Three Choices

Trading systems give us a way to define, quantify, and categorize market behavior. Since the markets offer traders a seemingly infinite combination of behaviors, all with their corresponding opportunities and risks, it is easy to understand how our minds can become overwhelmed. Trading systems limit the scope of market behavior, and therefore make this activity a little easier for our minds to manage.

They also give us direction and suggestions about what to do in a given market situation. Without them traders could easily feel as if they are floating aimlessly in an endless sea of possibilities and opportunities with no land in sight.

A true skill not only points the way, but almost automatically begins to direct awareness as well. And a thinking methodology controls the selection of which skills should be used and when.

Having the skills necessary to consciously manipulate one's psychological environment is essential for the trader who recognizes how ineffectual a trading system can suddenly become whenever a tense situation demands a split-second decision.

Obviously people don't consciously start trading with the belief that they don't have the right resources or that they're going to fail. In fact, it is just the opposite. Because most traders come from or still enjoy very successful careers outside of trading, they have a great deal of confidence in their ability to extend this success in the trading environment. This unfounded confidence, coupled with the way the markets distort a person's concept of reward in relationship to time and effort expended, will cause the trader to form some very unrealistic expectations about the kind of results he should achieve.

Believing that trading is easy is the reason for the unrealistic expectations. And they are probably the single biggest reason why most traders never make it beyond the initial levels of development before they lose all their money.

Starting out believing that trading is easy is a psychological trap that entices almost all traders. But it isn't too difficult to understand why, when you examine the dynamics of the process of how we set up a standard of performance for ourselves by which to gauge our progress. There are four basic components that make up a person's standard of performance or expectations for results.

First is our basic concept of time; most people believe that it is limited, passing nonstop and will eventually run out. Second is our concept of effort—our supply of personal energy is not inexhaustible; it runs out, we tire, and we may even become ill if we don't rest properly. The third is our concept of expertise—the number of skills we have learned and our degree of proficiency in using these skills; it usually takes a great deal of time and energy to acquire expertise.

Now one of the primary ways we learn to value ourselves is based on our belief about how much work we do and the amount of time it takes to do it. Which brings us to the fourth component in the equation; reward. To determine the amount of reward we should receive, we will make an assessment about how hard or easy a job is by determining how much effort (personal energy) we will need to expend and to assess how long the job will take (using up our limited time), so we can then determine how much we should be compensated. It is like our own personal supply and demand formula for our time and energy.

Now I am going to put all this together to demonstrate how trading distorts all these components in a way that allows someone to believe that trading is easy. First, to function in the market environment requires very little if any physical effort, especially for the off — the — floor trader. Second, time is not a relevant factor because a trader can be stunned with thousands of dollars in profits in a matter of moments. Conceivably, you could put on a trade, never have the market go against your position, and be rewarded at levels far beyond your expectations of what is possible. A person can't help but make the association between the speed at which something like this could happen and how easy it must be because there was no physical effort required.

Most people don't have to experience this personally to make the erroneous assumption that trading is easy. They will just naturally do it the first time they experience market action. They will assume that they would have been a buyer at some low point and held on to liquidate the trade for a profit. Even if it's just for a couple of ticks, invariably they will multiply those ticks by several contracts to come up with these mental windfall profits for themselves. These profits could represent an exotic trip, a dream car, or thoughts of financial independence. Then they will compare how long and how hard they normally have to work to get the same amount of money, and what will result is a completely erroneous conclusion that trading is easy.

The problem is that it is almost impossible for the beginning trader to make a reasonable assessment of the level of expertise that is required to function in the trading environment, like learning to limit oneself in an unlimited environment, when possibly for the first time in the trader's life he has the freedom to express himself creatively without any social constraints, or the amount of the time it takes to acquire this expertise, especially when it looks as if the profits should just roll in so easily and so fast. These kinds of assumptions will blind the trader to the true nature of the endeavor.

The few individuals who have achieved astronomical success in trading at some point learned to stop trying to conquer the markets or make them conform to their expectations or mental limitations. At some point in their trading careers, they understood the psychological implications of an event that is never ending, that begins only when one decides to participate, that ends only when one has had enough, and behaves without the slightest regard for individual survival.

The intensity of your emotional discomfort and pain you experience as a trader is an excellent indication of how much you will have to change to trade without fear and be consistently successful.

You might ask, "Why consider the market from a psychological perspective at all? Doesn't the market behave as it does regardless of what a single individual thinks or feels about it?"

My answer is this: "The market behaves as it does because of the interactions of hundreds of thousands of people. And since all these individuals are members of the human race, regardless of national origin, religious conviction, or what have you, they will all have one thing in common—the psychological structure of the human mind." This psychological structure behaves in certain highly predictable ways whenever it encounters stress or split-second decisions. In the market, the fear of losing one's fortune is every bit as intense as the fear of losing one's life from an attack by a wild animal.
You place on any particular price change is the result of your beliefs. As a trader you constantly have to define what is high and what is low relative to your beliefs about the future. That is the only way you can make money: buy low and sell it back at a higher price (in the future) or sell high and buy it back at a lower price (in the future). As long as prices continue to move, that movement will create opportunities to buy low and sell high or sell high and buy low, and these opportunities are available for all traders. You create the game in your own mind based on your beliefs, intents, perceptions, and rules. It is your own unique perspective and no one else's and the secret is, you can and do choose how you perceive events. Even if you are not aware of exactly how to control and change your perception to make other choices available to yourself, you are still choosing, even if it is out of ignorance. 

UNSUCSESSFUL TRADERS

Lack of Skills

The trader is generally not aware that the trading environment is different from all other environments. Trading has the appearance of something that should be easy to do coupled with the possibility of making vast amounts of money in a relatively short period of time.

The trader will thus create some inflated expectations of success. Adherence to these inflated expectations without the appropriate skills equals disappointment which equals pain which equals psychological damage which equals fear. Fear diminishes the trader's ability to be objective, execute his trades, or learn about the fundamental nature of the markets. Of course, it is possible to make money without the appropriate skills. However, without these skills the trader will invariably lose what he made back to the markets plus more. The result is disappointment, pain, psychological damage, and fear. 

People generally don't know how to repair psychological damage and as a result don't know how to release themselves from their fear. To compensate, we learn some very sophisticated ways of covering our fear up. In society we can get by and even be successful with a facade of confidence because people will generally support each other's illusions about themselves. The market, however, has no vested interest in supporting anyone's illusions about himself. If a trader is feeling fearful, he can try to cover it up all he wants but his trading results will readily reflect his true feelings.

Limiting Beliefs

Most people have a whole assortment of beliefs that argue against their success as a trader. Some of these beliefs you may be consciously aware of, most of them you may not be aware of. In any case, you cannot negate their significance in how they will determine and affect your behavior as a trader.

Many traders will try to circumvent confronting these limiting beliefs by becoming an expert market analyst. It doesn't matter how good a market analyst you become; if you don't release yourself from the effects of these beliefs, you won't be successful to the extent these limiting beliefs have power in your mental system. There are many market gurus who can predict market moves with uncanny accuracy but can't make money as a trader. Either they don't know the nature of beliefs and how they affect and determine behavior, or they don't want to confront the issues surrounding these beliefs. You have to want to do it or nothing will happen. And if you choose not to, you will be subjecting yourself to the same recurring cycles of negative experiences again and again until you either decide to work through whatever issues are necessary or lose all your money and have to give it up.

Lack of Self-Discipline 

If the type of environmental conditions exist that are beyond your skill level to respond to appropriately (without doing harm to yourself), then you will need to institute some rules and limitations to guide your behavior until you learn how to act in your best interests. When you were a child your parents didn't let you cross the street by yourself because the consequences of your inability to cross safely might have precluded your getting a second chance. When you were able to make the appropriate distinctions about the nature of traffic, your parents trusted you enough to cross the street on your own.

Until they trusted you, they always feared the possibility of your getting hit by a car. As a result of their fear, they restricted your freedom of movement, regardless of the opportunities that may have existed for you across the street. Your interaction with the trading environment works the same way. The difference is that no one is stopping you from standing in the middle of the street (metaphorically) to get hit by a truck. You are the only one who can stop yourself. After you have been hit once or twice, it might not be so easy to cross the street, regardless of how good the opportunities look on the other side. What makes it even more difficult (continuing with the traffic metaphor) to step out into the street is when you further realize that the cars and trucks can come at you in a seemingly random fashion. All of a sudden you're lying on the street not even knowing what hit you because you thought you were being careful.