Avoid Making Predictions in the Market

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

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

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

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

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

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

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

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

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

Develop a System that Fits You

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

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

Why test at all?

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

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

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

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

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

Assignment for the Week:

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

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

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

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

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

Empower Yourself

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

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

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

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

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

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

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

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

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

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

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

Overcoming a Stuck State of Mind

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

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

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

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

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

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

Some Simple Solutions:

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

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

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

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

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

Learn to "Dissociate" – Part II

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

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

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

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

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

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

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

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

Learn to "Dissociate"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Make Friends with Your Inner Interpreter

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

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

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

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

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

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

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

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

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

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

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

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

9. Notice how you feel about your interpreter now.

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

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

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

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

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

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

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

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

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

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

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

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