Friday, 27 December 2013
"If the market's behavior seems mysterious to you, it's because your own behavior is mysterious and unmanageable. You can't really determine what the market is likely to do next when you don't even know what you'll do next." - Mark Douglas
We come to the market from different walks of life and bring with us the mental baggage of our upbringing and prior experiences. Most of us find that when we act in the market the way we do in our everyday life, we lose money.
Your success or failure in the market depends on your thoughts and feelings. It depends on your attitudes toward gain and risk, fear and greed, and on how you handle the excitement of trading and risk.
Most of all, your success or failure depends on your ability to use your intellect rather than act out your emotions. A trader who feels overjoyed when he wins and depressed when he loses cannot accumulate equity because he is controlled by his emotions. If you let the market make you feel high or low, you will lose money.
To be a winner in the market you must know yourself and act coolly and responsibly. The pain of losing scares people into looking for magic methods. At the same time, they discard much of what is useful in their professional or business backgrounds.
Like an Ocean
The market is like an ocean - it moves up and down regardless of what you want. You may feel joy when you buy a stock and it explodes in a rally. You may feel drenched with fear when you go short but the market rises and your equity melts with every uptick. These feelings have nothing to do with the market-they exist only inside you.
The market does not know you exist. You can do nothing to influence it. You can only control your behavior.
The ocean does not care about your welfare, but it has no wish to hurt you either. You may feel joy on a sunny day, when a gentle wind pushes your sailboat where you want it to go. You may feel panic on a stormy day when the ocean pushes your boat toward the rocks. Your feelings about the ocean exist only in your mind. They threaten your survival when you let your feelings rather than intellect control your behavior.
A sailor cannot control the ocean, but he can control himself. He studies currents and weather patterns. He learns safe sailing techniques and gains experience. He knows when to sail and when to stay in the harbor. A successful sailor uses his intelligence.
An ocean can be useful -you can fish in it and use its surface to get to other islands. An ocean can be dangerous - you can drown in it. The more rational your approach, the more likely you are to get what you want. When you act out your emotions, you cannot focus on the reality of the ocean.
A trader has to study trends and reversals in the market the way a sailor studies the ocean. He must trade on a small scale while learning to handle himself in the market. You can never control the market but you can learn to control yourself.
A beginner who has a string of profitable trades often feels he can walk on water. He starts taking wild risks and blows up his account. On the other hand, an amateur who takes several losses in a row often feels so demoralized that he cannot place an order even when his system gives him a strong signal to buy or sell. If trading makes you feel elated or frightened, you cannot fully use your intellect. When joy sweeps you off your feet, you will make irrational trades and lose. When fear grips you, you'll miss profitable trades.
A professional trader uses his head and stays calm. Only amateurs become excited or depressed because of their trades. Emotional reactions are a luxury that you cannot afford in the markets.
Most people crave excitement and entertainment. Singers, actors, and professional athletes command much higher incomes in our society than do such mundane workmen as physicians, pilots, or college professors. People love to have their nerves tickled - they buy lottery tickets, fly to Las Vegas, and slow down to gawk at road accidents.
Trading is a heady experience and can be very addictive. Losers who drop money in the markets receive a tremendous entertainment value.
The market is among the most entertaining places on the face of the Earth. It is a spectator sport and a participant sport rolled into one. Imagine going to a major-league ball game in which you are not confined to the bleachers. For a few hundred dollars you can run onto the field and join the game. If you hit the ball right, you will get paid like a professional.
You would probably think twice before running onto the field the first few times. This cautious attitude is responsible for the well-known "beginner's luck." Once a beginner hits the ball well a few times and collects his pay, he is likely to get the idea that he is better than the pros and could make a good living at it. Greedy amateurs start running out onto the field too often, even when there are no good playing opportunities. Before they know what hit them, a short string of losses destroys their careers.
Emotional decisions are lethal in the markets. You can see a good model of emotional trading by going to a racetrack, turning around, and watching the humans instead of the horses. Gamblers stomp their feet, jump up and down, and yell at horses and jockeys. Thousands of people act out their emotions. Winners embrace and losers tear up their tickets in disgust. The joy, the pain, and the intensity of wishful thinking are caricatures of what happens in the markets. A cool handicapper who tries to make a living at the track does not get excited, yell, or bet the bulk of his roll on any race.
Casinos love drunk patrons. They pour gamblers free drinks because drunks are more emotional and gamble more. Casinos try to throw out intelligent card-counters. There is less free liquor on Wall Street than in a casino, but at least here they do not throw you out of the game for being a good trader.
In Charge of Your Life
When a monkey hurts its foot on a tree stump, he flies into a rage and kicks the piece of wood. You laugh at a monkey, but do you laugh at yourself when you act like him? If the market drops while you are long, you may double up on your losing trade or else go short, trying to get even. You act emotionally instead of using your intellect. What is the difference between a trader trying to get back at the market and a monkey kicking a tree stump? Acting out of anger, fear, or elation destroys your chance of
success. You have to analyze your behavior in the market instead of acting out your feelings.
We get angry at the market, we become afraid of it, we develop silly superstitions. All the while, the market keeps cycling through its rallies and declines like an ocean going through its storms and calm periods. Mark Douglas writes in The Disciplined Trader that in the market, "There is no beginning, middle, or end - only what you create in your own mind. Rarely do any of us grow up learning to operate in an arena that allows for complete freedom of creative expression, with no external structure to restrict it in any way."
We try to cajole or manipulate the market, acting like the ancient emperor Xerxes, who ordered his soldiers to horsewhip the sea for sinking his fleet. Most of us are not aware how manipulative we are, how we bargain, how we act out our feelings in the market. Most of us consider ourselves the center of the universe and expect every person or group to be either good or bad to us. This does not work in the market which is completely impersonal.
Leston Havens, a Harvard University psychiatrist, writes: "Cannibalism and slavery are probably the oldest manifestations of human predation and submission. Although both are now discouraged, their continued existence in psychological forms demonstrates that civilization has achieved great success in moving from the concrete and physical to the abstract and psychological, while persisting in the same purposes." Parents threaten their children, bullies hit them, teachers try to bend their will in school. Little wonder that most of us grow up either hiding in a shell or learning how to manipulate others in self-defense. Acting independently does not feel natural to us-but that is the only way to succeed in the market.
Douglas warns, "If the market's behavior seems mysterious to you, it's because your own behavior is mysterious and unmanageable. You can't really determine what the market is likely to do next when you don't even know what you'll do next." Ultimately, "the one thing you can control is yourself. As a trader, you have the power either to give yourself money or to give your money to other traders." He adds, "The traders who can make money consistently . . . approach trading from the perspective of a mental discipline."
Each trader has his own demons to exorcise on the journey to becoming a successful professional. Here are several rules that worked for me as I grew from a wild amateur into an erratic semiprofessional and finally into a professional trader. You may change this list to suit your personality.
• Decide that you are in the market for the long haul -that is, you want to be a trader even 20 years from now.
• Learn as much as you can. Read and listen to experts, but keep a degree of healthy skepticism about everything. Ask questions, and do not accept experts at their word.
• Do not get greedy and rush to trade - take your time to learn. The markets will be there with more good opportunities in the months and years ahead.
• Develop a method for analyzing the market-that is, "If A happens, then B is likely to happen." Markets have many dimensions-use several analytic methods to confirm trades. Test everything on historical data and then in the markets, using real money. Markets keep changing-you need different tools for trading bull and bear markets and transitional periods as well as a method for telling the difference.
• Develop a money management plan. Your first goal must be long-term survival; your second goal, a steady growth of capital; and your third goal, making high profits. Most traders put the third goal first and are unaware that goals 1 and 2 exist.
• Be aware that a trader is the weakest link in any trading system. Go to a meeting of Alcoholics Anonymous to learn how to avoid losses or develop your own method for cutting out impulsive trades.
• Winners think, feel, and act differently than losers. You must look within yourself, strip away your illusions, and change your old ways of being, thinking, and acting. Change is hard, but if you want to be a professional trader, you have to work on changing your personality.