanding what’s going on isn’t that difficult, if you remember that all price movement or lack of movement is a function of the relative balance or imbalance between two primary forces: traders who
believe the price is going up, and traders who believe the price is going down. If there’s balance between the two groups, prices will stagnate, because each side will absorb the force of the other side’s actions. If there is an imbalance, prices will move in the direction of the greater force, or the traders who have the stronger convictions in their beliefs about in what direction the price is going.
Now, I want you to ask yourself, what’s going to stop virtually anything from happening at any time, other than exchange-imposed limits on price movement. There’s nothing to stop the price of an issue from going as high or low as whatever some trader in the world believes is possible— if, of course, the trader is willing to act on that belief. So the range of the market’s behavior in its collective form is limited only by the most extreme beliefs about what is high and what is low held by any given individual participating in that market. I think the implications are self-evident: There can be an extreme diversity of beliefs present in any given market in any given moment, making virtually anything possible.
When we look at the market from this perspective, it’s easy to see that every potential trader who is willing to express his belief about the future becomes a market variable. On a more personal level, this means that it only takes one other trader, anywhere in the world, to negate the positive potential of your trade. Put another way, it takes only one other trader to negate what you believe about what is high or what is low. That’s all, only one!
Here’s an example to illustrate this point. Several years ago, a trader came to me for help. He was an excellent market analyst; in fact, he was one of the best I’ve ever met. But after years of frustration during which he lost all his money and a lot of other people’s money, he was finally ready to admit that, as a trader, he left a lot to be desired. After talking to him for a while, I determined that a number of serious psychological obstacles were preventing him from being successful. One of the most troublesome obstacles was that he was a know-it-all and extremely arrogant, making it impossible for him to achieve the degree of mental flexibility required to trade effectively. It didn’t matter how good an analyst he was. When he came to me, he was so desperate for money and help that he was willing to consider anything.
The first suggestion I made was that instead of looking for another investor to back what ultimately would be another failed attempt at trading, he would be better off taking a job, doing something he was truly good at. He could be paid a steady income while working through his problems, and at the same time provide someone with a worthwhile service. He took my advice and quickly found a position as a technical analyst with a fairly substantial brokerage house and clearing firm in Chicago.
The semiretired chairman of the board of the brokerage firm was a longtime trader with nearly 40 years of experience in the grain pits at the Chicago Board of Trade. He didn’t know much about technical analysis, because he never needed it to make money on the floor. But he no longer traded on the floor and found the transition to trading from a screen difficult and somewhat mysterious. So he asked the firm’s newly acquired star technical analyst to sit with him during the trading day and teach him technical trading. The new hire jumped at the opportunity to show off his abilities to such an experienced and successful trader.
The analyst was using a method called “point and line,” developed by Charlie Drummond. (Among other things, point and line can accurately define support and resistance.) One day, as the two of them were watching the soybean market together, the analyst had projected major support and resistance points and the market happened to be trading between these two points. As the technical analyst was explaining to the chairman the significance of these two points, he stated in very emphatic, almost absolute terms that if the market goes up to resistance, it will stop and reverse; and if the market goes down to support, it will also stop and reverse. Then he explained that if the market went down to the price level he calculated as support, his calculations indicated that would also be the low of the day.
As they sat there, the bean market was slowly trending down to the price the analyst said would be the support, or low, of the day. When it finally got there, the chairman looked over to the analyst and said, “This is where the market is supposed to stop and go higher, right?” The analyst responded, “Absolutely! This is the low of the day.” “That’s bullshit!” the chairman retorted. “Watch this.” He picked up the phone, called one of the clerks handling orders for the soybean pit, and said, “Sell two million beans (bushels) at the market.” Within thirty seconds after he placed the order, the soybean market dropped ten cents a bushel. The chairman turned to look at
the horrified expression on the analyst’s face. Calmly, he asked, “Now, where did you say the market was going to stop? If I can do that, anyone can.”
The point is that from our own individual perspective as observers of the market, anything can happen, and it takes only one trader to do it. This is the hard, cold reality of trading that only the very best traders have embraced and accepted with no internal conflict. How do I know this? Because only the best traders consistently predefine their risks before entering a trade. Only the best traders cut their losses without reservation or hesitation when the market tells them the trade isn’t working. And only the best traders have an organized, systematic, money-management regimen for taking profits when the market goes in the direction of their trade.
Not predefining your risk, not cutting your losses, or not systematically taking profits are three of the most common—and usually the most costly—trading errors you can make. Only the best traders have eliminated these errors from their trading. At some point in their careers, they learned to believe without a shred of doubt that anything can happen, and to always account for what they don’t know, for the unexpected.
Remember that there are only two forces that cause prices to move: traders who believe the markets are going up, and traders who believe the markets are going down. At any given moment, we can see who has the stronger conviction by observing where the market is now relative to where it was at some previous moment. If a recognizable pattern is present, that pattern may repeat itself, giving us an indication of where the market is headed. This is our edge, something we know.
But there’s also much that we don’t know, and will never know unless we learn how to read minds. For instance, do we know how many traders may be sitting on the sidelines and about to enter the market? Do we know how many of them want to buy and how many want to sell, or how many shares they are willing to buy or sell? What about the traders whose participation is already reflected in the current price? At any given moment, how many of them are about to change their minds and exit their positions? If they do, how long will they stay out of the market? And if and when they do come back into the market, in what direction will they cast their votes?
These are the constant, never-ending, unknown, hidden variables that are always operating in every market—always! The best traders don’t try to
hide from these unknown variables by pretending they don’t exist, nor do they try to intellectualize or rationalize them away through market analysis. Quite the contrary, the best traders take these variables into account, factoring them into every component of their trading regimes.
For the typical trader, just the opposite is true. He trades from the perspective that what he can’t see, hear, or feel must not exist. What other explanation could account for his behavior? If he really believed in the existence of all the hidden variables that have the potential to act on prices in any given moment, then he would also have to believe that every trade has an uncertain outcome. And if every trade truly has an uncertain outcome, then how could he ever justify or talk himself into not predefining his risk, cutting his losses, or having some systematic way to take profits? Given the circumstances, not adhering to these three fundamental principles is the equivalent of committing financial and emotional suicide.
Since most traders don’t adhere to these principles, are we to assume that their true underlying motivation for trading is to destroy themselves? It’s certainly possible, but I think the percentage of traders who either consciously or subconsciously want to rid themselves of their money or hurt themselves in some way is extremely small. So, if financial suicide is not the predominant reason, then what could keep someone from doing something that would otherwise make absolute, perfect sense? The answer is quite simple: The typical trader doesn’t predefine his risk, cut his losses, or systematically take profits because the typical trader doesn’t believe it’s necessary. The only reason why he would believe it isn’t necessary is that he believes he already knows what’s going to happen next, based on what he perceives is happening in any given “now moment.” If he already knows, then there’s really no reason to adhere to these principles. Believing, assuming, or thinking that “he knows” will be the cause of virtually every trading error he has the potential to make (with the exception of those errors that are the result of not believing that he deserves the money).
Our beliefs about what is true and real are very powerful inner forces. They control every aspect of how we interact with the markets, from our perceptions, interpretations, decisions, actions, and expectations, to our feelings about the results. It’s extremely difficult to act in a way that contradicts what we believe to be true. In some cases, depending on the
strength of the belief, it can be next to impossible to do anything that violates the integrity of a belief.
What the typical trader doesn’t realize is that he needs an inner mechanism, in the form of some powerful beliefs, that virtually compels him to perceive the market from a perspective that is always expanding with greater and greater degrees of clarity, and also compels him always act appropriately, given the psychological conditions and the nature of price movement. The most effective and functional trading belief that he can acquire is “anything can happen.” Aside from the fact that it is the truth, it will act as a solid foundation for building every other belief and attitude that he needs to be a successful trader.
Without that belief, his mind will automatically, and usually without his conscious awareness, cause him to avoid, block, or rationalize away any information that indicates the market may do something he hasn’t accepted as possible. If he believes that anything is possible, then there’s nothing for his mind to avoid. Because anything includes everything, this belief will act as an expansive force on his perception of the market that will allow him to perceive information that might otherwise have been invisible to him. In essence, he will be making himself available (opening his mind) to perceive more of the possibilities that exist from the market’s perspective.
Most important, by establishing a belief that anything can happen, he will be training his mind to think in probabilities. This is by far the most essential as well as the most difficult principle for people to grasp and to effectively integrate into their mental systems.
