A Healthy Psychological Profile is Needed for Successful Trading

Excerpted from Van Tharp's Peak Performance Home Study Course

Many mental health professionals define an "uncertain" condition as being stressful. Uncertainty occurs because of too much information or because of too little capacity. The very fact that we cannot deal with available information is stressful.

Available trading information far exceeds one's capacity for making basic trading decisions, so one can only attend to some of this data. Limited capacity is a major factor in trading success and in understanding stress.

Three factors are essential to successful trading:

1. a healthy psychological profile,
2. the ability to make accurate decisions from a large amount of information, and
3. money management and discipline.

A weakness in any of these areas reduces one's capacity for processing information, resulting in stress, poor trading decisions, and losses. Losses, in turn, can produce stress, resulting in more losses. Readers who have taken the Investment Psychology Inventory Profile™ may recall that their test results were split into these three major areas.

A Healthy Psychological Profile

A healthy psychological profile might easily encompass all aspects of trading. However, certain psychological characteristics appear distinct from decision making and money management.

Everyone has a different set of past experiences. As a result of those experiences, one develops certain attitudes toward life. These attitudes may be open or restrictive. Open attitudes produce growth, encompass change readily, orient people toward self-improvement, and produce happiness and success. The successful trader, for example, might describe himself as follows:

I enjoy life to the fullest. I am constantly exploring new ideas, visiting new places, experiencing change, and having fun. I try to get everything I can out of life, and I eagerly look forward to each day.

I am in the best of health because I eat proper foods, get plenty of exercise, and sleep well. I am never overly stressed because I do not feel pressure - only challenge.

Although an open attitude is not essential to trading success, most successful traders are quite open. An open attitude will help a trader in the market because it enhances information processing capacity. Although the successful trader still has a limited capacity, his attitudes toward life keep his capacity at the highest possible level.

The losing trader, by contrast, often has a closed attitude toward life. Part of this closed attitude includes a number of defense mechanisms against winning, such as the fear of success or the fear of failure. Any form of defensiveness results in isolation, building protective walls, and resisting change. Consider the following statements that a losing trader might use to describe himself:

I am really unlucky. Every time I try to trade, something goes wrong. I end up losing. Other people make it impossible for little guys like me to be a winner. Perhaps that is why I am so depressed all the time. Money sure has been my downfall.

Trading is very stressful to me, perhaps because I worry about what will happen all the time. But I also worry about what will happen if I get out of the markets. I'll probably never be able to get ahead in life.

The losing trader has closed himself off from the world. Some information still gets through, but it is all darkly colored by his restrictive attitude. His closed mind severely restricts his capacity for dealing with information, and he feels "stressed."

This is only a brief introduction to this concept. To learn more about the relationship between stress and capacity, and how this relationship affects you as a trader, refer to Chapter V in Volume Two of the Peak Performance Home Study Course for more.

Self-Sabotage Revealed

In my peak performance training with traders, I give a strong psychological slant to the concept of self-sabotage. Self-sabotage typically occurs when one lacks the discipline to act in one's own best interest. For example, when you have dessert, knowing it's taboo because you are trying get healthy, you might call that self-sabotage. Or perhaps you know you need to exercise and you really feel good when you do so, but somehow you just feel lazy and want to skip the exercise period. Self-sabotage occurs in trading in many instances:

• When you know you should follow the ten tasks of trading, but you don't.
• When you know you need to determine if your system will really work, but you just trade it anyway.
• When you know you should develop a business plan for your trading, but somehow that just seems like too much work.
• When you know you need to put a stop loss order in on a trade, but you don't.

These and numerous other examples characterize self-sabotage. And these examples of self-sabotage typically occur when you have internal conflict between various parts of yourself and when emotions pop up that result in behavior that is not in your best interest and when you just avoid doing what's important for success.

Many traders, however, avoid thinking about self-sabotage in this manner because they don't like to go inside of themselves to see what is going on. They prefer to think technically about systems rather than notice what their beliefs are and whether or not they are useful. As a result of this tendency, I've developed another definition of self-sabotage that everyone can relate to: repeating the same mistake multiple times.

My definition of a mistake is when you don't follow your rules. And if you don't have rules, then everything you do is a mistake. And self-sabotage occurs when you keep repeating the same mistakes over and over and over again.

For example, you don't raise your stop when the market makes a new high. When you skip it once, and your rules say you must do it, then it's a mistake. When you do it three times in the same week, then it is self-sabotage. When you develop this attitude, can start keeping track of your mistakes and see how much they cost you.

For example, suppose you are about to be stopped out for a 1R loss. (The definition of a 1R loss and R-multiples in general is explained in my book Trade Your Way to Financial Freedom and there is a brief description in my Tharp Concepts section of the website.) You don't want to be stopped out, however, so you cancel the stop – which is your mistake. The position keeps going down and eventually you get out with a 3R loss. That mistake cost you 2R (i.e., instead of a 1R loss you got a 3R loss).

Now suppose you have a system that makes you 100% per year. However, you make a 2R mistake each week. At the end of the year, instead of being up 100%, you have lost money just because of your mistakes. Now can you begin to understand how trading reflects your behavior and that one of the critical things that you must do as a trader is to eliminate mistakes

Hank Pruden on "Behavioral Finance" and Technical Analysis

Hank Pruden’s theory of "Behavioral Finance" proposes that human flaws are consistent, measurable and predictable, and being aware of and utilizing this phenomenon can benefit a trader.

"For the better part of 30 years, the discipline of finance has been under the thrall of the random walk\cum efficient market hypothesis. Yet enough anomalies piled up in recent years to crack the dominance of the random walk. As a consequence, the popular press has been reporting the market behavior," said Pruden. One of these new methods discussed is "behavioral finance."

Pruden is a professor in the School of Business at Golden Gate University in San Francisco. He was a featured speaker at the 20th annual Telerate Seminars Technical Analysis Group Conference (TAG 20).

Behavioral finance is "the use of psychology, sociology and other behavioral theories to explain and predict financial markets. Behavioral finance describes the behavior of investors and money managers and their interaction in companies and securities markets. It recognizes the roles of varying attitudes toward risk-framing of information, cognitive errors, lack of self-control, regret in financial decision-making and the influence of mass or herd psychology," said Pruden.

Predictable human behavior can and does impact markets, said Pruden. One example is the "crowd psychology" or "bandwagon" theory. For example, if a market is coming up from a basing area on the charts, "smart money" is responsible for the majority of the initial buying. "As people jump on board, we see the bandwagon effect, and that bandwagon pushes prices up. Volume tends to surge at its peak, certainly on the buy side, during the mark-up phase in the middle. Later on, toward the end of the trend, smart money is not doing the buying; somebody else is. The smart money is doing the selling. The market tops by curving over, or sometimes with a spike top. So, we can see express that in price and we can see under it in volume," said Pruden.

Regarding the type of trading approach to the bandwagon effect, Pruden said, "We align our indicators to show a distribution pattern or a breaking of trendlines, and we should see a post-volume peak. Volume will typically peak before a big change in sentiment."

Pruden said he puts time, price and sentiment together to come up with a composite to look at all those parameters at once. This composite would help in any trading decision, he said.

In the four major elements of technical analysis - price, volume, time and sentiment - recognizing and factoring in human behavior is certainly a major portion of the sentiment element, said Pruden.

At Golden Gate University, Pruden developed and teaches accredited courses in technical market analysis.

Make An Honest Self Appraisal

If you are willing to accept total responsibility for your investment results, you will realize that you are the most important factor in your trading or investment success. If you have done that, you are way ahead of the crowd.

I once had a call from a gentleman in England who had been working with my home study course. He said, "I've been working through the course for over six months. It's helped me realize a lot about myself, but there is one thing it hasn't done. It hasn't given me a positive expectancy system." The ironic thing about that statement is that I had not attempted to give a methodology. There are several reasons for that: 1) If you want to be good, you must design something that fits you. That only is possible if you design the methodology. 2) Psychology is far more important than methodology. In fact, psychology is part of methodology. For example, when we attempt to help people develop a reasonable method that works, they resist it strongly because they have so many biases that keep them focused on the wrong aspect of trading - areas that have nothing to do with success. And it is very difficult to show them the correct direction.

As a result, the best thing you can do for yourself to increase your income from the market is to determine how you are blocking yourself. This should be done at two levels. Whenever you develop a trading business plan a great deal of that plan should have to do with introspection. Take a look at all of your beliefs. Are they useful beliefs or do they hinder you in some way? What are your strengths and weaknesses? What about you can't you see clearly because you are part of it? You should look at doing this sort of assessment at least once each quarter.

The second self-appraisal you need to make is at the beginning of the day - and perhaps even hourly throughout the day. What's going on in your life? Are you ready to face the markets? How are you feeling? Is there some sort of self-sabotage surfacing in you? For example, are you starting to get too confident? Are you starting to get too greedy? Do you in any way want to override your system? The best traders and investors are constantly doing this sort of self-assessment. If you want to make money in the market, then perhaps you should start doing the same.

Behavioral Patterns That Sabotage Traders - Part I

Although I do not maintain a private practice of counseling/coaching for traders, it is perhaps inevitable that traders would contact me for assistance after reading my book on The Psychology of Trading. Once in a while I take on a project of working with a group of traders because of the opportunity to push the envelope and use psychology to improve their trading performance. In the past few years, I would guesstimate that I have gathered personality questionnaire data and assisted over one hundred traders.

That's a decent-sized sample, and provides me with worthwhile insights into the minds of traders and the problem patterns that interfere with their trading. Below I outline a few of the things I have learned from questionnaires and interviews with individuals who are trading for a living.

• Most trading problems are varieties of performance anxiety. Performance anxiety occurs when a performance that is usually automatic becomes the object of excessive scrutiny. This attention to the performance creates an interference effect, in which the performance can no longer flow naturally. Such performance anxiety frequently interferes with athletic performance, public speaking, sexual performance, and test taking. Whenever fears about the outcome of a performance dominate the performance, outcomes are apt to suffer.
• Performance anxiety occurs as much during times of market success as during times of market loss. It is not at all unusual to find traders who are good at taking (appropriate) losses, but who become fearful when they book a gain and take profits prematurely (i.e., prior to reaching their profit targets). Interference effects following strings of losses are no more debilitating than interference effects from pressure that traders feel when they are making money.
• Traders commonly try to replace negative self-talk with positive self-talk during trading. This is a mistake. When traders are immersed in the market and focused on the screen, they are not engaging in self-talk at all.
• Perfectionism is the most common source of performance anxiety among traders. Traders tend to be achievement-oriented and often set lofty goals for themselves. These performance goals contribute to tension when the goals are not met. In general, it makes sense to replace performance goals with process goals. Instead of setting a goal of making $250,000 a year, a trader should, for example, set a goal of following a trading plan (entries, position sizes, exits) on 90+% of all occasions.
• Perfectionism leads traders to overtrade. Overtrading is the most common source of losses among the traders I've interviewed. Traders overtrade when they feel internal pressures to make money that blind the trader to what is happening in the markets at the time. Trading when volatility is low, trading outside one's trading plan or strengths, trading to make up a loss, and trading imprudently large size are examples of overtrading.
• Traders that master performance anxiety at one level of size (e.g., 5 contracts) frequently re-encounter it once they meaningfully increase their size (50 contracts). We generally calibrate our emotions by the dollar amounts we make or lose. This makes a fifty contract trade much more difficult for traders than a five contract trade, even though the setups may be identical.
• Traders often think they have worse psychological problems than they actually have. When performance anxiety patterns have interfered with trading for a considerable period of time, traders often become convinced that they have deeply-seated emotional problems that need intensive psychotherapy. Often, the self-perception that one is damaged - that one is emotionally unfit - is a larger problem than the performance anxiety itself, which is a very solvable problem.

To be sure, there are problems other than ones related to performance fears that can interfere with trading. Many of these are described in my book. The unique thing about performance anxiety is that it can afflict highly successful traders every bit as much as rookies. This is because the root of much of the anxiety - perfectionism - tends to be present in the most achievement-oriented and successful individuals. It is truly a double-edged sword.

Somewhere between the extremes of performance pressure and complacent laziness is a happy medium where traders can focus on self-improvement without sabotaging their results. Trading is like dating: You want to keep initial expectations reasonable, enjoy it while it's happening, and learn from it once it's over. In the second and final article in this series, I will take a look at strategies traders can use to overcome performance pressures.

Enjoy Bumping Into Walls

This is a new section featuring Peak Performance Trading Tips. These won't be tips on some hot new investment. Instead, they'll be tips on how you get yourself in the best possible condition mentally to perform at a peak level. We'll be doing one new tip each month. You may have heard some of them in one form or another before, but you can never apply them enough. As a result, these tips should become second nature to you.

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.

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.

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.

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.

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.

Van Tharp Back-To-Basics Series

What Does Van Tharp Mean When He Says:

"We Only Trade our Beliefs About the Markets"?

If you are a regular student of Van Tharp's work or reader of this newsletter you hear this a lot: You can't trade the markets, you can only trade your beliefs about the market. Let's explore what this really means.

As a long time modeler of what makes great traders great, Van understands that to model effectively you have to find out what highly accomplished people do in common. Once you get the common tasks that produce excellent behavior, you need to get the ingredients of those tasks. Those ingredients include the beliefs, the mental states, and the mental strategies necessary to carry out those tasks.

Let's look at some statements and see what you believe about them:

• The market is a dangerous place to invest. (You are right.)
• The market is a safe place to invest. (You are right.)
• Wall Street controls the markets and it's hard for the little guy. (You are right.)
• You can easily make money in the markets. (You are right.)
• It's hard to make money in the markets. (You are right.)
• You need to have lots of information before you can trade profitably. (You are right.)

Do you notice the theme?

You are right about every one of these beliefs (whether you said yes or no to any of them). If you don't believe in any of these statements, what do you believe instead? You are right about that too! However, there is no real right/wrong answer. Some people will have the same beliefs and agree with you and others won't.

Therefore, whatever your beliefs about the markets are, they will direct your thinking and your subsequent actions.

What is a Belief?

Beliefs are a primary way to filter information from the world. Beliefs are judgments, categorizations, meanings or comparisons. They determine how we perceive reality and relationships in reality. What you expect (i.e. your reality) depends upon your beliefs and they are largely unconscious. Every sentence in this document represents one or two beliefs, including this one.

One of the beliefs that is most productive for good trading is the belief that you are totally responsible for your own results as a trader. When you adopt this belief, then you can learn from your mistakes. However, if you tend to blame someone else (your broker, your spouse, the person giving you tips) or even the market for the results that you get, then you will tend to repeat the same mistakes over and over again.

When traders "own their problems" and assume responsibility for the results produced, then they discover that their results come from some sort of mental state that either allowed them to 1) follow their rules, 2) not follow their rules, or 3) trade without having any rules.

When traders take the time to write down all their beliefs (about themselves, the markets, money, etc.), then they can establish a much better idea of what they want to trade, and how they want to trade. They can also see flaws in their thinking much easier. It is valuable to know which beliefs support you as a trader, and which ones hinder your progress.

What is a Mental State?

Every task has an optimal mental state that will allow you to accomplish it effortlessly. For example, to execute a trade you benefit from courage and total commitment. Fear, in contrast, is a big disadvantage as a mental state for executing trades.

Mental states are primarily what most people call discipline or emotional control. Examples include: being impatient with the markets, being afraid of the markets or being too optimistic about the markets.

Controlling your mental states is just part of the answer, but when you can see that you are the creator of your own results as a trader, then you can really make progress.

What is a Mental Strategy?

To understand mental strategies, you have to understand how people think. People think in their five sensory modalities (that is, in terms of visual images, sounds, feelings, taste and smell).

A mental strategy is the step by step way in which you use these modalities; it is the specific sequence of your thinking. For example, the most effective strategy for the action step of executing a trade is to 1) see the signal, 2) recognize internally that this is the signal you decided you should take, 3) feel good about it, and 4) take action. If you do anything else, you probably won't be able to take action or it will be very slow.

The Psychology of Trading

Once you have a clear understanding of which beliefs, mental states and mental strategies are the core factors in top trading performance, you can then teach the same skills to others and have them perform well too. And when you can see this success duplicated in others, which we have been able to do in most aspects of trading, then you know you have a workable model.

The key psychological traits of top traders are

1. Personal Responsibility
2. Commitment
3. Their psychological "profile"
4. Working on personal issues (e.g., self sabotage)

Trading fundamentals include the Ten Tasks of Trading.

1. Self Analysis
2. Mental Rehearsal
3. Low-Risk Idea Development
4. Stalking
5. Action
6. Monitoring
7. Abort
8. Take Profits
9. Daily Debriefing
10. Periodic Review

Traders need to be reminded of these tasks and to eliminate any self-sabotage that keeps them from following the tasks. Van teaches all of these steps in detail in his various products and workshops.

Van Tharp believes that everything revolves around your beliefs, mental states and mental strategies, so with that in mind, everything about trading is 100% psychological, including why and how you trade and which system you will follow or build.

Many traders have a hard time "believing" this and it is almost the antithesis of what people learn in academic finance. So only you can decide whether it is worth the time to learn more about yourself and the psychological aspects of trading.

People get exactly what they want out of the markets. Most people are afraid of success or failure. As a result, they tend to resist change and continue to follow their natural biases and lose in the markets. When you get rid of the fear, you tend to get rid of the biases ~ Van K. Tharp, Ph.D.

Know When to Fold 'Em

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, when I started to play online with play money, I had tremendous difficulty making money. And that didn't make sense to me because I knew that most of the people I was playing against were terrible. Why couldn't I make money?

However, one day I read a poker book by a professional who said that he had the same experience in low-limit games in Las Vegas. He said that when he had a good hand, he typically had five or six bad players staying with him. One of them would typically make a very lucky draw and he would be beaten.

Once he figured out what was happening, however, he rarely lost again. And his secret was knowing when to fold 'em. In Texas Hold'em, every player is dealt two cards face down. These are your unique cards that you must use, although with five common cards that are dealt face up, to make the best five card poker hand. You typically bet your hand after you see your two "pocket cards;" after the fist three common cards (called the flop); and after the fourth and fifth cards respectively.

Bad players typically play most starting hands they are dealt, but if there are enough bad players, then one of them will get a good draw that will beat most people. So the solution to beating them is to only play the outstanding starting hands - the hands that will typically win the pot 30% of the time or better. That means that you must FOLD 80% of the hands you are dealt. You never play them and in most cases, it doesn't cost you anything not to play a bad hand.

One of the advantages we have as traders is that we do not have to trade. And it costs nothing to not trade. So the common solution is to only take a position in outstanding trades. And these are usually either trades that are moving strongly in your favor before you enter or trades that are so highly undervalued that you are getting an investment at a small fraction of what it is worth.

One of the highest starting hands in poker is an Ace-King of the same suit. In a ten person game, this starting hand will typically win 68.6% of the time. But it usually does require some help to win. Suppose you are dealt an Ace-King of hearts which you bet so you can see some more cards. However, the next three cards are a 3 of clubs, a jack of diamonds, and a 7 of spades. Those three cards didn't help you at all. You don't even have a pair in your hand and you only have two more cards to see. Now the odds don't look good that this will be one of the 68.6% of the hands that an Ace King of the same suit will win. You should fold that hand, especially if other people are betting heavily. And again, it won't cost you much money at this stage to fold - just the amount of your initial bet.

The same occurs when you invest in a stock. You buy the stock because it is going up. However, once you buy it, it starts to slowly go down. After several weeks, it's down about 5%. At this point it's like the bad poker hand - you should walk away from it. The odds, right now, don't seem to be in your favor.

Bad players will typically play bad hands to begin with and they'll stay with good hands that don't get supported as more cards are revealed. If you become more conservative with the odds, only playing the best hands, you'll probably win most of them and lose very little money.

One of the golden rules of trading is to cut your losses short and this means get out of trades that don't seem to be working in your favor. Next, week we'll talk about the opposite situation, when the poker hand or the trade starts to look really good.

Do What You Love

I have a pretty good taste in art, I think. At least, I can go into most art galleries, find the piece that I like the best, and it is usually one of the most expensive pieces in the gallery. I can do that except for abstract art. I remember one gallery in Paris that we went into. This artist had a very expressionist style and I liked most of the work in the gallery, but it was all very expensive.

With that introduction, I'd like to mention that I've watched my wife learn art and go from beginning artist to a fantastic artist in a period of about 5-10 years. Many of her pieces might now be the type of work that I'd tend to gravitate to in a gallery.

And I think her art turned the corner as a result of two things she did. First, she went to an Avatar workshop in Ireland. She didn't think that she got that much out of the workshop, but her painting took a leap forward after that workshop. She said that somehow it freed her creative expressive.

The second thing she did was to start a program in a book called The Artists Way by Julie Cameron. As she worked through the program I noticed that her art was getting better and better. She painted her first painting in the style of the artist we both admired in Paris and my feeling was that it was as good as his work.

At this point, what I noticed was that Kala was really loving her work. She actually opened up a web site called www.kalatharp.com to sell her painting. She painting two pieces for her brother in Singapore and he thought that they were pieces that she had bought. And our friend DR Barton actually commissioned her to paint something for his study. And the work was fabulous.

So what does this have to do with trading and success? I've noticed that the people who are really successful in many, many fields start some sort of program of self improvement. I have mentioned many of those in past tips and the Artists Way is one of them. They move into what they love to do and as they commit to it (because they love it) all sorts of things happen to make it work for them

And one day my wife announced to me, “No one has more self-sabotage than me,” as she was going through her program. I was delighted to hear her say that, not because it is true, but because when people begin to think that, then I know they've come a long way in their self-work program. In fact, just saying that told me that she was way ahead of most people who are so numb to their self-sabotage that they are not even aware of it. It shows in her art and it shows in her way of being. I'm very proud of her.

In our Super Trader program, I have most of the people in there spend at least six months (or perhaps a year) of their two years doing psychological work. And as they begin to get insights of how much self-sabotage they really do have, and also get the desire to move through it all, then I know they'll make it.

When To Quit Your Day Job

I have had many readers through the years--most of whom were less-experienced traders--tell me that at some point in the future they planned to quit their day jobs and trade futures full-time. While their optimism was certainly positive from the standpoint of eagerness to learn about a truly fascinating business, it is also probably unrealistic that they will ever make a good living as a full-time futures trader. At the end of this feature I have a few questions that may help determine if you are ready to attempt to join the elusive rank of "full-time" trader. But first, I want to present you with some straight facts.

I have been in this business nearly 20 years. I have read stacks of trading books and have voraciously studied markets and market behavior. I have worked right on the trading floors of all the major futures exchanges. As a journalist, I have conducted countless interviews with the very best traders and analysts in the world. But I still cannot specifically predict what a given market will do in the future.

Now, at this point a few of you may be thinking, "This is not very encouraging news. Maybe I should listen to some of those other guys that say I can have immediate trading success by learning their 'secrets' or adopting their 'proven' system or strategies?" While I hope this is not the case with you, I am very proud of the fact that I have made my reputation in this industry by refusing to be marketed and promoted (hyped) as something I am not, nor can ever be.

It's very important to realize the fact that neither I nor anyone else--not even the most powerful computer trading systems--can predict what the markets will do in the future. Markets will never be tamed. I've said many times that my profession is not a business of market predictions, but one of exploring market probabilities, based upon fundamental and technical analysis--and human behavior. By exploring and understanding market probabilities, and human nature, one can achieve trading success.

Many traders are lured by fast-talkers or fancy wording into thinking that someone or some firm has a sure-fire trading "secret" or system that beats the markets on a consistent basis--and racks up big trading profits in the process. But the truth is, most of these claims are half-truths at best and downright lies at worst--and come from people who are out to take your money. I tell my readers right up front that I have no "trading secrets" and that achieving futures trading success is not easy and takes hard work. And even hard work does not guarantee futures trading success. Unfortunately for many traders, it takes the pain of losing substantial amounts of money early on before they finally realize what I stress to my readers right away.

Okay, enough preaching from me.

What are some clues that you could be one of the fortunate few that actually could succeed at being a full-time trader? I'll get some questions for you shortly, but first I want to address an issue about which you may be pondering right now. That is: Jim, why don't you only trade futures full-time if you are so knowledgeable?

I have never attempted to be a full-time futures trader. By "full-time" I mean focusing only on trading futures and using the realized profits for my living expenses. In my case, that would mean no analytical service, no custom consulting, no educational writing--all of which I'm doing now. Since I have never tried to make a living only by trading futures, I cannot tell you whether I would be successful or not. The reason I have never attempted to trade futures full-time is because I truly enjoy the communications aspect of being a market analyst and a trading educator and mentor. I hope that those of you who have talked with me or emailed me would agree that I do really enjoy discussing markets with other traders. I do know that if I were to attempt to be a "full-time" futures trader, the task would not be easy, even though I do have much experience and knowledge.

Now, on to a few questions to ask yourself if you think you might be ready to trade futures full-time:

Are you a successful part-time trader? You'll need to be successful at trading futures on a part-time basis before you think about moving into the full-time trader ranks. Don't be fooled into thinking that trading futures on a full-time basis will allow you to spend more time to cure your part-time trading ailments. In other words, don't say to yourself: "If only I could spend more time trading markets, I could have more success than I've had just trading 'one-lots' here and there."

Do you have enough money available to live on when (yes when, not if) you hit a streak of losing trades? A losing streak will inevitably occur--and probably sooner rather than later. And I don't mean a losing streak of two weeks, but more like a stretch of poor performance of up to six months, or longer.

Do you have the psychological stamina to be a full-time futures trader? Quite frankly, most people do not. Can your psyche (not to mention your pocket book) handle six months of mostly losing trades?

Will your immediate family members support you--even during a prolonged rough stretch of trading? Believe it or not, this is a very, very important question. For example, if your spouse does not support your decision to trade full-time, then you are likely doomed to failure. The pressure of having to produce winning trades and knowing that your spouse is skeptical of your efforts is almost insurmountable.

And on your part, will you be able to uphold your family or other important responsibilities even during a rough trading stretch? Or, will you brood and kick the dog when he happens to cross your path?

I think you'll agree with me that those are tough questions to answer.

One more thing: I do have many readers that are "full-time traders" but who do fall into a different category than what I described above. These are people who do have enough money to trade futures on a full-time basis--even if their trading profits alone will not support their lifestyles. These are individuals who already have significant amounts of money derived from means other than trading futures. Also, I have many readers who are now full-time traders, and that have retired from another profession and want to spend the "autumn of their lives" not in a rocking chair, but in a field that is challenging to them.

Finding the Best Traders In The World

I was recently approached by a top hedge fund about profiling the best traders in the world. Profiling really refers to finding those psychological characteristics that will best predict success. And I believe that I'm one of the world's experts in that area since we have a huge database of psychological profiles of traders. I've been testing traders since 1982 to help them discover their strengths and weaknesses. The instrument that I've developed, The Investment Psychology Inventory, does an excellent job of that.

However, if you were to numerically rank the best traders in the world, they are probably people who can take $100 million dollars or more and make 20% per year on that money consistently. There are probably only about 20-30 such traders in the world, so how do you profile those traders? And even if you could get a thorough profile of all such traders, their numbers are so small that your data might not be that meaningful. Such are the issues of profiling.

After spending some time thinking about the whole issue, I now believe that my company has developed everything possible to do the task. However, it involves a lot more than just a psychological profile. In fact, it involves a number of assessments.

First, you need their psychological profile. I would expect traders who can make 20% per year or more on large amounts of money to generally fall in the top 10% of our database on all the skills we measure.

Second, I would look for their trader type. We now believe that there are approximately 15 trader types, but that most top traders would fall into only five or six specific categories. As a result, I'd want to look at their trader type.

Third, I'd want to look at accountability. All top traders must believe that they are personally responsible for the results that they get. This leads to certainly qualities. Either 1) they have tremendous discipline to do what needs to be done to be a top trader or 2) they have a strong desire to constantly work on themselves to improve. They are constantly working to maintain an optimal mental state for top performance and they are constantly looking at their beliefs to see if they are useful.

Fourth, we can now quantitatively measure systems and determine how good they are, regardless of the type of trading that people do. I call this the System Quality Number or SQN ™ for short. For example, someone who has a system with an SQN of 5 definitely has a much better trading system than someone who has a SQN of 3. I would expect most of the world's top traders to have systems with SQNs of 5 or better. And the exciting thing about the SQN, is that we can measure it for various market types.

Fifth, one of the big secrets (that most people don't understand) is that position sizing (the variable that controls how much throughout the course of a trade) is the key to meeting your objectives. I expect that most top traders understand this concept at some level. However, this can be taught and can be used to improve performance dramatically. And the higher the SQN, the easier it will be to use position sizing to meet your objectives. Thus, if your SQN was only 3.5, you still could be one of the best traders in the world if 1) you had thorough control over your personal psychology; 2) totally understood how to use position sizing to meet your objectives; and 3) have mastered the sixth quality which is the ability to minimize the impact of mistakes upon your trading.

Sixth, the next secret of the top traders is that they know how to minimize the impact of mistakes. I've talked about this in prior tips, but let's say that the expectancy of your system is 1.2R. You make 100 trades per year, so you should be able to make about 120R per year. However, let's say that every month you make one mistake. That mistake costs you 5R. So in one year, you'll make about 60R worth of mistakes, and your total return is now only 60R. Your mistakes will have cost you half of your potential returns. Top performing traders know how to negate the impact of mistakes.

Lastly, there are certain fundamental skills that all top traders will have such as 1) how to get the information you need; 2) how to execute orders; 3) how to organize yourself; etc. I'd expect all top traders to have these specific qualities.

Using the "ADM" Method to Deal with Losing Trades

A main tenet of success in futures trading is the ability to accept losing trades as part of the overall trading process. This is not an easy undertaking--especially since many futures traders tend to be of a more competitive nature in the first place. Traders certainly don't have to enjoy losing trades, but they must accept the fact and move on. Those who can't accept the fact that losing trades are a part of futures trading usually don't stay in the business very long.

My wife is a school teacher, and one of her favorite acronyms--ADM--can be applied to losing futures trades. "Accept" it. "Deal" with it. "Move" on. (This is a part of the important psychological aspect of trading, and deserves much more discussion than I can provide in this feature.)

I had lunch with one of my trading mentors a while back. We discussed losing trades. I asked my mentor how many losing trades in a row he has had to endure during his long and successful trading career. His reply was 13 in a row. I asked him how he coped with that. He said that while it was certainly not easy, he knew that losing trades are a part of the business and that he was in the business "for the long haul," and that his trading methodology was sound. He added, "Ninety-percent of futures trading profits are made on 10% of the trades, which means most of the other trades are either small losers or break-even-type trades." This is an important fact for all traders to keep in mind.

My lunch meeting with my mentor was good for me because, even though we made no "break­through" discoveries on the path to increased futures trading success, we did reaffirm our own philosophies on trading and markets. My passion for trading and market analysis is fed immensely every time I talk with people in my profession, or attend the quality trading seminars.

For many of you, the futures trading arena can be more fulfilling (and more fun) if you have someone, or some support group, with which to share your thoughts and strategies. If you are passionate about futures trading and markets, finding someone who shares that passion is a great trading tool within itself!

Peak Performance Trading Tips

Last week I discussed Chapter 12 of the second edition of Trade Your Way to Financial Freedom, talking about how five investors with totally different ideas, including opposite views on what might happen, could all profit from various scenarios. The five such investors included:

1. Mary; a long-term trend follower.
2. Dick; a swing trader.
3. Victor; a value investor
4. Ellen; trading on the idea that there is some order to the universe and the markets
5. Ken; a spreader-Arbitrager

These five people were contrasted with Eric who buys and sells when he gets an urge to do so and Nancy who follows the advice of several newsletters. The reason they can all profit is due to the shared ten common characteristics most good traders have. Last week I gave you five of the ten characteristics, including

• A tested, positive expectancy system that's proven itself
• A system that fit them and their beliefs
• Totally understanding the concepts they are trading
• Knowing how to determine 1R and
• Being able to evaluate the risk-reward of each trade

Hopefully, you can see how those five qualities would start to generate success. However, I also said there were five equally important (if not more so) qualities and asked you to guess what they are. Let's see how you did.

The sixth key quality is that they all have a business plan to guide their trading. I've been talking about the importance of this plan for years. Most companies have a plan to raise money, but you need such a plan to help you treat your trading like a business. I've done a complete teleseminar on this topic and also a prior workshop. You can learn more about these on my website, plus future tips will also be about this topic.

The seventh key quality is that they all use position sizing. They have clear objectives written out, something that most traders/investors do not have. They also understand that position sizing is the key to meeting those objectives, and have worked out a position sizing algorithm to meet those objectives. We'll be discussing this is subsequent tips.

The eighth key quality is very critical. They all understand that their performances are totally a function of their own personal psychology and they spend a lot of time working on them selves. This area has been my key focus for many years - teaching traders to become efficient, rather than inefficient, decision makers.

The ninth key quality is that they take total responsibility for the results they get. They don't blame someone else or something else. They don't justify their results. They don't feel guilty or shameful about their results. They simply assume that they created them and that they can create better results by eliminating mistakes.

This leads to the tenth key quality, understanding that not following their system and business plan rules are a mistake. We've discovered that the average mistake can cost people as much as 4R. Furthermore, if you make even one mistake per month, you can turn a profitable system into a disaster. Thus, the key to becoming efficient is to eliminate such mistakes.

If you want more information on any qualities, we can help you. In addition, I'd suggest that you look at Chapter 12 to see how these seven traders approached the sample situations that were given and how they made/lost money.

Abell, Koppel Discuss Their Profitable Short-term Trading Methods

No short-term trading system is perfect. However, having and using a system is critical for short-term trading success, say Howard Abell and Bob Koppel.

"A successful short-term trading system must be profitable, consistent, and personal--conforming to the unique psychological and methodological needs of the individual," they said.

Abell is chief operating officer for Innergame Division and author of "The Day Trader's Advantage" and "The Insider's Edge." Koppel has authored "The Intuitive Trader" and is president of Innergame Division, which is a professional and institutional brokerage and trader execution services division of Rand Financial--a Chicago-based futures commission merchant with clearing representation worldwide.

Innergame Division is also associated with the Moore Research Center, based in Eugene, Ore. Steve Moore is the proprietor. Together, they have created the Innergame Partners/Moore Research, Inc. (IPMR) Trading Approach.

The trading method has the following tenets:

Patience Is Your Edge

The edge of the floor trader is buying the bid and selling the offer. This is an unreasonable expectation for off-the-floor day- and swing-traders. However, there are other ways to maintain an edge. Patience and preparation serve to create an edge that helps build and conserve equity. Knowing what you expect the market to do and waiting patiently for the market to come to you-­in other words, to meet your expectations--gives you that edge.

Good Daytraders and Swing Trades Result from High Percentage of "Set-ups"

Each day must be viewed in a larger context, which might be one day to two weeks of market action. Understanding how markets "set up" to make predictable moves and anticipating these moves through the set-up is a valuable key to success.

Anticipating Market Opportunities

In most instances, waiting for the market to demonstrate what appears to be a trading opportunity will result in entering too late for maximum profits.

Predetermined Buy and Sell Areas Must Be Executed

For those traders who have difficulty "pulling the trigger," putting resting orders in the market will get you into or out of the trade.

Trade One Set-Up Per Market Day

Overtrading comes from indecision and anxiety. By setting your sights on one good set-up in a market, you avoid trading your emotions.

Ignore the Noise, Follow the Signal

Much of what a market does during the day can be considered noise--that is, market action without meaning. Hanging on every tick can be a wearisome and misleading chore. You must eliminate your reactions to the noise and follow the essential signals.

Take "Fast-Market" or Climax Condition Profits

In day- or swing-trading it is a good idea to exit a profitable trade if the market climaxes on heavy tick volume or "fast-market" conditions. It is a high probability that the high or low of the day is being made at this time. If the market hits your resting entry orders under these conditions, expect immediate profits or be alert for another wave in the same direction.

Abandon Dull or Non-Performing Markets

If you find yourself in a market that is very dull--look elsewhere. Time is scarce and watching a dull market drains energy.

Koppel and Abell made their presentation to traders attending the Technical Analysis Group (TAG XVIII) meeting in New Orleans late last week. The meeting was sponsored by Dow Jones Telerate.

Everyone Can Profit

What most people don't realize is that at any given time 4-5 people might go long a position and another 4-5 might go short or unload a position. Each of them can have different systems and different ideas, and all of them can make money. They might have different ideas about the market, but they trade it because they've figured out that it is a low risk idea. And a low risk idea is one that I define to be an idea with a positive expectancy, that's traded at a position-size level so as to survive the worst case contingency in the short run so as to realize the long-term expectancy. In addition, they all have common characteristics, some of which I'll discuss later in this week's tip.

In Chapter 12 of the second edition of Trade Your Way to Financial Freedom, I discuss the strategies and thinking of five such investors.

• Mary, a long-term trend follower.
• Dick, a swing trader.
• Victor, a value investor
• Ellen, trading on the idea that there is some order to the universe and the markets and
• Ken, a spreader-Arbitrager

These five people are contrasted with Eric who just buys and sells when he gets an urge to do so and Nancy who follows the advice of several newsletters. I then show how these people would evaluate five different market scenarios and how those scenarios turned out six weeks later. The interesting thing is how the five major characters can generally make money despite totally different market views.

The reason they can do that is because they all share ten common characteristics which most good traders have. In this tip, I'll share five of those with you.

• First, they all have a tested, positive expectancy system that's proven itself to make money. We've been discussing how that's done in this series of tips.
• Second, they all have systems that fit them and their beliefs. They understand that they make money with their systems because it does fit them.
• Third, they totally understand the concepts they are trading and how those concepts generate low risk ideas.
• Fourth, they all understand that when they get into a trade, they must have some idea of when they are wrong and will bail out of the trade. This is what determines 1R for them as we've discussed previously.
• Fifth, they all evaluate the risk-reward ratio of each trade that they take. For the mechanical traders this is part of their system. For the discretionary traders, this is part of their evaluation before they take the trade. And the chapter goes into how they specifically do that for each of the five trading scenarios.

Can you begin to see how those five qualities would start to generate success? However, there are five more qualities that are just as important and, in some cases, even more important than the ones just listed. Why don't you read through prior tips and see if you can determine what they might be.

Have a good weekend. Next week I'll talk about what those remaining five traits are, but hopefully you'll be able to figure out at least 3-4 of them on your own by reading through some of my prior tips. Until then, this is Van Tharp.

Better to be Profitable Than Right

The ultimate goal of a futures trader should be to have overall trading success by being profitable. There is no single-best path one can take on the destination to trading success and profitability. However, there are a few general trading tenets to which all successful traders have subscribed. One such trading tenet is "losing your ego" when trading futures.

Mark Cook, a well-respected trader and trading educator from rural Ohio, for many years has stressed that traders need to lose their egos before getting into trading futures markets. He is also an advocate of survival in futures trading. One must survive in this challenging arena before one can succeed. I enjoyed listening to Mark at a trading seminar a few years ago. He even used to wear bib-overalls (with no shirt) at some of his trading seminars - just to drive home the point that trading futures is not easy and that ultimate success takes a lot of hard work.

My good friend and respected trader and educator Glen Ring also espouses the notion, and may have even coined the phrase, "it's better to be profitable than right in futures trading." Those who know or have talked to Glen know he, too, is a no-nonsense, no-hype trader who takes a yeoman's approach to the business. When asked what direction a specific market "will" go in the future, Glen is never afraid to say, "I don't know," before he adds that, "successful trading is not a business of predictions but one of probabilities based on past price history."

It's been reported that people who get into the endeavor of futures trading tend to be of higher-than-average intelligence and have more aggressive personalities - called "Type A" personalities. Having higher-than-average intelligence certainly can be advantageous in any field of endeavor. However, in futures trading, possessing the "Type A" personality can be a disadvantage. Reason: More aggressive and competitive people do not like to lose and do not like to be wrong. It's a time-proven fact that trading futures is about absorbing numerous losing trades. But that does not mean "Type A" personalities cannot succeed in futures trading. Those with the competitive and aggressive tendencies just need to realize they possess those traits and then manage them properly when trading futures. (My wife says that I'm a "Type A" personality, but I say I'm not. I just know I'm right and she's wrong - just kidding!)

Most have heard the simple trading adage, "Cut your losses short and let your winners run." What this also implies is that during any given year the vast majority of futures traders will see more losing trades than winning trades. Yet, some can still realize profits by getting out of the more numerous losing trades quickly at small losses (by setting tight protective stops), and allow the fewer winners to run and accrue bigger profits.

Just think for a minute about the futures trader who does not want to lose his or her ego. This is the trader who likes to be right and cannot stand to be wrong. In fact, this type of trader will probably go to great lengths just to be proven right. What does this mean when executing trades? It probably means that the trader who hates to be wrong won't be willing to get out of a losing position at a small loss. Instead, this type of trader may pull a protective stop when in the heat of a trade, or may not use protective stops at all - in the hope that he or she will be proven correct. This type of trader is likely to see a small loser turn into a big loser, and might even get a margin call from his or her broker. And if this type of trader repeats this scenario and keeps absorbing big trading losses, he or she will eventually be forced to exit the endeavor of futures trading. This is also the type of person who would likely blame the markets or the broker for his or her lack of trading success.

Be a humble futures trader. If you are not a humble futures trader now, the markets will eventually make you one - and very likely sooner rather than later. I guarantee it. There are few guarantees in futures trading but this is one that I can make.

Peak Performance Trading Tips

Jack Schwager's primary conclusion after writing the first two Market Wizard books is that great traders all have developed systems that fit who they are. I tend to agree that that's one of the secrets to success. Chapter 4 of the new edition of my book, Trade Your Way to Financial Freedom presents my revised 14 step model for designing a system that fits you. While I cannot do justice to the model in a short tip, what I can do is list some of the criteria you might want to think about in order to design a system that fits you.

Some of the criteria were mentioned in the last tip and I'll just add to that.

1. You need to know who you are. How can you design something that fits you if you really don't know who you are?

2. Once you know who you are, then you can determine what your objectives are and design a system to fit those objectives.

3. What are your beliefs about the big picture and to what extent must your system be able to fit your big picture beliefs. For example, if you believe that the U.S. dollar is doomed to collapse over the next 15-20 years, how would that affect your thoughts about developing a trading system.

4. You can only trade your beliefs about the market, so you need to understand what those beliefs are. What specifically do you believe about the market and how does that give you an edge? When you understand these criteria, then you can specifically design a system that you are comfortable.

Let's take a look at one example. Suppose you believe that markets are not really random because there are big trends in the market that don't fit the price movements you'd expect of random markets. You perhaps believe that the best way to make money in the markets is to find and capitalize on those trends. Now if this was your primary belief, do you think you could do the following?

• Buy things that were out of favor that nobody likes? Probably not because this doesn't fit the primary belief that you believe gives you an edge.
• Sell high and buy low, like a band trader is likely to do? Probably not because this is a very different mentality.

Now I could give lots of examples of beliefs and lots of examples of things that might be hard for you because they don't fit those beliefs. Hopefully, you've got the idea by now. You must determine what you believe about the markets that will give you an edge because you can only trade something easily that fits your beliefs.

5. Next you must understand the various parts of a system and the beliefs that you have about each of those parts. For example, what do you believe about setups, entry, stops, taking profits, position sizing etc. Again, you can only comfortably trade your beliefs

For example, suppose you want to catch trends, but you believe in tight stops. This means that you could easily get whipsawed in and out of trades a lot, but that when you do catch a big trend, your total reward will be many times your initial risk.

6. One of my beliefs is that a trading system is characterized by the distribution of R-multiples that it generates. (See prior tips for a discussion of what R-multiples are (or see the book). That distribution will have a mean and standard deviation that will tell you a lot about how easy it will be to trade. So you must decide what your system's R-multiple distribution must be like in order for you to be willing to trade it.

7. Another way of stating #5 is to ask yourself, "What criteria must my system meet in order for me to be able to comfortably trade it?" And while I can give you lots of suggestions, this is still a matter of personal comfort and a big part of developing a system that fits you.

8. You must also ask yourself, how can I use position sizing to meet my objectives and what is the probability, given the systems R-multiple distribution, that I will be able to do that. And if you have an accurate sample of R-multiples, then you can probably answer this question through simulations.

Lastly, you must ask yourself, what you will do to make sure your system fits all of these criteria well enough for you to be comfortable trading it. If it doesn't meet some of your criteria that well, what will you do to make it fit? Or will you change your criteria?

4 Key Questions to Gauge Your Trading Success

The attitude of the individual trader (part of the important aspect of trading psychology) plays a huge role in success (or failure) in futures trading. For a trader to become successful, he or she must enjoy the "process" of futures trading.

I have a few questions below that will help determine whether you are a good candidate to become a successful trader--if you don't feel you already fit into that category.

Before I get to the questions, it's important to touch upon the term "trading success." What is trading success? Many would reply that trading success is defined as being profitable at trading-­making more money at futures trading than one loses. I cannot disagree with that definition, but there is more to trading success than just the amount of profits accrued from trading. To better explain, here are examples of two hypothetical traders:

1. Trader Bob just started trading this year and has racked up $50,000 in futures trading profits. But he's not happy with that figure. He wants more. Bob wants to "bring the markets to their knees"--and quickly. Bob does not at all enjoy studying charts or reading and learning about fundamental factors that impact markets. His trading decisions are based mostly upon "tips" from friends or his broker. Soon, Trader Bob says he will begin establishing larger trading positions to accrue even bigger and faster profits.
2. Trader Mary has read many books and attended trading seminars--and "paper traded" before she began putting "real money" on the trading table. She, too, has been trading for around one year, and has accrued about $2,000 in profits. She enjoys studying charts, reading about market fundamentals and continues to read books on how successful traders became successful. Trader Mary enjoys the interaction she has with other traders with whom she has become acquainted. She does not get overly excited about winning trades or overly discouraged about losing trades. Trader Mary knows she's "in it for the longer haul" and figures that if she works hard, uses sound money management and "loses her ego," then hopefully good things will come from trading futures.

One can argue that both Trader Bob and Trader Mary have been successful futures traders. But which trader would you say has been most successful? Which trader would you say will continue to be successful? Most would agree that Trader Mary is achieving the greater degree of success in futures trading--even though she does not have nearly as much trading profits as Trader Bob. No doubt, Trader Bob has seen a very good run of trading profits. However, he appears to be a "flash in the pan" and is very likely doomed to "flame out."

One more analogy before I get to the questions that may help determine if you are, or will be, a successful trader. (I think my friend and respected fellow trader and educator Joe DiNapoli would agree with this analogy, as Joe restores classic cars, too.) Trading futures is like rebuilding and restoring a classic automobile. There are several tasks (many of them tedious) on the road to completing the restoration. Those restorers who do not enjoy the tasks of restoring likely will not continue to restore, and will not have a good finished product. Those restorers who take their time and enjoy the entire process of restoring an automobile will have a very fine finished product. The same is true with trading.

Now, here are a few questions to help determine if you are, or will be, a successful futures trader:

1. Do enjoy the entire process of trading futures--from studying charts, reading about and learning fundamentals, listening to and learning from mentors, and even figuring out what mistakes you have made in previous trades, and how you will improve from those previous mistakes? (Remember, a trader never stops learning and should never stop seeking knowledge about markets and trading.)
2. If you are a beginning trader with less than a couple years experience, are you willing to use the very sound money management principles required for survival in futures trading--even if it means meager profits (or meager losses) the first year or two?
3. Do you have the "patience" to wait for good trading opportunities to develop, and then have the "discipline" to follow your trading plan once you make the trade?
4. Are you the type of person who CAN stand to lose, and can you accept that trading losses are your own fault? (This is a very important question, because the typical futures trader has a more competitive personality. Remember that even the most successful traders have losing trades--and sometimes several in a row.)

If you have answered "yes," to these questions, then your road to trading success will be less rocky. If you answered "no" to any of the above questions, then you face a more difficult task on the road to trading success, and you need to figure out what changes you should make to make the "process of trading" more rewarding.

Vitamins for Your Soul, Part VIII

If you've been practicing our vitamins for your soul tips, you've probably seen some major changes occurring in your life. Most of the change may be non-trading related, but overall, I believe they'll help you immensely as a trader because they'll help you lighten up.

Our last six vitamins have included:

1. Focus on the Moment;
2. Make Yourself Laugh;
3. If Something Bothers You, Give It To God;
4. Give Thanks Every Day for your Blessings;
5. Follow Your Bliss;
6. Commit to Love; and
7. Meditate and Listen

This week my I'm adding a difficult, but very beneficial one called fasting.

Fasting

I once did a 57 day fast. It started with three meals a day of just fresh fruit and vegetables. In between the meals, I took shakes with lots of fiber and barium to coat my system. In addition, I was taking special nutritional supplements.

When my system felt like it could tolerate it, I reduced by one meal and just substituted a shake. I continued this process until I was only doing the shakes, plus lots of water. The total experience was 57 days and the last 10 days involved no meals. I lost 33 lbs (which I gained back quickly) but by the end of the fast I had an amazing amount of energy. I felt clean and better than I've felt in a long time. However, I'm not recommended anything that strenuous.

Fasting is actually your body's way of cleansing itself. When you think about humans living with nature, they had to deal with the seasons. During the growing season there was plenty of food, but in the winter months there was nothing. People could only eat what they had managed to preserve and save from the growing season. So naturally there was probably a lot of fasting.

When you were fasting, the body would feed off of itself and it would eat those portions of the body that were the least useful - things that are actually harmful to the body. Today, of course, there is no need to ever fast. We have refrigeration and lots of preservatives, so there is always food - even in the depths of winter. However, much of that food is not very good for us. It contains food elements that have been refined out of much of the nutritional value (i.e., wheat) or preservatives which are designed to keep other things from eating your food (and thus are not good for you either) or chemicals. For example, the most nutritious food in nature was either sweet or salty. Those tastes basically meant that the food was full of essential minerals and vitamins. We crave those foods. However, modern man has figured out how to artificially produce those flavors (i.e. sugar and sugar substitutes) and has created massive addictions as a result. Sugar is not that different chemically from alcohol.

If you decided to try this vitamin for your soul, it probably will not be that pleasant. Within a day, you'll probably get either withdrawal reactions or side effects from some of the poisons that are already in your system. However, I'm not suggesting anything drastic. Just spend one day drinking lots of fresh water and fruit juice with no food. Notice your experience when you do that. Or, instead, spend three days on a fresh fruit and vegetable fast. Notice your experience then. This one is another exercise in self-discovery.

Vitamins for Your Soul, Part VI

If you've been "taking your vitamins" for your soul, since I started these tips, you've probably noticed some lightening and some expansion in yourself. And lightening up as a trader will help you immensely. So far your recommended vitamins have included:

1. Focus on the Moment;
2. Make Yourself Laugh;
3. If Something Bothers You, Give It To God;
4. Give Thanks Every Day for your Blessings; and
5. Follow Your Bliss

This week we will add another interesting tip, Commit to Love.

Commit to Love

Two months ago, I attended a self-improvement workshop given by someone that I considered to be very loving. Most of the workshop involved people bringing up problems and he would very lovingly help them release the problem. That was great, but I noticed that certain people would bring the same problem up over and over and over again. In fact, one person, who might be described as a "starving actor," had been to over ten of these workshops and he was still bringing up trivial stuff – almost as if he'd accomplished nothing. Nevertheless, the workshop guru laughed with him and gently took him through a release of his problem.

My initial thought was "how can he not react to that person bringing up the same stuff over and over again." In fact, I'm sure he got the workshop for free for being an assistant, but that means he's probably brought up the same stuff over and over again at each workshop. And again I thought, "how can he not react to this person's lack of progress?" And then he told me the secret. The secret was to love the person as he was. This means that he has no emotional investment on whether or not the person makes a change. He just loves him, which means he can respond lovingly, no matter what happens. And when I understood that, I really began to understand what unconditional love really means.

So this week's tip is all about being loving. That means loving everything exactly as it is without any judgment.

Most of our decisions are made from fear and worry. I can remember numerous times in the past when I might have noticed that a future workshop we were doing had a very low enrollment. My natural tendency would be to start to worry about that. What if no more people enroll? What if there is not enough enrollments to pay for speakers fees much less the hotel? But what if we cancel? Then we have a bad reputation with the hotel because they cannot rely on us. We also lose all the marketing money we've already spent on the workshop. I could go on and on with that kind of dialogue and worry. When I do that, I'm operating out of fear and that's not useful. Instead, I elect to operate from love.

One way to operate out of love is to declare who you are. For example, you might make a declaration that says: "I'm a loving, kind, compassionate man." Write it out! Memorize it and declare it to yourself so that it becomes second nature to you. And, when you make decisions, you then begin to say, "What does a loving, kind, compassionate man do in this situation?" He certainly doesn't make decisions based upon fear. Instead, he makes decisions based upon love and compassion. And, of course, the first thing that pops into my mind when I say that is "How can I handle this situation so that everyone wins?" What more can I give to increase enrollment in this workshop? How can I add more value to this workshop so that more people can attend? And, of course, those responses get a much different response than saying to yourself, "We're going to lose a lot of money here even if I cancel the workshop."

So here's your next assignment: Start doing what you love to do. Notice what you love to do and what you dislike doing and move toward doing what you love. Even if it seems scary, try selecting what you love to do. And when you do that, notice the results you get.

Secondly, decide who you are and make a commitment statement that reflects who you are. That statement might go something like: "I'm a powerful, generous, kind leader!" Or, "I'm a courageous, loving, compassionate woman." Write down whatever you think might fit you. Put it on a sheet of paper and memorize it. And when you make decisions read your personal declaration and act as if it were true. Once you've done that, then make your decision. If you do, you'll probably find that your results are much different in all aspects of your life.

Vitamins for Your Soul, Part V

If you've been "taking your vitamins" for your soul, since I started these tips, you've probably noticed some lightening and some expansion in yourself. And lightening up as a trader will help you immensely. So far your recommended vitamins have included:

1. Focus on the Moment;
2. Make Yourself Laugh;
3. If Something Bothers You, Give It To God; and
4. Give Thanks Every Day for your Blessings.

This week we will add one of my favorites, Follow Your Bliss.

Follow Your Bliss

When I first went through A Course In Miracles, I made a commitment to follow my bliss. Joseph Campbell stated in his remarkable series The Power of Myth that following your bliss is essentially following God's path. And that seemed great to me: do what gives me joy, and my life would work better.

In 1986, I made a commitment to quit my part-time job. I was working one day a week on a job I hated, but that job was a security blanket. As long as I was part-time, I had medical benefits and the possibility of becoming full-time again. I quit the job and got rid of the security blanket. Two weeks later my wife unexpectedly lost her job and was not re-employed for about nine months. However, I made it through that year without even having to borrow much money.

By 1987 my own business was progressing. I decided that I needed to hire a secretary to keep up with the workload. However, I hadn't made that much money the prior year and a secretary's salary would take up most of that. Nevertheless, I took the plunge—another sign of commitment—and that year was the first year that I made a six-figure salary. My business really seemed to take off from there.

In each case, the decisions were difficult. I was giving up security and the status quo for something unknown. Even though I hated the known and loved what I was going into, it was very scary.

Along the way, through following this guidance of where joy seemed to be, I moved away from almost every attachment I had at the time—which included my marriage. It just wasn't working and we couldn't seem to fix it. Much of this was very scary, even though I was moving toward more joy. In the end, the results have been wonderful. It's a big step, but following your bliss is a very important vitamin for your soul.

What do you love to do? That's probably a sign that you should be doing more of that. What do you hate to do? That's probably a sign that you should be doing less of that. At one point, when my business was already quite successful, I made a note of all of the things I hated to do and all of the things I loved to do. Guess what? All of the things I loved to do were the things that probably made the most money for the business. They revolved around helping people, doing creative things, doing my workshop, developing new products, and trading. Those were all things that made money.

What I hated were the day to day routine of managing the business and all of the details I had to put up with by doing that. While I still have some of those tasks, I elected to find other people who do a much better job of doing those things than I could ever do. And now I totally concentrate on the things I love to do.

So this week's assignment is to make a list of what you love to do and what you dislike. If you love it, then decide how you can do more of it. If you dislike it, then determine how you can turn it over to someone else. You'll probably find that this simple act makes a tremendous difference in your life.

Trading Your Account is Like Running a Business

There has been much said about the psychology of trading and the necessity that we manage our emotions with every gain and loss. Emotions tend to rise to the surface during times of uncertainly as we are faced with an unexpected situation or crisis. How would we feel to win the state lottery worth over $10 million? It is easy to say, we would feel very surprised and in fact ecstatic. On the other hand, how would the average person feel to lose their life savings in an investment of some type? Most would assume he/she would feel pretty horrible. These emotions should not come into play as we trade our accounts. Speculating in the financial markets should be approached with the same planning, research, and discipline in its execution, as a small business owner spends each day making decisions in order to improve revenues, and reduce risk. It would be absurd for a business owner to fall into panic during the first or second slow day of sales. We would logically expect that entrepreneur to simply review the mission statement and ensure each one of his/her actions has this mission statement and long term business plan in mind.

Let's assume we are not trading the FX-market, but rather our business is one of a traveling salesman, who travels the world, marketing their various products to potential consumers in various marketplaces. It is safe to say that one product may reap higher profits in certain markets and regions than others. No one would be surprised to learn that snow tires may not sell extremely well in Mojave Desert, just as a sun-tan franchise may not be able to sustain itself in northern Canada. So as traveling salesman, we should quickly realize certain goods and services should be marketed to certain marketplaces and spared from others.

Just as our planet acts as the home of many different marketplaces, each specific currency pair also offers us an active and liquid market that may reward certain trading styles and not others. In other words, as traders, our basket of goods and services are nothing more than our individual trading strategies. Let's take a look at the GBPJPY pair. Over the past few years, the BOE (Bank of England) has maintained a quite aggressive interest rate policy as rates have continued to soar due to a strong underlying economy and housing market. During the same period of time, the BOJ (Bank of Japan) has maintained a strict zero interest rate policy, only finally raising rates in the summer of 2006' after nearly a 6-year drought of zero interest rates across the land. This obvious inequality has led countless traders, hedge funds, and financial institutions alike to sell short the JPY in order to fund purchases of higher yielding currencies such as the GBP, AUD, NZD, & USD. For that reason, the chart has developed a long-term trend to the upside, as buyers have continued to win the battle against sellers over the past few years.

Taking all this into consideration, a lucrative trading strategy would have been to 'buy new highs' as this would surely put the wind (or a strong up trending market) in our sails. To summarize: When trading a pair with an obvious bias to one side of the 'carry' (interest rate differential), we should focus our attention to that direction of the carry, and with a breakout approach in mind. The marketplace is the GBPJPY currency pair, and our basket of goods and services is our breakout trading strategies. Finally, logic dictates that if we hope to drum up the most amount of business, those transactions should be done during the markets active hours; namely the GBP & JPY active market hours.

Following this analogy let's travel now to a different market environment in which both components of the currency pair are quite similar in make up. Both the GBP and CHF currencies are derived from economies of a similar background. If the European economy performs well, it is very plausible that both the UK and Swiss economies will benefit to a similar degree. When the European economy falls into economic and / or political turmoil, thus both the GBP and CHF currencies may fall under similar selling pressure. For this reason the GBPCHF currency pair tends to establish very consistent trading ranges that may persist one or many years at a time. As neither currency is expected to breakout of this relative trading range, the long-term charts have provided range bound players with a fantastic opportunity to assume simply; nothing different will happen.

In extreme range bound conditions, traders may opt to simply take a very straight forward 'buy low, sell high' approach. With conservative limits and relatively wide stops, it is not difficult to attain a high % of winning trades over a period of time, as the market spends an enormous amount of time oscillating within recent high and low ranges. In this case, the marketplace being the GBPCHF pair, our most lucrative process of generating revenues may be to simply play the range.

Looking back to see if we we're right. Every so often, it is important that we look back to our success rate in generating profits, and identify those practices that made money, and those that did not. Did our breakout bias make money in the GBPJPY environment? Did this trading style produce profits in any other markets as well? On the same note, did our range bound mentality prove to be successful in the more dormant GBPCHF pair? We should also identify why or why not did this occur. Assuming a consistent application of these strategies, our trading records can provide a very accurate gauge of the strength or lack there of, of each strategy, and its respective performance in each trading environment (currency pair).

If we can identify what trading techniques tend to produce the most consistent and profitable results within a specific currency pair and under strict money management supervision, then the day to day gains and losses will not grip our emotions but will rather place our trading equity at risk, only under the most favorable market and trading conditions, and with the highest probabilities of success placed in our favor.

Vitamins for Your Soul, Part IV

Give Thanks For Your Blessings

I've been practicing taking my vitamins for a while, and I'm noticing a lightening and expansion in myself. I think it is wonderful and I thoroughly encourage you to follow these ideas yourself.

For example, I went with my wife to a place of great beauty. We spent a lot of time hiking, meditating, and being with nature during the week. My concerns seemed to melt away as a result. It was probably the most relaxing vacation I've had in a long time despite some "apparent" external pressures that were bothering me a lot before I left. Yet, miraculously, I didn't even think about them while I was on this trip. Consequently, I want to give you several more "vitamins for your soul" this week

Our first two vitamins have included 1) Focusing on the Moment , 2) Making Yourself Laugh, and 3) Giving it to God. This week, we'll continue with our fourth vitamin, giving thanks for your blessings.

Give Thanks For Your Blessings

A great book that I recommend is called Marriage of Spirit1. It's a whole program to help you lighten yourself. And part of that program is to keep a daily journal. When I did the program, I'd write down all of the issues and emotional turmoil that I seemed to be going through that day. When I finished writing, I then did exercises to clear out the turmoil.

What was interesting to me was noticing how much turmoil I could write down in that journal. The exercises seemed to work, but there was always something to write down. And this really surprised me since I've done hundreds of hours of personal clearing work over the years, so I would expect to be pretty clear by now.

However, I remember an old adage that goes "you are what you think about." I'm very strongly in favor of personal clearing because most people have major scars on their souls that they need to heal. However, I've cleared just about all of them as far as I know. And I was still coming up with stuff.

However, then it began to dawn on me how much time I was spending in my life looking for things to clear. When you look, you always find something. As a result, I changed my focus to giving thanks each day. Instead of looking for issues, I spent the same amount of time writing down the blessings in my life and giving thanks for those blessings. Quite often the blessings are the same, but that's okay because I'm still thankful for them.

However, I find the process of writing down my blessings and giving thanks changes my focus entirely from the old process of finding my issues. What's occurred is a gradual lightening of my spirit. Again, this is a wonderful vitamin. Try it yourself.

So here's your assignment: Get yourself a journal and each day write down five blessings you've experienced for which you are very grateful. In addition, if you find yourself worrying about anything or fearful about anything, then write that down on a piece of paper and give it to God. Put it in your own God box. But remember that you have to be totally willing to turn it over to God and release it. If you don't give it willingly, you'll find that God is quite willing to let you keep it.

Vitamins for Your Soul, Part III

Our first two vitamins have included 1) Focusing on the Moment and 2) Making Yourself Laugh. Both of these involved doing things that cause you to lighten up. This week we'll change directions slightly and focus on some vitamins that help you discover who you are. This month I'd like to suggest a third vitamin that if something bothers you, give it to God;

Give It to God

About five years ago an event happened in my life that was so traumatic, it changed a number of my values. It also caused me to worry a great deal - mostly over nothing - and spend a great deal of time feeling sorry for myself. Essentially, a lot of change happened in my life, mostly from my own internal creations, and I then hated how my life was different and became very concerned about it.

Ironically, I spent four years going through A Course In Miracles, and learned that much of what we think of as reality is an illusion. I understood that what I created was an illusion and that I created it. Nevertheless, I worried about it constantly, even though nothing happened. My values changed and I stopped doing certain things that I used to do; yet nothing changed but the creation of new illusions.

While much of what I've said in the prior two paragraphs may not make sense to you…perhaps it will when I give you the solution, the vitamin for the soul. My solution was to make a God Box. We keep this box in a special place in the house. And whenever something seems to really bother me, I do the following:

• First, I notice that I am spending a great deal of time in illusion and that it is not food for my soul.
• Once I've noticed the impact that this item has upon my life, I take a small piece of paper and write it down.
• As I write down what's bothering me, I give it to God.
• In addition, I also give thanks to God knowing that He will take it from me.
• I then put the piece of paper in my God Box and forget about it.

I've noticed that an amazing thing happens when you follow this exercise. A problem that once dominated my thinking suddenly disappears. And if it doesn't, then the problem usually changes in some way and I then give the new problem to God in the same way. And to date, I've never had the same problem recur after I've offered it twice.

• First, I notice that I am spending a great deal of time in illusion and that it is not food for my soul.
• Once I've noticed the impact that this item has upon my life, I take a small piece of paper and write it down.
• As I write down what's bothering me, I give it to God.
• In addition, I also give thanks to God knowing that He will take it from me.
• I then put the piece of paper in my God Box and forget about it.

I've noticed that an amazing thing happens when you follow this exercise. A problem that once dominated my thinking suddenly disappears. And if it doesn't, then the problem usually changes in some way and I then give the new problem to God in the same way. And to date, I've never had the same problem recur after I've offered it twice.

Occasionally, I might have a thought about the problem, but then I realize, "You just gave this to God. Are you now taking it back?" The answer is usually "No," and I automatically just drop it.

There is an interesting statement in A Course In Miracles that says something like, "Everything is in God's control unless you have fear about it. When you have fear, you are taking control away from God and trying to control the situation yourself through your own creations." Perhaps this explains why the God Box works so well. Anyway, I strongly recommend this important vitamin for your soul. It works very well.

So your assignment for the week, as your third vitamin, is to practice this exercise for the week for everything that bothers you. Even if you find yourself with some little irritation, just write it down on a piece of paper, and put it in your God box and forget about it.

Vitamins for Your Soul, Part II

Giving vitamins to your soul might not have a direct, noticeable effect on your bottom line. However, these vitamins could prevent a disaster and they certainly will make you a lighter and happier person. Lighter and happier people usually make better traders and investors.

Last week I talked about the first vitamin, focusing on the moment. This week I want to cover a fun vitamin, laughing.

Spend Some Time Laughing

Norman Cousin's believed that he cured himself of cancer using laughter therapy. He found lots and lots of funny things and just spent the day laughing and enjoying himself. The effect of changing his outlook to one of humor seemed to have immense healing effects on his body. However, there is no need to wait until you have some serious disease to practice taking vitamins for the soul. You might even want to look at his book, Anatomy of an Illness.

I enjoy jokes and will laugh when something is funny, but I have not made a conscious effort to bring more laughter into my life. So that's something I want to practice more of for the next month. Here are some suggestions for how to do that.

Find some movies that are really funny and watch them. Better yet, invite some friends over and watch them. There's only one rule for how to watch them, laugh as much as you can. If something is a little bit funny, force yourself to laugh out loud. It's actually not that hard. And it's contagious.

Here are some interesting examples depending upon your sense of humor: Porkys and American Pie usually crack me up and my wife thinks I'm sick to laugh at that sort of humor. However, there are many classics; old Abbott and Costello movies, old Marx Brothers movies, some of the Charlie Chaplin silent movies, or how about modern comedians such as John Candy movies (i.e., Uncle Buck); Bill Murray (Ghostbusters, Caddyshack); Eddie Murphy (The Nutty Professor, Dr. Doolittle); or some of the National Lampoon movies (i.e., Christmas Vacation, Animal House).

Try looking at movies like Porky's and Porky's II, or American Pie and American Pie II. The humor is a bit raunchy, but sometimes that can be the funniest.

Also save your Internet jokes. You probably have friends who get lots of Internet jokes and would be happy to send them to you. I personally have at least four people who send me jokes all the time. And I actually save them. But that means that I can read through my old files any time I like. And some of the stuff is really funny. So get your friends to start sending you jokes (and you send them jokes as well) and save your collection. Memorize them and tell them often. You'll find that when other people laugh at your joke collection, you'll laugh with them. Even though you know the joke and the punch line isn't a surprise, you'll get immense joy and fun out of telling the jokes to others.

Let me give you an example that I still remember. About ten years ago, one of my friends told a joke at dinner, having to do with the three biggest lies that a cowboy tells.

Those lies were.

1. My truck is paid for.
2. I won this belt buckle at the rodeo. And
3. I was just helping the sheep over the fence.

When my wife, who had just arrived from overseas and wasn't used to American humor, heard the joke, she didn't get the last one at all. And the process of explaining it to her put everyone at the table in stitches. I don't even think the joke is that funny, but it's one I'll always remember because of my wife's reaction when it was being explained. So telling jokes to others can really brighten up your soul. Practice it.

A healthy soul is a happy soul and it experiences qualities of joy, laughter, and lightness. This doesn't mean that you must avoid looking at the suffering that occurs all around us, but it does mean that you avoid letting that suffering steal your joy over the many blessings that God presents to us all around. The opposite of joy is not necessarily sorrow - it's unbelief in the true nature of your soul or in the essence of God.

Many of us as adults have to relearn how to laugh, and that starts with a slight desire to do so. One of the amazing things about my wife is her amazing laughter. She can laugh at almost everything. And I almost never hear her talking on the phone without hearing many bursts of laughter. It's one of the many reasons I'm so attracted to her. But the real secret of laughter is to just do it. If something is the least bit funny, try laughing at it - even if it seems like you are forcing it at first. It becomes catching once you start.

Read something funny before you go to sleep each night. Get a collection of cartoon books or joke books and have them by your bedside. When something strikes you as the least bit funny, laugh out loud. You'll find it is contagious and the material becomes funnier and funnier.

Lastly, you'll find that young children are much less inhibited about laughing than most adults are. Thus, spend time with some kids and see what they think is funny. Go watch that movie or cartoon with them. And laugh when they laugh.

So here's your assignment with laughter this month: Find something to laugh about each night before you go to sleep. In addition, watch a funny movie at least once each week this month. Enjoy it and have fun.