Avoid Making Predictions in the Market

Most people make a big deal out of market prediction. They think they need to be right 70% or better in order to "pass" the exam that the market gives them. They also believe that they might get an "A" if they could be right 95% of the time. The need to predict the market steps from this desire to be right. People believe that they cannot be right unless they can predict what the market is doing.

Among our best clients, I have traders who continually make 50% or more each year with very few losing months. Surely, they must be able to predict the market very well to have that kind of track record. Well, I recently sent out a request for predictions and here is what I got back from some of the better traders.

Trader A; "I don't predict the market, and I think this is a dangerous exercise."

Trader B: "…these are just scenarios, the market is going to do what the market is going to do."

Ironically, I got these comments from them despite the fact that I was not interested in any of their specific opinions, just the consensus opinion.

So how do they make money if they have no opinions about what they market is going to do? Well, there are five critical ingredients involved:

• They follow the signals generated by the system.
• They get out when the market proves them wrong.
• They allow their profits to run as much as possible—meaning they have a high positive expectancy system.
• They have enough opportunity so that there is a great chance of realizing the positive expectancy any given month and little chance of having a losing month.
• They understand position sizing well enough so that they will continue to be in the game if they are wrong and make big money when they are right.

Most traders, including most professionals, do not understand these four points. As a result, they are very much into prediction. The average Wall Street Analyst usually makes a large six-figure income analyzing companies. Yet very few of these individuals, in my opinion, could make money trading the companies they analyze. Nevertheless, people believe that if analysts tell you the fundamentals of the marketplace, someone can use that information to make money.

Others have decided that fundamental analysis doesn't work. Instead, they have chosen to draw lines on the computer or in their chart book to analyze the market technically. These people believe that if you draw enough lines, and interpret enough patterns, you can predict the market. Again, it doesn't work. Instead, cutting losses short, really riding profits hard and managing your risk so that you continue to survive is what really makes you money. When you finally understand this at a gut level, you will know one of the key secrets to trading success. In the meantime, we will continue to make predictions in our column, so that you will begin to understand that they are entertaining, but nothing more!

Develop a System that Fits You

My book, Trade Your Way to Financial Freedom, is all about the subject of system development. It's about constructing a system that fits you, and then testing that system so that you have confidence in it. Confidence in your system is a part of having faith. Following is a quote from the conclusion of the book in which I was having a conversation.

"Nothing is exact. You can never know how it will really turn out. Instead, trading is very much a game of discipline, of being in touch with the flow of the markets, and of being able to capitalize upon that flow. People who can do that can make a lot of money in the markets.

Why test at all?

"So you can get an understanding of what works and what doesn't work. You shouldn't believe everything I've told you. Instead, you need to prove to yourself that something is true. When something seems reasonably true, then you can develop some confidence in using it. You must have that confidence or you'll be lost when are dealing with the markets.

"You probably cannot be exact. But no science is exact. People used to think that physics was exact, but now we know that the very act of measuring something changes the nature of the observation. Whatever it is, you are a part of it. You cannot help that because it probably is the nature of reality. And it again illustrates my point about the search for the Holy Grail System being an inner search."- page 317

Faith is empowerment. The primary source of faith is from God. This involves opening up your heart and mind to your spiritual nature. It is tuning into the God Presence within you. When you realize that an Infinite Presence is the source of your faith, it gives your faith real power. Your system is not the source of your abundance or of your trading success-the God Presence within you is the source of that success. Understanding and truly believing that principle is the basis of real faith.

Now when I talk about God, I’m dealing with spiritual beliefs. These beliefs are at the core of most human beings (even when you think you don’t believe in God) and who they are. People fight wars over spiritual beliefs. They fly airplanes into buildings over spiritual beliefs. Thus, I know I’m treating on sensitive ground here. However, if you don’t like the way I’ve phrased the beliefs, then rephrase them to fit your own beliefs. The beliefs I’m giving you are very useful if you use them and apply them. With that said, let’s go on.

When you have confidence in that God Presence assisting you, then you'll begin to develop a lot more confidence in yourself. Lastly, when you develop confidence in yourself, then you'll develop extensive confidence in your system and your ability to make money from your system. However, none of this works as real faith without thoroughly understanding the Source of everything.

Assignment for the Week:

Spend 20 minutes meditating each day. At the beginning of that meditation, affirm your source. You might say something like,

"God's magnificence is empowering me now. It is closer to me than my breath. It fills me with Love, Abundance, and all that I desire. I know that it is the Source of All my Good and I give thanks for Its Presence."

Repeat the thought several times until it becomes a part of you and then spend 20 minutes in silence. If you become distracted, simply repeat the thought.

When you trade, remember the Source of your abundance and have faith in that source. Remember that the God Presence within You is your Source, not the next trade. Notice what impact this thought has upon your trading.

Much success to you and let me know about your experiences in practicing this all-important principle.

Empower Yourself

It's possible for traders to tap into one of three general attitudes when they approach the market. The first attitude is one of pessimism; the second is one of randomness and/or neutrality; and the third is one of empowerment. The first attitude never works. The second attitude seldom brings us much success, while the third attitude, when properly done, guarantees success.

Let's imagine that you have immense power to create the results you want from your trading activity. And a good reason to make this assumption is because you do have such power. Now, if you had such power, what do you think would happen if you approached your trading from a viewpoint of pessimism? You'd probably lose money-no, you would lose money. No matter how good your system, you'd figure out a way to lose money.

If you approach the market with neutrality (and you have this power to create your life), then the best you could possibly do is perform at an average level. You certainly wouldn't add any personal energy to the market, and I suspect that your performance would probably be substandard.

But let's look at the third option-approaching trading with an attitude of empowerment. I pointed out in Volume Five of my Peak Performance home study course that all good traders know they will win at the end of the year. I might take that one step further and say that great traders know they will probably win at the end of the month. What does that imply? It implies a great deal of FAITH. You must believe in yourself and in your trading. You must know deep in your heart that you have won and feel grateful for your success.

Faith is like a magic power that propels you to greatness. For example, let's take a look at a few Bible quotes:

Let it be to you according to your faith. Matthew 9:29

If there is faith in you even as a grain of mustard seed, you will say to this mountain move away from here, and it will move away; and nothing would prevail over you. Matthew 17:20.

If you can believe, everything is possible to him who believes. Mark 9:23

Whoever should say to this mountain, be moved and fall into the sea, and does not doubt in his heart, but believes that what he says will be done, it will be done to him. Mark 11:23

Therefore, I say to you, anything you pray for and ask, believe that you will receive it, and it will be done for you. Mark 11:24.

Incidentally, I used to avoid a lot of spiritual references. I did so because I found that many people's beliefs about spirituality were both very strong (the essence of who they were) and very narrow (i.e., if you went beyond their boundaries, you went into dangerous territory). However, my objective is to help people change and I've found the most powerful change comes at the spiritual level. Thus, it is now time to begin to open up the spiritual basis of trading. And perhaps, this being the weekend after Easter, now is the right time to do that.

Overcoming a Stuck State of Mind

When you are marching toward some goal, like trading excellence, you might do so by overcoming obstacles. When your focus is on problems you have, such as the lack of funds or limited resources or limited knowledge, you are probably going to generate feelings of guilt, anger or frustration in yourself. Little is usually accomplished from such mental states. You feel stuck and your orientation toward “stuckness” tends to persist.

Whatever you cannot accomplish in life is a model of a stuck state. Early in life, when you tried to accomplish something, you probably were attacked by some sort of unforgiving failure. The problem was not so much the failure as the intensity of the attack. That event planted a psychological stop sign in front of you whenever you started in certain directions. And, that psychological stop sign has an impact that is as strong on you as the original bashing. It creates internal conflict when you attempt to accomplish certain things, with part of you wanting to go on and part of you wanting to retreat. You go back and forth, oscillating, producing a stuck state of mind.

When people are stuck, you can see the oscillation in their bodies. Typically, they see two pictures. With the first blink, they see what they want and with the second picture, they see their psychological stop sign. You can observe this in sales professionals, for example. The sales person wants to make the sale. Yet, on the other hand, he hates rejection. He either decides, “I can do this, but I don’t have a worthwhile product” or “My product is good, but people just don’t respond to me.” The result is usually the stuck state of procrastination.

The same goes for the trader. One part of the trader says “Get out of the trade, it’s hit your exit point and you need to cut your losses short.” Another part says, “Stay in the trade, it’ll turn around and you don’t want to take a loss now.” And usually the result is a stuck state.

I’ve seen hundreds of people in stuck states. One that was particularly striking was a man in his forties who still lived with his parents. He wanted to go out on his own, but something held him in place, dependent upon his parents. When I saw him, he had decided that trading was a way he could earn money to escape. However, he’d become stuck because earning enough money to escape would result in an extreme negative state. As a result, he found he could not pull the trigger.

Every time we put something off, some dream or goal, we start to oscillate. We want to achieve our dream or goal, but we also want to avoid the pain that it takes to accomplish the task. The result is e-motion—a lack of motion outside and an intense motion inside of ourselves.

Some Simple Solutions:

When you are stuck, the more effort you put into trying to un-stick yourself, the worse off you become. It’s a little like being stuck in quicksand—the more you struggle the quicker you sink. The first solution is always to relax and often move slightly in the direction that is opposite to what your instincts tell you. For example, a pilot going into a nosedive must first push gently into the dive to get air flowing under the wings properly. At that point he can begin to control the airplane. Similarly, when you start to skid in your car, you must first steer into the skid until you gain control over the car—which our natural reaction is to do the opposite.

If you are stuck in your goal of becoming an excellent trader, try doing the opposite of your instincts. If you must take a trade, make it okay not to take the trade. Instead, move toward working on your emotions.

The second solution is to focus on what you want. When you focus on limitations, you feel the emotions of the stop sign or the limitation. When you focus on what you want to achieve, then you begin to see possibilities and new resources that open you up. What is your focus?

Finally, the third solution is to focus on being what you want to be. If you want to be a great trader, don’t focus on what they have or do, focus on their state of being. What is it like to be a great trader? What is it like to step into their shoes?

I do an exercise in our Peak Performance Workshop in which I ask students to step out of a stuck state to notice what they look like. This dissociates the person and takes them out of the stuck state. I then ask them to imagine a great trader in that same situation. What would that trader look like? What would they be like? I then ask them to step into the beingness of the great trader. The result is almost instant transformation. Try it.

Learn to "Dissociate" – Part II

Last week we talked about two ways that you can imagine something. First, you can imagine yourself doing it from the perspective of being in your body. The example I gave was sky diving. Imagine yourself jumping out of an airplane and actually sailing through the air. What's it feel like doing that? See yourself pulling the rip cord. See the ground below you as you move toward it.

The second perspective is to simply see a moving of yourself doing the same thing. Now watch yourself doing the same thing only this time you are seeing a movie of yourself sky diving. This second perspective is the dissociated one. Even though both images are made up, the first one is attached to your feelings, while the dissociated perspective is now made up.

So how can you apply this to your trading? Well, here is a simple exercise for you. When you feel that you are not trading well. Simply stand up and walk away. Move to a different part of the room and observe yourself. Notice what you looked like sitting there in the state you were in. What did you do with your body? How did you hold yourself? What did your face look like? What was your breathing like?

And after you've observed all of those things, then notice how you feel now. You are no longer in that body. Instead, you are simply watching yourself from a dissociated perspective. All the feelings and emotions should be gone. If they are not, then make sure that you are watching yourself.

Now ask yourself some questions? What resources do I need to be able to handle this situation like a market wizard. Do you need confidence? Do you need the courage to get out? Do you need some perspective?

And how would you look if you had those resources? Imagine yourself in the same situation with those new resources. See yourself sitting there full of those resources and notice how much different the situation is when you bring those resources to the table.

Chances are it is quite different. Now comes the real application of this. Go back to the situation and become what you were just imagining. What is that like? Chances are its an entirely different perspective on the situation. And chances are that you are now performing at a totally different level.

That's the power of dissociation. Now practice this technique at least once a day for the following week. The more you do it, the easier it will become for you.

Learn to "Dissociate"

If you think about Peak Performance trading you could look at a market genius and how that person approaches their craft. However, you could also look at a genius from some other area and notice if some of their behavior could be usefully applied to trading. In that regard, I've been thinking about how Einstein would think about the modern markets. I learned that one of the things Einstein did so well was to dissociate. Which means he used imagery to step out of his body and assume another perspective.

This is an exercise in my Peak Performance Course for Traders and Investors Try it for yourself. During each part of the imaginary adventure that follows, notice what your thoughts are and what your experience is like.

Here is the first imaginary scene. See yourself (your whole body) on a movie screen skydiving. See yourself in the airplane with your parachute attached. Now see yourself getting ready to jump. After you jump, see yourself free falling for about ten seconds and then pull the ripcord. Notice what happens when you pull the ripcord; it's like the parachute pulls you up in the air. Now, watch yourself gently floating down to the ground. That's what's called being dissociated.

Repeat the same scenario only now see it out of your own eyes. Notice your hands and feet as you are sitting in the plane getting ready to jump. Now, move over to the door, get yourself ready, and then jump. Notice yourself moving rapidly away from the plane as you free fall. After about ten seconds, see your hand as you pull the ripcord and notice what the experience of your parachute opening is like. Now, feel yourself floating gently down to the ground. That's what is called being associated.

Notice that the scene was the same for both experiences—you were jumping out of an airplane. Yet the images, both of which were imagined, were quite different in each case.

We live most of our lives in an associated state. As a result, everything seems so real. Our feelings seem real. Our beliefs seem like reality. Yet that is simply because we seem to be part of it. What we are thinking seems to be all there is.

As soon as you assume another position—dissociated—your experience changes dramatically. Your thoughts are different. Your experiences are different. Yet is this second experience any more or less real? No, it's just another experience.

This quality of assuming other perspectives, especially this dissociated perspective, is common of many great people in many fields. Einstein is just one example. Great quarterbacks have claimed to have the perspective of being above the entire football field (even while they are playing) so they can see the entire field in a detached manner.

Imagine the perspective that would bring for anyone who could do that.

Michael Jordan has claimed to be able to imagine himself floating over the basketball court and from this perspective see everything that is going on. Perhaps that explains why he just seems to know where everyone is. Again, think of the advantage that such a skill would give you.

I did two interviews with former fund manager, Tom Basso. Jack Schwager who gave him the nickname, Mr. Serenity, interviewed him in The New Market Wizards. In my interview with Tom, he revealed that his ability to dissociate was one of the secrets of his success. Here's a little of what he said:

"In situations where I felt I needed improvement or in which I wanted to improve my interactions with other people, I would just play key events back in my head—figuring out how others handled the situation…I've always thought of it as some Tom Basso up in the corner of the room watching Tom Basso here talking to you in this room. The funny thing about this secondary observer was that as time went on, I found the observer showing up a lot more. It wasn't just at the end of the day anymore. As I got into stressful situations, as I started trading, doing more interacting with a lot of people, getting our business off the ground, dealing with clients, etc., I found that this observer was there to help me through it. If I felt awkward or uneasy, then I was able to watch myself do it. Now, I have this observer there all the time." — Excerpt, Course Update #9, December 1990.

A fundamental presupposition of NLP (Neuro Linguistic Programming) is that if one person can do something, then everyone else can do it too. Since being able to move to another perceptual position is one of the critical aspects of genius and greatness, it's important to start practicing.

Here's an exercise for you. At the end of the day, replay the day in your mind, especially critical junctures in the day. Do it from a disassociated point of view in that you watch yourself going through the day. Once you've completed the exercise, write down what you notice about yourself.

Make Friends with Your Inner Interpreter

Think about some problem you have with your trading. It could be almost any problem. Perhaps you have trouble taking profits too soon. You might get angry when a trade gets away from you. Perhaps you frequently second guess yourself. Whatever your problem is, write it down. You can apply this exercise with almost anything that you think might be a problem.

Once you have that problem, write down several statements about the problem. Why do you think you had the problem? What caused it? What's your reaction to the problem? Your statements could be almost anything. You might say things like: "Why do I keep doing that?" "That behavior just shows that I'm stupid." "I just can't seem to control myself." "The problem is really nothing, but it just seems to continually repeat itself."

These statements are all your interpretation of the problem. In fact, without this interpretation, you probably wouldn't even have a problem. Thus, perhaps it's important to now work with your inner interpreter.

You need to use your imagination with this exercise. Be willing to play like a child.

1. Now that you have listed a problem and some statements about it, ask yourself how you can best explain the way the problem happened. Perhaps you've already done that with one of your statements. If not, that's your next statement. Write down what you hear. In addition, notice the qualities of the voice making the statement. Where do you hear the voice—which direction does it come from? Whose voice is it? Is it your own? Is it someone else's voice?

2. Now find two more problems and repeat step number one. Make sure that the problems have some emotional significance for you.

3. Look at the three statements you've written about how your three problems happened. What do they have in common? Notice how permanent and how pervasive the statements are. Also notice the overall personality behind the voice.

4. Rewrite the three statements and make them more optimistic, specific to a time or occasion, and to the place that they happened. Also make them impersonal so as to separate them from your behavior.

5. Let's assume that a part of you—your inner interpreter—is responsible for these statements. Where does this part of you seem to live? Is it on one side of your head? Is it at the front of your head? Or perhaps it's coming from your heart? Notice, once again, where the voice seems to come from.

6. Think of this part of you as a friend that you created for some positive intention. Thank your part for helping to bring you to where you are today. It's really been a friend to you and you need to acknowledge it.

7. Once again, now that you are in communication with your inner interpreter, ask it to come up with some even more positive excuses for your three experiences.

8. Move your interpreter voice to some other part of your body—say your right shoulder. Change the tone of the voice. Make it sound like a cartoon character or a famous celebrity that you like. Try moving it again and giving it another new voice. Listen to that voice go over your new excuses and perhaps some even more optimistic ones.

9. Notice how you feel about your interpreter now.

10. Now let your inner interpreter go to where it feels best. That may be its original spot or it may be some new place in your body. Give it the voice you find most reassuring.

If you get stuck in this exercise, it is okay to make up an interpreter. In fact, you really never make up anything. When you make something up, you are just bringing it up from your unconscious mind.

You'll find that you suddenly have much more control over your feelings when you do this. Your interpretations are never reality. Instead, they are just judgments, feelings, or beliefs about some particular event. They feel real because they give you an emotional response. But emotions have nothing to do with reality. They are simply coming from you.

The nice thing about such interpretations is that they are changeable. They cost nothing to change, but give you tremendous benefits. It's now time to put your inner interpreter on your side. After all, it is your friend.

Here's how one person, let's call him Bill, went through this exercise. When he thought of a problem, it was the criticism he got from his spouse whenever they talked about trading. He could hear her voice in his head, saying, "Trading is nothing but gambling. It's a waste of time and has no redeeming values."

When Bill wrote down some statements about the problem, he came up with the following.

• I married the wrong woman. She's an idiot and she just doesn't understand what I do.
• Her parents instilled an old work ethic in her and trading doesn't fit that work ethic—that's why she gets upset.
• She wants security and she doesn't feel comfortable when I tell her about trading.

He noticed that the voice was kind of high pitched and always seemed to come from the right side of his head. It even seemed to be coming from an elevated position down into his head. When he repeated the exercise with several more problems, the voice had the same qualities and came from the same place.

When he tried to move the voice, he first put it in his throat and made it raspy. This didn't feel comfortable at all. However, he didn't have any problem moving it between his eyes and giving it a child's voice. This seemed very comfortable.

When he made new, more optimistic interpretations of situations, he found that it was quite easy when he kept the voice in this position. As a result, he decided to give his inner interpreter a new home. Now this part seems to appreciate him much more and gives him very few problems.

Try this interpreter exercise at least once a week for the next four weeks. Notice what happens after you do it and keep practicing. You could be adding a very valuable tool to your life.

These exercises are only useful if you use them. So decide how important they are to you and then do them.

Successful Traders: The Few, the Proud

Boot camps like the Army's in Fort Leonard Wood, Mo., are becoming kinder and gentler, according to a recent article in the Wall Street Journal. In an effort to decrease the number of wash-outs from boot camp, the Army has dramatically changed the way it trains recruits:

Once-feared drill sergeants have been ordered to yell less and mentor more. "Before, our drill sergeants' attitude was 'you better meet my standard or else.' Now it's 'I am going to do all I can to assist you in meeting the Army standard,'" says Command Sgt. Maj. William McDaniel.(Wall Street Journal, Feb. 15, 2006)

Traders need to have discipline, too, says Bob Prechter, the kind that makes you tougher in the face of adversity. If he had his way, all traders would go to their own personal boot camp before they started trading. In fact, he has found that the best traders are often ex-Marines. Tough and disciplined. To learn more about how discipline makes for better trading, read this excerpt from Prechter's Perspective.

Bob Prechter's Six Secrets of a Successful Trader

1. Find a method. 2. Be disciplined. 3. Get experience. 4. Accept responsibility. 5. Accommodate losses. 6. Accept huge gains.

*****

The No. 1 requirement for being a successful trader is to get a method, such as the Wave Principle. What's the second requirement?

Bob Prechter: No. 2 – Be disciplined. You need the discipline to follow your method. Among the true professionals, this requirement is so widely understood that it's almost a cliché. Nevertheless, it is such an important cliché that it cannot be sidestepped, ignored or excepted.

Any system with a decent track record will be profitable if you apply it rigorously and honestly. As I indicated before, using the 10-day advance/decline oscillator with reasonable parameters, you can make money seven times out of 10. But very few people have the discipline to do it. Discipline is much more difficult to obtain than a method.

Do you mean that a well-constructed system will work, but the investor often doesn't?

Bob Prechter: Well, certainly a lot of work is required. But that's not the only aspect of the task. Lots of workaholics fail at trading. What you need is the guts to do what is right when it feels wrong. That takes immense courage and discipline. It struck me one day that among a handful of consistently successful professional options and futures traders of my acquaintance, three of them are former Marines.

The few, the proud?

Bob Prechter: The few, for sure! Among my acquaintances anyway, this is a ratio way out of proportion to the ratio of former Marines as a percentage of the general population. This anomaly implies to me that discipline is extremely important. At some point in their lives, these guys volunteered to serve in an organization that requires discipline and stamina. These people knew they were "tough" and wanted the chance to prove it. Being "tough" in this context means having the ability to suppress a host of emotions in order to act in a manner that would cause most people to shrink back in fear.

But you don't seem like the Marine type.

Bob Prechter: No, I'm not. But years ago while attending summer school with Georgia's Governor's Honors Program, I was given a psychological test and told that one of my skewed traits was "tough-mindedness." I didn't exactly know what that meant, but after trading and forecasting the markets since 1972, it is clear that without that trait, I would have been forced long ago to elect another profession. The pressures are enormous, and they get to everyone, including me. If you are not disciplined, forget the markets.

Can anyone follow rules if he or she puts a mind to it?

Bob Prechter: A lot of people will tell you that they have that discipline, but when it comes to actually doing it, they don't. The markets aren't merely an intellectual exercise. They're an emotional one as well. By the time the emotions have eaten away at you for several months, it's even physical. Trading is incredibly difficult to do, and it's one reason I do not like trading.

The most important factor in the market strategy is learning to stand fast if your system tells you to do so, even when the news, your friends and the tape are screaming at you to do the opposite. Outside forces don't really affect the market and never have. People hear horrible things on the news – the assassination of President Kennedy is a good example – and they panic and sell. A crisis may influence where prices go that afternoon, but not overall. You have to learn to avoid that natural human reaction to what looks catastrophic or hopeful. Stick with your system; never second-guess it; always follow it.

Does discipline mean you should stick to one or two markets?

Bob Prechter: Not in my opinion. One of the most important characteristics of a successful commodity trader is the flexibility to go into any tradable market. If traders are "married" to particular markets, they may find themselves forcing a trade where none exists. The flexible trader can ignore 80% of the charts that are saying nothing and concentrate on the 20% that are calling for action. On the other hand, if one's method is market-specific to some degree, then specialization can add value.

The Financial Forecast Service is the most valuable investment forecasting service you can buy – period. You get three publications that deliver time and price analysis, in the timeframes that matter to your investment decisions

Trade Through Mindfulness, Part II

Last week, I raised an interesting idea for you. What would happen if you could just pay attention to what the market is doing right now? What if you could just be totally in the present with no preconceived ideas or biases to influence you. Quite likely, trading that way would take your results to a totally new level. Well, you can trade that way if you practice mindfulness.

Last week, we talked about the first three aspects of mindfulness. These included:

1) creating new categories,

2) welcoming new information,

3) looking at things from more than one perspective,

I gave you some exercises to do to begin to practice these aspects of mindfulness. How did you do with them? Did you do the exercises at all?

This week I'd like to cover the last two aspects of mindfulness:

4) controlling the context, and

5) putting the process before the outcome.

4) Controlling the Context

Much of your behavior is context dependent. For example, many professional traders know it is quite possible to lose $20,000 in a trade—perhaps paying $1,500 in trade costs in doing so. However, the same traders are much less likely to pay $1,500 to attend a course that could dramatically reshape their trading and help them avoid many such losses. The thinking behind such logic is that the loss is a cost of doing business whereas the course is an unnecessary cost. Notice what happens to the logic if you switch it around and start to think of the course as being essential to doing business well. It becomes much more significant than the losing trades—especially since it may save the trader many thousands of dollars in just a single year.

People who practice mindfulness are aware of the context in which they are interpreting events. They are also quite willing to shift contexts to determine the impact upon their behavior and their thinking. As a result, they give themselves much more choice and are much more likely to make money.

Ask yourself the following questions:

• How are you interpreting your losses?
• What is the context in which you are viewing all of your trading?
• How does trading fit into the scheme of things in your life?
• And what if you shifted the context on just one of these questions?

5) Putting the Process Before the Outcome

People can imagine themselves taking gradual steps, while great heights seem totally forbidding. Yet, when you take enough gradual steps, you'll reach great heights.

If you are concerned with the final result—the outcome—then you will probably have problems attaining the outcome. However, if you concentrate on the process of getting to the outcome, then you are much more likely to arrive at your destination.

Every outcome is preceded by a process. You will not make money trading unless you follow a predetermined plan and continually stick to that plan. That's why you should pat yourself on the back every day if you can honestly say that you totally followed your rules throughout the day. Every "market wizard" arrives at that stature by taking one trade at a time. The primary difference between that person and the average trader is that the market wizard probably continued to follow his plan every single day.

So what can you do to practice mindfulness in your trading?

1. Practice a 20-minute mindfulness meditation each day for at least a week. If you just practice watching your thoughts (and releasing them as soon as you notice them), you can be satisfied that you are doing the exercise appropriately.
2. Keep a regular diary of what is going on in your life. Do it for a few days before you start the mindfulness meditation and then keep it up. When you've completed a week of mindfulness meditation, look at your diary and notice how your life is different.
3. Bring mindfulness into your trading and investing by doing the following:

a)Imagine yourself taking the other side of every trade that you actually take. What does that position feel like? Also imagine yourself being a neutral observer who watches you and the other person both take a position in the market. What do you think that person would think?

b)Look for new information about each new trade. What information are you normally accepting and what information are you normally rejecting?

c)When you do something you don't like in your trading, notice the context in which you are interpreting not liking it. How else might you interpret that behavior? What other intention might cause that behavior? Perhaps those other intentions are something you value highly.

d)Concentrate on the process of trading—following your rules. In fact, at the end of each day ask yourself a simple question—did I follow my rules? If you did, pat yourself on the back. If you don't have any rules, then you obviously didn't follow them. Think about it.

These exercises are powerful if you do them. If you don't do them, they are meaningless. Are you doing to do them? Until then, this is Van Tharp. Have a good weekend.

A Disciplined Trading Plan

The better performing traders above chose a good trading system and executed it perfectly. The only difference was their different use of leverage. The use of leverage must be tested and built into a disciplined trading plan. Obviously, leverage must be handled judiciously. It would be beneficial to one’s reward and risk performance to find a way to use leverage only when the probabilities of success are very strong.

Overly leveraged traders without a tested and precisely defined trading plan are merely gamblers who face an almost certain "risk of ruin" and have no chance of success in the long run. Sure they can win and win big for a little while, but no lucky streak lasts forever. Generally, a long series of wins and wipeout losses leaves the undisciplined trader in the unenviable position of fanaticizing that someday he will enjoy a run of unusually good luck, and then somehow quit the game while still on top. But it is only human nature that when he feels luck is on his side he does not feel like quitting when he is ahead. Traders quickly making and then just as quickly losing fortunes is a very old story repeated untold times. See the book, Reminiscences of a Stock Operator, by Edwin Lefèvre, describing the experiences of an actual famous trader, Jesse Livermore, who made and lost many fortunes using his instincts with extremely high leverage in the early decades of the 20th century.

To reduce the "risk of ruin", we must have a sound plan to limit our use of leverage and keep sufficient cash reserves to keep our place at the table. It also is very useful to diversify our risk across many trades and across low-correlated financial instruments. Seasoned money managers refuse to risk more than one percent of their capital on any one trade. They can’t do that unless they adhere to strict disciplines that are well tested and designed to insure that they can stay in the game when markets turn volatile.

To reduce such risks, there are many techniques that have stood the test of time. These ideas are so old that they have become cliches, but that does not mean that they can be ignored. The old masters have long recommended respecting the trends in multiple time frames, thus putting the odds in our favor and not fighting the tide. A strict loss cutting discipline also comes highly recommended, including the use of actual stop-loss orders. Never meet margin calls or average down: never throw good money after bad. Systematically eliminate losing positions and close out the worst performing positions. With a series of losses, cut back size and total risk exposure. These ideas can be back tested and built into a sound trading system.

Personal Responsibility

My job as a coach is to find talented people and make sure they learn and follow the fundamentals. But what is a talented trader? What do I look for in people before I will personally coach them? Last weeks, I talked about one of those traits, commitment. This week, we'll talk about another trait that I find just as valuable, personal responsibility.

Why is personal responsibility so important? Well, one of my beliefs is that YOU are the most important factor in your trading. It's not you system because YOU both produce and execute your system. It's not your money management, because YOU must execute your money management in order to produce results to meet YOUR objectives. And it's not the market, because you don't really trade the market, YOU trade YOUR BELIEFS about the market.

The net result is that YOU PRODUCE THE RESULTS YOU GET AS A TRADER. And when you understand that, you then realize that you must make changes if you want more effective results. YOU must produce the changes.

At some of my workshops I play a simulated trading game. In that game everyone gets the same trades, and their only real decision is how much to bet (so it's really a game about position sizing). In fact, since everyone gets the same trades, the only two factors really operating in the game are position sizing and personal psychology. Yet in a game with a positive expectancy, with 100 people playing the game, I'll typically see 1/3 of the room go bankrupt, another third of the room lose money, and the remaining third will make very nice profits.

Typically I ask people in the audience to pull out marbles, representing the trades, and I will ask the same person to keep pulling trades (i.e., marbles) until he/she gets a winner. That means that if there is a long losing streak (and there usually is) that it will be associated with the person who pulled the marbles out of the bag for that streak. I can then ask the audience, "How many of you think you went bankrupt because of Bill?" – while pointing to the person who pulled out the losing streak. And amazingly, quite a few of the bankrupt people will raise their hands. The problem with that assumption is that nearly every simulated trading game will have a long losing streak (i.e., it's designed that way) and it will always be associated with the person who pulled that streak. Thus, if you believe that person was responsible, you'd probably make the same mistake over and over again. You'll go bankrupt in many games and it will always be "Bill's" fault.

Furthermore, there are many possible responses to "why did you lose money in the game?" They include:

• It was the fault of the guy who pulled all the losing marbles (trades)
• This is a stupid game and it's doesn't reflect real trading.
• It's random chance and has nothing to do with me.
• I didn't have a good system
• I'm a stupid idiot.

All of those responses are excuses and then won't help you improve. There is only one response that will help you improve and that is:

"I risked too much money on a number of the trades and that's why I lost money or went bankrupt."

When you understand that, then you can fix the problem. When you give any of the other excuses, then you just compound the problem and will repeat the same mistake over and over again.

Now are you beginning to understand why taking personal responsibility for your trades is so important?

When you look at your trading results and say, "I created that result," then you are in charge of the process. And if you don't like the result, you can start to look for the mistakes that you made. And when you find the key ones that really produced your results, then you can make changes and get better results. THAT IS WHY PERSONAL RESPONSBILITY IS SO IMPORTANT and why I look for it in all of my super traders.

Do you like the results you produced as a trader in 2005? If not, then what mistakes did you make and how can you correct them. And you might ask yourself:

• Do I have a business plan to guide my trading?
• Do I have a worst case contingency plan?
• Do I have several positive expectancy systems that are well tested for this market climate that I can trade.
• Do I have something else that will work if the markets change?
• Do I regularly work on myself as the core of my trading results?

If you answered "No" to any of those questions, then you have some real clues about why you got results you didn't like in 2005. And those, by the way, are only a few of the questions that you could ask yourself.

Commitment

My job as a coach is to find talented people and make sure they learn and follow the fundamentals. But what is a talented trader? What do I look for in people before I will personally coach them?

One of the first things I look for is commitment. Most people come into trading, having accumulated a lot of money from some other profession. We see a lot of doctors, lawyers, engineers, IT professionals, etc. And all of those professions require a lot of training to master the skills involved. You cannot just walk into a hospital, with no training and say, “I'd like to do some brain surgery today!” Instead, it requires sixteen years of basic education, four years of medical school, serving an intern and then a residency period. That requires a lot of dedication and commitment to just begin to practice as a doctor.

Now let's look at trading. What's the entry price for trading? Perhaps you might watch some show on television in which some guru tells you what stocks they like. You then open up a brokerage account, by filling out some paperwork and depositing some money. You can then buy some stocks and wait for your profits. Entry into trading is that easy! It's designed that way so that other people can take your money – in fees and commissions. And people who trade that way have the same results that an off-the-street brain surgeon might have – the patient dies. In this case, the death is to your money.

Last week, in Tip 9, I covered the elements of successful trading. And they were quite extensive, including: 1) doing what's required on a daily basis, going through the trading process; 2) have a strong enough money mindset to have sufficient funds to trade with; 3) having a business plan to guide your trading; 4) having a good system or perhaps two or three good systems; and 5) having proper position sizing in place. And behind all of those elements is the key to everything, your personal psychology.

Working extensively in these five areas requires immense commitment, the same commitment that is required to become a brain surgeon. And it makes sense, great traders make a lot of money, but you've got to be willing to do what it takes to be successful.

This requires that you have a goal in mind, and have an intense desire to reach that goal so that you'll do whatever it takes to get there. This is the essence of commitment. But most people don't realize what is necessary for trading success because it's not required for entry into the position. And while I can teach people what's important and how to develop this commitment to achieve it, I certainly cannot give them the commitment to do it. And potential traders must have an intense commitment in order to get through the elements of successful trading.

Imagine someone who is driving around but has no where in particular to go. We'll call him Henry. Henry stops at a fast food restaurant and orders a sandwich. The sandwich turns out to be the worst sandwich he's ever had. It's been burnt, dropped, and the sauce on it is spoiled. As a result, Henry complains and then talks to the other restaurant patrons about the food. The manager is not very happy and kicks Henry out. Now Henry is infuriated and starts a campaign through the local newspaper to have the restaurant closed. This goes on for weeks and Henry is willing to spend the time because he doesn't have anything else to do.

When people are not committed, they run into distractions. Henry had no place to go, no motivating force behind him, so he just attached himself to a poor tasting sandwich and his campaign against the restaurant took up a lot of his time.

Now imagine someone who has an important appointment that they must make within the next three hours. They still have a 2.5 hour drive to make the appointment. However, they stop at the same restaurant and get the same bad tasting sandwich. Does the sandwich suddenly consume them? No, they might complain and throw it away, but then they move on because they are committed to something else. They either stop at another restaurant to buy something to go or they skip lunch. To the commitment person, the most important thing is the destination.

When you are committed to becoming a good trader, you do whatever it takes. And little things don't throw you off track. When distractions arise, you just avoid them and focus on your goal. That's the power of commitment. And commitment is essential to trading success.

In my experience, people who are not committed will find numerous distractions that will take up most of their time. They complain that they are too busy to do what it takes to be successful as a trader, but most of their time is pre-occupied with distractions.

A football coach looks for talented players who have the commitment to follow the fundamentals and do what it takes to be the best. You might be the most talented and gifted athlete ever, but if you don't have the commitment to be the best, the coach will probably drop you from the team. And I find myself doing exactly the same thing with traders, I look for talented people with a lot of commitment because they are the ones who will be successful. How is your commitment to trading excellence? If you read over the elements of successful trading given in Tip 9, how committed are you to achieving them? This is your real entry requirement for trading success.

Know When to Really Bet Your Hand

As I mentioned previously, one of my hobbies is playing poker and I can do it for free online. When I visit a casino and play poker, I usually make money. However, I used to have trouble making money when I'm playing with a lot of bad players. The problem is that they all stay with me and one of them often gets a good draw (because there are so many of them) that I get beaten.

The secret to overcoming this is to really play conservatively. Get out of every starting hand that doesn't give you at least a 30% chance of winning the pot. And get out of the good hands that don't develop well after you've seen three more cards.

What happens when you do this is that you really cut your losses short. On most hands, by folding at the beginning, you won't lose any money at all. And when you do play a hand, even if everyone else stays in the pot, you still know you have at least a 30% chance of winning. And if you risk $20 along with nine other players, you have a pot of $200. You have a 30% chance of winning that pot (i.e., your expectancy is $200 times 30% or $60), but it only cost you $20 to get that advantage. If you do that a lot, you'll make a lot of money.

Furthermore, when you do get a good hand and it develops into something very good, then bet it heavily. You'll chase out many bad players and others will be calling you on long shots. You'll be playing hands that give you an 80% chance of winning, risking the same money as let's say two opponents who each have a 10% chance of winning. But they put in the same amount of money as you did. Don't you like those odds?

For example, suppose you start out with an Ace King of the same suit which has a 68.6% chance of winning the final pot. Three common cards are dealt and you get an ace and two more hearts. You now have the strongest pair on the board and you have the potential for an even stronger hand – five hearts. Your odds of winning this pot are very good and you should bet accordingly. Let's say you bet $50 and two other people match you. There is now $200 in the pot from the first round of betting and $150 in the pot from the second round of betting. There is $300 in the pot and you now have an 80% chance of winning it, so your expectancy is $240. However, it only cost you $70 to get that expectancy of the first two rounds of trading. Now your situation is even better.

So let's look at a similar trading situation. You find a stock which is selling for about 65% of its liquidation value. (If you don't know how to do this, I'd recommend you read about the Graham's number strategy in my book Safe Strategies for Financial Freedom). Not only is the stock cheap, but it has been moving up for the last two months, so it is moving in your favor. This is a trading situation is equivalent to getting an Ace King of the same suit as a starting hand in poker. In fact, it's better because your odds of making money in this trade are probably much better than 68.8%.

So you want to make sure you take a strong position in a stock like this. Let's say you have a $100,000 account. You invest $5000 in the stock, knowing you'll stop out if you lose $1000 of the $5000. Thus, you are only risking 1% of your equity on the stock.

Once you are in the stock, it continues to move in your favor. Within three weeks, the stock has moved up 33%. If it retreated down 20%, you'd get out to preserve your profits, so you are basically guaranteed that this trade will now be a winner. This is equivalent to getting a really good draw on your poker hand when you feel almost certain that you will win the pot.

In poker, you'd probably bet heavily on the strong hand. And in trading, you want to make sure that you give this stock plenty of room to move so that it has the potential to make you a lot more money. It's the second part of the Golden Rule of Trading: Let Your Profits Run.

The Components of Trading Well

I'm an NLP modeler and a coach for traders. As a NLP modeler, I find a number of people who really excel in something. Once I've found them, I determine what they do in common. And then when I've found the common tasks, I determine what beliefs and mental states are required to perform each task. Once I have this information, I can then teach the tasks to others and expect to get similar results. And my job as a coach is to find talented people and make sure they learn and follow the fundamentals.

I remember doing a workshop with Market Wizards, Ed Seykota and Tom Basso around 1990. All three of us agreed that trading consisted of three parts: personal psychology, money management (which I subsequently renamed Position Sizing in my book Trade Your Way to Financial Freedom) and system development. We also generally agreed that trading psychology contributed about 60% to success. Position sizing contributed another 30% which left about 10% for system development. Furthermore, most traders ignore the first two areas and don't really have a trading system and that's why 90% of them fail.

Over the years I've done extensive modeling in all three areas and I disagree slightly with our conclusions in 1990. First, I would argue that trading psychology is 100% of success. Why? This conclusion is based upon two findings. First, people are generally programmed to do everything the wrong way. They have internal biases that seem to result in them doing the exact opposite of what is required for success. For example, if you are the most important factor in your trading, then you should spend the most time working on yourself. But most people totally ignore the "you" factor in their success. In addition, read over the checklists involved in good trading below. If you've worked extensively in all the areas listed below, you are probably very successful and you are certainly a rarity.

Secondly, every task I model requires that I find the beliefs and mental states that are involved. Both of those things are purely psychological, so it's hard not to conclude that everything is psychological.

In addition, I now think there are five components to trading well. These include the following areas:

• The process of trading – those things that you need to do on a day to day basis to be a good trader.
• The wealth process – exploring your relationship with money and why you do or do not have enough to trade with. For example, most people believe that they win the money game by having the most toys and that you can have it all now if your monthly payments are low enough. This means that they save zero dollars and are in debt over their heads. If this is you, it also means that you don't have enough money to trade.
• Developing and maintaining a business plan to guide your trading. Trading is as much a business as any other area. The entry requirements are much easier because all you have to do is deposit money in an account, sign a few forms, and then start trading. However, the entry requirements for successful trading require that you master all of the areas that I'm listing here. And that requires a lot of commitment which most people do not have. Instead, they want trading to be easy, fast, and very profitable.
• The process of developing a system. People often consider their system to be the magic secret for how pick the right stocks or commodities. In reality, entry into the market is one of the least important aspects of good trading, while the keys to a money-making system are elements like determining your objectives and how you exit a position.
• Position sizing is the key to meeting your objectives. We've discovered through our simulation games that 100 people can get the same set of 50 trades, but at the end of the 50 trades, they will have 100 different equities. And this extreme variability of performance can only be attributed to two factors: how much they risked on each trade (i.e., position sizing) and their personal psychology that determined their position sizing decision.

Hopefully, this tip has opened your eyes as to what is really involved in successful trading. Look at each area and rate yourself, by asking the following questions.

• How well have I mastered the discipline of trading well each day? This means do I do things like a daily self-analysis or a daily mental rehearsal to begin each day. If not, why not?
• Do I really have enough money for trading to make sense? If not, then you probably need to work on yourself and the wealth process.
• Do I have a business plan to guide my trading? If you don't, you are not alone. We estimate that only about 5% of traders have a written business plan. But, then again, perhaps you've heard that only about 5-10% of all traders are really successful?
• Do you have a set of objectives thoroughly written out to guide your trading? Most people don't, but how can you develop a system to meet your objectives without having objectives? And if you have objectives, then have you developed a thorough system to meet those objectives? And have you tested it to make sure it does that?
• How much attention have to paid to the "how much" factor – position sizing? Do you have a plan for position sizing your system to meet your objectives or perhaps you've never heard of position sizing?
• And lastly, how much time to you spend working on yourself – on overcoming your psychological issues and developing the discipline necessary to carry out of the processes described above which are necessary for success?

Most of the items described in this tip could be the topic for an entire book. However, this tip was about giving you an overview of what is required for successful trading. And my job as a coach is to find talented people and then coach them on following the fundamentals that I've described and guiding them through their own self-sabotage.

Enjoy the Obstacles

In any endeavor in life, you have up and down periods. Dealing with the market has many such up and down periods. In order to profit from the up periods, you have to tolerate or even "enjoy" the down periods. In order to enjoy the profits, you have to got through losses. And perhaps if would be useful if you could actually celebrate your losses.

I'm an NLP modeler. That means if someone does something well, I can figure out the essence of what they are doing by understanding their thinking. Thus, when such a person goes from A to B easily and effortlessly, I can determine how they do it and teach that skill to other people. Some people make money through trading easily and effortlessly and I've been studying those people for 25 years.

It turns out that one of the major problems people have in going from their current location to their desired goal is all of the walls or obstacles they continually run into each day. There is a common solution to these obstacles—make them okay. Don't worry about getting from point A to B; just enjoy bumping into the walls.

If you're in the market, one of biggest obstacles you'll face is the wall of losses. It's fairly difficult dealing with the markets if you are not willing to lose. It's almost impossible. It's like wanting to be alive, but always wanting to breathe in and not willing to breathe out. It's like walking, but only wanting to use your left foot and avoid your right foot. Neither one works and nor does trading without losses.

When you want to be right, you're not dealing with the obstacles. Instead, you're forcing things. When you want to make a profit out of today's trade, even though it's a big loser, then you're not dealing with today's obstacle. Enjoy the obstacle—embrace it—and be willing to accept it. If the market tells you it's time to get out at a loss, then do so.

I've already told you that good traders typically know have some point in the markets in which they know they must get out of a position in order to preserve their capital. Taking this loss is essential. It PRESERVES YOUR CAPITAL, so enjoy doing it.

However, if you don't understand that the loss has nothing to do with being right or wrong, it's just part of the process, then you could turn it into a monster. What then happens is that you fight with each loss and in the struggle they typically get bigger. For example, if you are afraid of a $500 loss, and won't take it, then you could easily watch it become $1000 loss. The $1,000 loss, when not taken, can easily become a $2,000 loss. And the net result is a losing trading system.

Think about it, if you have this problem with losses, you could easily turn a good trading system into a losing system. And if you don't realize that its your problem with losses, then it might become the trading systems problem. Or if you are following someone's advice, then it might become your advisor's problem or you money manager's problem.

And guess what? Quite often traders take the relationship they are having with the market, and transmute it by developing a different system or trading with a professional money manager. Now, the old struggle they used to have with the market—of not accepting what the market gives them—becomes a similar struggle they are having with their system or with their new advisor. Instead of giving up on the market after a string of losses, just in time to miss the really big move, they avoid their system until it is doing really well. When it is showing tremendous profits, they jump on board, only to be blown away by the market. And the same thing happens when they invest with money managers. This desire to be "right" motivates them to jump to the top money manager when he's hot, only to go through a big string of losses. It's all the same thing.

Psychologically, if you don't come to grips with your obstacles and embrace them, you will simply find another way to repeat them. Realize that the walls occur because they are there for you to bump into. When you accept this fact and embrace it, you'll accept bumping into walls. And strangely enough, you hardly even notice that the walls are there. The result will be a new level of success in the markets.

Good traders realize that they can easily have 10 to 20 losses in a row. It's just part of the business of trading. It happens. So just accept it and move on. And if you have trouble accepting it, then you need to realize that the problem is you and deal with that. But, of course, that's another topic.

Traits of Top Traders/Investors

Quite often I get asked the question, "what are the qualities that most top traders/investors have?" Furthermore, I'm also asked, "Can those traits be developed?" While there are many, many traits that I've noticed in top traders, I though I'd pick four of them in this tip and talk about each of them briefly." In other future tips, I'll be talking about some of them in much more detail.

Trait 1: Personal Responsibility. I think the most important trait that all top traders have (or top people in any field) is the ability to assume total responsibility for what happens to them. And for top traders and investors, this means that they assume total responsibility for their investments results. This means that if you lose money it's not the market's fault, it's not your advisor's fault, it's not your system's fault, or the fault of anything else. Instead, it is a direct result of what you did. When you assume this attitude, you can learn directly from your mistakes and trading becomes a big university setting which constantly allows you to improve. When you don't assume this attitude, then you get to repeat your mistakes over and over again because you believe that you were a victim of some external forces. Which would you rather have – the ability to learn from your mistakes or the tendency to repeat them over and over again?

Trait 2: Commitment. Becoming a successful investor/trader requires hard work. You must get to know yourself intimately because you are the source of your trading performance. You must develop a business plan to guide your trading. You must develop and test three or four strategies that fit within the big picture (as you see it) and then become part of your business plan. You must do your homework every evening. You must follow certain disciplines during the day that we call the ten tasks of trading. And all of this requires a lot of time and energy. And in my experience, it is only the people who are really committed who will put in the work necessary to become successful.

Trait 3: Mental State Control. I'm both a coach for traders and a modeler of top trading behavior. As a coach I help top traders follow the fundamentals (some of which I'm outlining here). And as a modeler, I determine what top traders do in common and those qualities actually become the fundamentals that I teach. For example, there are ten tasks of trading that I expect each of my clients to follow every day. But the key to following those tasks is mental state control. Each task requires a particular mental state in order to execute it properly and you must have the skill to step into that state and perform the task.

For example, one of the ten tasks of trading is the action step of pulling the trigger. The mental state required is 100% commitment to action. There is no thinking involved, just 100% action. You should already know what to do when you get this signal because you've already developed a system that works. Thus, your job is simply to act. Think about when the tiger starts to leap on the antelope. He doesn't suddenly think to himself, "Is this a good idea?" If he did that, he'd probably miss the antelope and break his back. No, his mental state is 100% commitment. Well, each essential task of trading requires a particular mental state and you must have the ability to step into that state.

Trait 4: Top-Down Discipline. I'm in the process of developing a new workshop entitled "17 Steps to Becoming a Great Trader." One of those steps involves developing top-down discipline. In developing this sort of discipline, you must go through the following steps:

• Write out your dream life. What would you like to be, do, see, experience, and have in your lifetime in order for it to be ideal? Write this out completely.
• Write down the purpose behind that dream life. Write down your mission, your purpose and all of the whys behind that dream life. This step helps you get excited about achieving it.
• Write down your goals for the next year.
• Write down the purpose for each goal.
• Write down a series of action steps for each goal.
• And each action step (if it takes longer that a week for you to finish) could be considered another goal with a purpose behind it and a series of action steps behind that.

The net result of following these steps is that you develop a top-down discipline that helps you develop commitment and achieve almost anything you set your mind to achieving. Now let's look at what we have in these four qualities.

First you have a top down discipline that really helps you achieve almost anything you set your mind to achieving. Next you have the ability to get yourself into the appropriate mental state to do whatever you need to do with excellence. Third, you have the commitment to see your goals through to the finish. And lastly, but remember that I mentioned it first; you believe that you are personally responsible for what happens to you – which means that you can learn from your mistakes.

Now, don't you agree that with these four qualities, you could achieve peak performance as a trader or almost anything else you set your mind to doing?

Trader Self-Evaluation

What are Seven Key Areas that You Need to Work on to Become More Self-Aware?

In my work with traders and investors I believe the most significant work that anyone can do to increase market returns is self work. Really understanding yourself and how you think can give you an edge that others in the market don't have.

As part of my Super Trader Program, I give a long questionnaire to each trader to do an evaluation of themselves. Some of the feedback that I get is that taking the test is like doing a Ph.D. program! It's that involved.

I consider the ten questions that I give my Super Traders to be the essence of this self-evaluation process— a minimum starting point for this type of work.

This week we'll start this process with just one of the points. My advice to my Super Traders is to spend at least an hour on each question—a day is even better. These questions are meant for you to really dig deep and come up with responses from your core belief structure.

Question of the week: What are seven key psychological areas that you need to work on or are currently working on?

Don't say "none" because that answer really suggests that you are totally unaware of what is going on with you.

We basically live in a society in which we are programmed to feel separate and alone from everyone else, programmed to follow the rules of the games that others invent for us to play. The net result is most people do the exact opposite of what is necessary for success. As you become aware of this, you'll also become aware of all your patterns, beliefs, and emotions that you need to work on or clear out to become more successful as a trader.

Here are some examples that might fit some of you:

• I really have a fear problem that enters into my trading. I want to make trades but I'm afraid to pull the trigger. And that fear seems to come up in other areas too; I guess I'm really afraid of failure.
• I have some internal conflict when it comes to working on myself. On one hand I want to, but on the other hand, I'd rather do other things. Working on myself feels like having a tooth pulled. For some reason, I just don't want to do it.
• I don't have any discipline. Sometimes I just decide to trade. I make almost random trades or take recommendations that I've been given, but just certain select ones appeal to me. And the net result is that those trades never seem to work out. (Note: this is also an incomplete answer. What is the selection process? What happens to those trades? Do you cut losses and let profits run? Are you compelled by some emotion to trade?)
• My mother continually criticizes me. My mother gave me everything when I was growing up, and I'm very grateful to her. But she's always telling me what I do wrong. In fact, it upsets me to be around her. Yet at the same time, I feel that I must support her. I need to find out why her criticism bothers me so much and what I can do about it.
• I really don't like to be alone. When I do all of things that are important to trading success, like psychological work, I have to go inside and search and that really disturbs me. Also when I try to meditate, things come up that cause me to be afraid. (And, of course, if you had this response, I'd want you to at least find out what's trying to come up that is causing this).

Those five statements are just examples of what might come up for you. But whatever you find… look thoroughly. What's really going on? What are the emotions you don't want to feel? What are the hidden beliefs? What is the internal conflict where part of you wants certain things and another part wants something else? Who are these parts and what are they trying to do for you? (The concept of 'parts' is covered extensively in the peak performance home study and 101 workshop).

Trader Self-Evaluation - Part Two

What are Your Key Beliefs About the Markets?

Last week I asked you to begin a process of self-evaluation, mentioning that in my work with traders and investors I believe the most significant work that anyone can do to increase market returns is self work. Really understanding yourself and how you think can give you an edge that others in the market don't have.

As part of my Super Trader Program, I give a long questionnaire to each trader to do an evaluation of themselves. Some of the feedback that I get is that taking the test is like doing a Ph.D. program! It's that involved.

Iconsider that answering the ten questions, the essence of this self-evaluation process, to be a minimum starting point for this type work.

This week we'll continue this process with a second important question to explore. Remember, my advice to my Super Traders is to spend at least an hour on each question—a day is even better. These questions are meant for you to really dig deep and come up with responses from your core belief structure.

Question of the week: What are your key beliefs about the markets?

It is important for you to remember that you can only trade your beliefs about the market. So what are the key beliefs that are guiding you?

To really understand what's guiding your trading, you should list at least fifty beliefs. However, at least ten is a good starting point.

To help you get started, I've listed twelve of my most important beliefs about the market. Some of these are core principles that I teach everyone and some of them are just things that fit me. Also I just came up with these twelve off the top of my head. Like I mentioned, you'll probably need to discover at least fifty beliefs to thoroughly cover the key principles that guide your trading.

1. Cut your losses short and let your profits run!!!!!!!
2. Risk, as it relates to how much you can lose in a trade, is much more important than risk as it related to how much volatility you can have. Both are related though.
3. You must understand the R-multiple distribution of your trading system and the average R it produces (expectancy) and the variability of that distribution (i.e., how volatile it is).
4. You must know the objectives you wish to accomplish. What would you like to accomplish and what can you tolerate in terms of drawdowns? In my case, I'd like to make 10% per month in my trading.
5. To achieve your objectives, you must understand and use position sizing to your advantage.
6. Fill your portfolio with a core position that you might adjust weekly or monthly. However, then find efficient stocks and use leverage with those stocks to achieve peak performance. (Again, remember that these are my beliefs and they might not fit you.)
7. When I have a large down day, thoroughly investigate what happened and how I might have caused it or made any mistakes.
8. Keep a trading diary on every trade.
9. Follow the ten tasks of trading.
10. When I cannot be actively trading, remove all speculative positions.
11. Understand the risk reward of each trade before you enter it. For example, your potential reward should be at least three times your potential risk.
12. Keep stops loss levels with my core positions and actively monitor the market for my speculative positions. (Again, this one is my personal preference.)

I want to caution you again that these 12 beliefs are my personal beliefs. Your beliefs might be different. However, certain beliefs are universal for good trading. These include beliefs 1- 4 (knowing your objectives), and 8-11. These are just ideas to get you going. So be honest with yourself, and start to look at what you truly believe about the markets. You may surprise yourself.

The Flow of the Markets

Imagine yourself flowing down a river, only you don't know that you are. You do, however, notice that when you move in one direction, with the flow of the river, you move rapidly. When you move in another direction, against the river, you move slowly or not at all. In fact, when you go in that direction, you seem to put out a lot more effort just to stay in place. Your life becomes a struggle. It just seems to push you in another direction. Feeling miserable, you fight against it. But it doesn't help. You still seem to move only in one direction—with the flow of the river.

Most people prefer to struggle against the river. They try everything they can think of to go upstream. All solutions like this—going against the flow—have the same result: frustration. If you were in the river, what could you do to make your life easier? One solution would be to get out of the river. But that would be giving up. There is only one easy solution—to acknowledge or accept that the problem has nothing to do with the river. The river just is. And it moves downstream and nothing you do can change that. When you realize that the problem stems from you, then the solution becomes obvious - just relax and flow with the river.

Buy High, Sell Low?

One of the oldest adages in market psychology is "Don't be afraid to buy high and sell low." Let's analyze what that means. If the market price is high, then the market is moving up. Those who are afraid to buy because the market is too high are fighting the flow of the river. It is possible the river may change direction, but you cannot predict if it will by determining how long it has been flowing in a particular direction. It may continue in the same direction for an unspecified length of time. Then again, if the market price is down, it also indicates the direction of the flow of the river. Those who are afraid to sell, once again, are fighting the flow.

Whether you go with the flow of the market or struggle against it, the market will continue to flow, taking you with it one way or another.

Why do traders resist the flow of the markets? They do so because they play psychological games with the market. The most common game involves not being willing to give up what you perceive to be control, the need to be right, although you have no control over the market flow.

When you are struggling with the market, the struggle becomes all consuming. You don't realize that you are struggling with the market. Instead, you find yourself always looking for some solution to overcome the struggle. The struggle obscures the obvious solution: Letting go.

For example, suppose you have a tendency to be in a perpetual market bear, always expecting the market to go down. For you, every little turn in the market is evidence that the market is turning. As a result, you always go short and consequently, take a beating. You repeat the process, over and over, until the market actually turns down. With each transaction the struggle against the flow of the market intensifies for you.

Even worse is the trader who refuses to accept the inevitability of eventual loss. The market moves against each position the trader takes, but he refuses to go with the flow and refuses to accept the loss, no matter how small. It is an affront to the trader's ego. As a result, he refuses to accept it and the loss becomes larger. The bigger loss is even harder to take and the trader again refuses to accept it. The struggle continues until the loss becomes so overwhelmingly large that the trader has no choice but to take the loss.

The solution to the problem of resisting market flow is to realize that the problem has nothing to do with the market. The problem stems from you, the trader. The market is not going against you personally. The market is simply moving. Whether you go with the flow of the market or struggle against it, the market will continue to flow, taking you with it one way or another. Market flow is bigger than any individual trader. The question is whether you realize how you are creating your struggle against the market. When you push against the market, the market seems to push back. But the market is not the problem.

The trader's struggle with the market is the problem.

Being Right and Making Money Are Not Equivalent

How important is it for you to be right? Let's say I could guarantee that you would make money by the end of the year—lots of money—but you would probably lose money on 90% of your trades. Would you like that? Could you tolerate that? Would you accept that? Most people would probably answer "no" to all three questions. And if that is you, you probably are denying yourself the opportunity to make money simply because being right is more important than making money.

Some of you might be saying, "How could you be wrong 90% of the time and still make money?" The solution goes back to the golden rule of trading, "Cut your losses short and let your profits run." Let's say that 90% of your trades lose money and that your average loss is $100. On the year you make 100 trades so you end up losing 90 of them for a total loss of $9,000. However, let's also say that your average winning trade is a big R-multiple. It's an R-multiple of 100 or a $10,000 winner. You have ten of those in a year, so you end up making $100,000 on your winning trades. If you subtract your winnings from your losses, you'd end up with a profit of $91,000 at the end of the year. You make $91,000, yet 90% of your trades are losers.

My guess is that 99% of the trading population could not trade a system that would produce those kind of results. The reason is because they don't get to be right enough. They have too many losing streaks. They have losing streaks that are longer than five in a row. Most people cannot tolerate long losing streaks. When they occur, they totally abandon what they are doing. In such a system you could easily have 25 consecutive losses. At that point you become certain that your system is broken, and you try something else.

Let's look at the opposite end. Suppose you got to be right 90% of the time. Suppose your average win was $100 and that your average loss was $2,000. This means that you'd have a total of $9,000 in winnings and $20,000 in losses. You would lose $11,000. Would people trade that system? Yes, they would. They would probably trade it for a number of years until they went bankrupt. Why? Because they get to be right most of the time and that is very rewarding.

You might be saying, but how could people possibly tolerate losses of $11,000 after 100 trades? It is easy; they turn the losing trade into a long-term investment in their mind and say, "it's only a paper loss." For example, I've had workshop attendees who were probably way above average in terms of sophistication. However, I asked them to raise their hands if they had an investment in their portfolio that was only worth 50% or less of what they paid for it. Eleven people raised their hands—over a fourth of the class. And my guess is that among the overall population of investors, most people are sitting on a number of big losers, hoping they will come back. Why? Because they cannot stand to be wrong on an investment and they are waiting to be right on those losing trades.

What is the cost of having losing investments in your portfolio? It's major. First, you are using valuable capital up with nonproductive investments. Second, you are missing many good opportunities.

Why Being Right Seems So Important

There are two primary reasons why we focus on being right. First, we are conditioned to be right by the school system. Second, everyone in the trading industry gives people what they want—ways to be right—which tends to perpetuate the myth. Let's take a closer look at these two reasons.

First, we are conditioned by the school system to the importance of being right. In school you are taught that there are right answers and wrong answers. What is a right answer? If you learned how to survive in the system, you learned that a "right" answer is whatever the teacher wanted.

Your performance is measured periodically through tests in which you are asked to pick the right answer. If you cannot get more than 70% right on the test, you are labeled a failure and ostracized. Your humiliation might even be in public in front on all your friends. And if your humiliation isn't public, it certainly is semipublic. Your "poor" performance goes home in the form of a grade with a comment that "Johnny is a little slow or Johnny is bright, but he just doesn't try." Usually, at this point, the most important people in your young life get involved—your parents.

Even if you understand the system and work hard to know the right answers, you still might be taught that your performance is not good enough. It usually takes 94% right to get an excellent grade. But how many children go home and show their 94% test to dad only to get the response, "Why didn't you get 100%?"

Thus, it is no wonder that traders want to be right all the time. And being right usually costs them dearly in terms of profits. Whether you've been through 20 years of schooling and have a graduate degree or less than 10 years of schooling, you still have the same conditioning about being right.

The second reason people want to be right is that service providers for traders and investors feed the bias to be right. First, software vendors tend to provide systems that can be highly optimized. Once you've optimized your trading, you can lay a line over the prices and see exactly where you should have bought and sold. It seems obvious. However, the same optimized system does very poorly when applied to the real world.

At investment conferences, the hottest speakers are those who provide information about high probability entry techniques. If you say, "Trade with the odds on your side" and show someone a technique that is right 75% of the time, you'll get a large audience. Yet most techniques of this nature usually have big losers and may not even have a positive expectancy. Nevertheless, being right 75% of the time is all is takes to get people to trade them.

The Solution: Expectancy

What you must do now that you are trying to survive in the real world is learn about expectancy. My book, Trade Your Way to Financial Freedom is one of the best sources I know that covers this topic. By definition expectancy is how much you can expect to make, on the average, over many trades. Expectancy is best stated in terms of how much you can make per dollar that you risk. In Trade Your Way to Financial Freedom I cover this important topic as well as detailed instructions on how to calculate expectancy. In my workshop and home study program on How to Develop A Winning Trading System we really focus on this topic and show you how to incorporate expectancy into a successful, profit generating trading system.

Mastering Self - Motivation

In my ebook “ The Way To Trade Forex” and also in my Forex Mentoring I often say that you could have a superb strategy or even a good entry, but if you are unable to master yourself, you are unlikely to succeed in trading.

Emotion free trading means you have to have to be in a right state of mind, calm, focussed and totally motivated, which will greatly help you in your trading.

To truly become a master trader, action is required. As Shakespeare said, “Action is eloquence”. You cannot have a goal without an action plan. Action is needed in any areas of your life, more so in Forex Trading.

So how can you motivate yourself? Though there are probably hundred’s of way to motivate yourself, for today I will go through 5 ways how you can achieve motivation.

1.) Have a Vision

Creating a Vision can be very motivational tool. You must ask yourself, what is my preferred future? You have to create a vision of what you want to be, and you have to live into that picture, as if it were already true. By creating a vision, it will identify a direction and purpose, and it will promote a laser like focus, which in turn will build confidence. What better way to motivate you?

2.) Step outside your comfort zone.

90% of traders lose money, so have you ever wondered what sets a master trader apart from the amateur trader? It is their determination, countless hours of learning, improving their skills and having a drive to succeed. You have to challenge yourself, only challenge causes growth, only challenge will test our skills and make us better traders.

Each and every one of us can and should strive to extend past our comfort zones to achieve personal success in life. To succeed we have to extend ourselves a little further. Go on! Give that comfort zone a nudge.

3.) Leave your negative friends – Always be in a positive frame of mind

Politely walk away from “friends” who don’t support your goals. If you associate with negative people than they will pull you down. Never indulge in negative gossip, because it will drain your energy and stifle your own optimism. Cynics and negative people do not create. I come across many traders’ who will always look at the pull you down too. So stay away from such friends.

Enthusiasm for life is contagious; being in a positive frame of mind will greatly assist in your trading. So hang around with traders who are positive, focussed and successful

4.) Plan

One of my golden trading rules is planning. In trading this has no equal. One hour of planning and doing homework will save you lot of money by not pulling the trigger on a losing trade. Most traders don’t take that precious hour to plan, because we all want to rush into a trade; don’t want to “ miss” the trade. We don’t understand that this one-hour spent in planning will be the most productive hour.

Successfully planned trade will motivate you, and will certainly increase your bottom line.

5.) Relax – Sit there and do nothing!

A relaxed mind will think well. For some traders, who like to work non-stop, doing nothing can actually be pretty difficult. You should always set aside some free time to do nothing, this can actually be healthy for your mind, body, and emotional life, especially if you find that you’re really wearing yourself down.

Completely relax and don’t allow television or music to distract you. Feel your sense of belonging to silence. Sitting in silence gives your most perceptive side a chance to speak to you. It allows your true dream in life to take shape and clarity. This is a kind of meditation to empty the mind and if you can achieve this for some time, than you will achieve levels of tranquillity and serenity that is difficult to achieve any other way. The person’s mental and emotional as well as physical health is likely to improve with that kind of meditation practice.

This in turn can only improve your trading.

Trader's Expo Report? Zombies Among Us

A while ago, I helped TradersWorld Magazine at their booth at the 2003 Trader's Expo in Chicago.

It was an experience that confirmed many of my thoughts and feelings about the "state of the trading environment".

Why did it not surprise me that the vast majority of those that walk the aisles are looking for one thing…the Holy Grail?

It's so easy to think that if you surround yourself with experts in the field (and there were plenty of them in attendance), you're bound to come across someone you can trust and relate to,… not just from words on a page, but by getting a sense of who they are in person.

Some of these experts made themselves VERY accessible.

I walked up to Steve Nison, the Japanese Candlestick guru and had a 15 minute conversation with him about our mutual love for candlestick analysis… AND our common appreciation for the mental and emotional part of successful trading.

The very personable Larry Williams walked up to the TradersWorld booth to say hello to Larry Jacobs, but instead his eye caught my display about The Mental Side of Trading.

We spoke for about 10 minutes on a small range of subjects from the markets to internet marketing to the importance of mental toughness for traders.

After wishing Larry well, it occurred to me that one thing all the gurus seem to have in common was their appreciation for the Mental part of trading.

Now, most traders in general will give lip service to the importance of the mental aspects, but do absolutely nothing about it.

A few lines of "Today I'm not going to make the same mistakes as I made yesterday" self-talk is about all the mental training they will muster.

Gurus and successful traders do more than give lip service.

They train.

They train their minds to do the right things during the trading day. What are the "right things"?

To follow their tested and trusted trading system… without wavering…without flinching.

Of the 113 booths (that I counted) at the Traders Expo, 111 ½ had to do with trading systems, trading information sources, data feeds, and the like, while 1 ½ booths dealt with the mental part of trading.

Why is that?

Well, many traders(wrongly) feel that committing to training their minds means that something must be wrong with them.

It's an admission that one is out of control and that's just not something that most want to face.

They'd rather find a system that works more of the time… one that gives you better signals that they can follow.

No admissions necessary.

The truth is that if you train yourself to be disciplined and focused in your trading, you don't even need last year's best performing system to be successful in your trading.

All you need is a "decent" system.

I'll likely be many other Trading Expos and my guess is That I'll see a lot of the same trading faces, zombie-ing down the isles, continuing their searches for the Holy Grail… and not ever looking inward for the answers.

Trading Is a Thinking-Man's Game: WRONG!

Most traders move from trading system to trading system, and over time, until they find one that suits them…

One that is comfortable to run, and tests well over (back-tested, then real) time.

Some traders never stop looking for the "right"system.

THAT is a problem.

There are many systems that can generate nice profits over time. To settle on a trading system that's right for you:

First, you have to believe in the process by which the system generates trades.

Who was Fibonnaci, and how did he arrive at his methodology?

Does it make SENSE to YOU?

Maybe you're a visual sort of person and you are drawn to Candlestick charting. Take the time to understand why the patters mean "reversal" and not just accept the "picture".

Go deep.

Choose a guru that you will need to trust 100%.

If you choose to take your trades from a guru, understand where his or her godliness is coming from.

This can be a dangerous choice in that you are giving up control to another. Choose wisely.

Second, whatever system you decide to go with, Back-test it.

In today's modern world of software, there's no excuse not to run all the back data you can through your system and see what the results would have been.

Although back-testing is no proof of future performance, at least you can see the logic of your system at work.

Third, test your system in the real time.

Take a VERY small amount of risk capital and trade live.

This could be the most valuable phase. Although you won't have "fully-invested" emotions tugging at you, you will feel something, and you can learn to control your emotions as you allow your system to do its' work.

The bottom line to all of this is that if you don't have TOTAL CONFIDENCE in your system before you start trading it, you will doubt your system's ability to perform with every losing streak.

Thinking about your system and its' validity while you are trading it will spell doom.

Do all your thinking in the "pick a system" stage.

Now, when the trading day is over, you should be reviewing your trades… but not your system.

Did I follow my system correctly?

Did I weaken in my resolve to follow my system?

How can I (not my system) improve?

Nobody is saying that you should be sticking to a system that is losing in real time.

What I'm saying is you should only judge your system over the long term…not on a daily or even a weekly basis.

THINK long and hard about what stock or futures or forex speculation is and whether it fits your investment objectives.

THINK about the system you are choosing and why it's right for you.

THINK about the results you get from your back-testing and your real-time testing of your system.

BE A MACHINE (DON'T THINK) when you are trading your system.

This is why I dedicate myself to the mental training of traders.

Unless you can control yourself, you can never control your system.

And in order to control yourself and your emotions, you have to believe totally in your trading system.

Do the work.

Think.

Then don't think.