The Mature Trader

Successful traders are sharp, curious, and unassuming people. Most have been through losing periods. They graduated from the school of hard knocks, and that experience helped smooth their rough edges. Successful traders are self-assured but never arrogant. People who survive in the markets remain alert. They trust their skills and trading methods, but keep their eyes and ears open for new developments. Confident and attentive, calm and flexible, successful traders are fun to be with.
Successful traders are often unconventional people, and some are very eccentric. When they mix with others, they often break social rules. The markets are set up for the majority to lose money, and a small group of winners marches to a different drummer, in and out of the markets. Markets consist of huge crowds of people watching the same trading vehicles, mesmerized by upticks and downticks. Think of a crowd at a concert or in a movie theater. When the show begins, the crowd gets emotionally in gear and develops an amorphous but powerful mass mind, laughing or weeping together. A mass mind also emerges in the markets, only here it is more malignant. Instead of laughing or weeping, the crowd seeks each trader’s private psychological weakness and hits him in that spot.
Markets seduce greedy traders into buying positions that are too large for their accounts and then destroy them with a reaction they cannot afford to sit out. They shake fearful traders out of winning trades with brief countertrend spikes before embarking on runaway moves. Lazy traders are the favorite victims of the market, which keeps throwing new tricks at the unprepared. Whatever your psychological flaws and fears, whatever your inner demons, whatever your hidden weaknesses and obsessions, the market will seek them out, find them, and use them against you, like a skilled wrestler uses his opponent’s own weight to toss him to the ground. Successful traders have outgrown or overcome their inner demons.
Instead of being tossed by the markets, they maintain their own balance and scan for chinks in the crowd’s armor, so that they can toss the market for a change. They may appear eccentric, but when it comes to trading they are much healthier than the crowd. Being a trader is a journey of self-discovery. Trade long enough, and you will face all your psychological handicaps—anxiety, greed, fear, anger, and sloth. Remember, you’re not in the markets for psychotherapy; self-discovery is a byproduct, not the goal of trading. The primary goal of a successful trader is to accumulate equity. Healthy trading boils down to two questions you need to ask in every trade: “What is my profit target?” and “How will I protect my capital?” A good trader accepts full responsibility for the outcome of every trade. You cannot blame others for taking your money. You have to improve your trading plans and methods of money management. It will take time, and it will take discipline.

Discipline

A friend of mine used to have a dog-training business. Occasionally a prospective client would call her and say, “I want to train my dog to come when called, but I do not want to train it to sit or lie down.” And she’d answer, “Training a dog to come off-leash is one of the hardest things to teach; you must do a lot of obedience training first. What you’re saying sounds like, ‘I want my dog be a neurosurgeon, but I do not want it to go to high school.’” Many new traders expect to sit in front of their screens and make easy money day-trading. They skip high school and head straight for neurosurgery.

Discipline

Discipline is necessary for success in most endeavors, but especially in the markets because they have no external controls. You have to watch yourself because no one else will, except for the margin clerk. You may put on the stupidest and self-destructive trades, but as long as you have enough money in your account, no one will stop you. No one will say hold on, wait, think what you’re doing!Your broker will repeat your order to confirm he got it right. Once your order hits the market, other traders will scramble for the privilege of taking your money. Most fields of human endeavor have rules, yardsticks, and professional bodies to enforce discipline. No matter how independent you feel, there is always some agency looking over your shoulder. If a doctor in private practice starts writing too many prescriptions for painkillers, he’ll soon hear from the health department. Markets impose no restrictions, as long as you have enough equity. Adding to losing positions is similar to overprescribing narcotics, but nobody will stop you.
As a matter of fact, other market participants want you to be undisciplined and impulsive. That makes it easier for them to get your money. Your defense against self-destructiveness is discipline. You have to set up your own rules and follow them in order to prevent self-sabotage. Discipline means designing, testing, and following your trading system. It means learning to enter and exit in response to predefined signals rather than jumping in and out on a whim. It means doing the right thing, not the easy thing. And the first challenge on the road to disciplined trading involves setting up a record-keeping system.

Record-Keeping

Record-Keeping

Good traders keep good records. They keep them not just for their accountants but as tools of learning and discipline. If you do not have good records, how can you measure your performance, rate your progress, and learn from your mistakes? Those who do not learn from the past are doomed to repeat it. When you decide to become a trader, you sign up for an expensive course. By the time you figure out the game, its cost may equal that of a college education, only most students never graduate—they drop out and get nothing for their money except for memories of a few wild rides. Whenever you decide to improve your performance in any area of life, record keeping helps. If you want to become a better runner, keeping records of your speeds is essential for designing better workouts.
If money is a problem, keeping and reviewing records of all expenditures is certain to uncover wasteful tendencies. Keeping scrupulous records turns a spotlight on a problem and allows you to improve. Becoming a good trader means taking several courses—psychology, technical analysis, and money management. Each course requires its own set of records. You’ll have to score high on all three in order to graduate.
Your first essential record is a spreadsheet of all your trades. You have to keep track of entries and exits, slippage and commissions, as well as profits and losses. Chapter 5, “Method—Technical Analysis” on trading channels will teach you to rate the quality of every trade, allowing you to compare performance across different markets and conditions. Another essential record shows the balance in your account at the end of each month. Plot it on a chart, creating an equity curve whose angle will tell you whether you are in gear with the market. The goal is a steady uptrend, punctuated by shallow declines. If your curve slopes down, it shows you’re not in tune with the markets and must reduce the size of your trades. A jagged equity curve tends to be a sign of impulsive trading.
Your trading diary is the third essential record. Whenever you enter a trade, print out the charts that prompted you to buy or sell. Paste them on the left page of a large notebook and write a few words explaining why you bought or sold, stating your profit objective and a stop. When you close out that trade, print out the charts again, paste them on the right page and write what you’ve learned from the completed trade.
These records are essential for all traders, and we will return to them later in Chapter 8, “The Organized Trader.” A shoebox crammed with confirmation slips does not qualify as a record-keeping system. Too many records? Not enough time? Want to skip high school and dive into neurosurgery? Traders fail because of impatience and lack of discipline. Good records set you apart from the market crowd and put you on the road to success.

Training for Battle

How much training you need depends on the job you want. If you want to be a janitor, an hour of training might do. Just learn to attach a mop to the right end of the broomstick and find a pail without holes. If, on the other hand, you want to fly an airplane or do surgery, you’ll have to learn a great deal more. Trading is closer to flying a plane than to mopping a floor, meaning you’ll need to invest a lot of time and energy in mastering this craft. Society mandates extensive training for pilots and doctors because their errors are so deadly. As a trader, you are free to be financially deadly to yourself—society does not care, because your loss is someone else’s gain. Flying and medicine have standards and yardsticks, as well as professional bodies to enforce them. In trading, you have to set up your own rules and be your own enforcer.

Training For Battle

Pilots and doctors learn from instructors who impose discipline on them through tests and evaluations. Private traders have no external system for learning, testing, or discipline. Our job is hard because we must learn on our own, develop discipline, and test ourselves again and again in the markets. When we look at training for pilots and doctors, three features stand out. They are the gradual assumption of responsibility, constant evaluations, and training until actions become automatic. Let us see whether we can apply them to trading.

1. The Gradual Assumption of Responsibility A flying school doesn’t put a beginner into a pilot’s seat on his first day. A medical student is lucky if he is allowed to take a patient’s temperature on his first day in the hospital. His superiors double-check him before he can advance to the next, slightly higher level of responsibility. How does this compare to the education of a new trader? There is nothing gradual about it. Most people start out on an impulse, after hearing a hot tip or a rumor of someone making money. A beginner has some cash burning a hole in his pocket. He gets a broker’s name out of a newspaper, FedExes him a check, and enters his first trade. Now he is starting to learn!When do they close this market? What is a gap opening? How come the market is up and my stock is down?
A “sink or swim” approach does not work in complex enterprises, such as flying or trading. It is exciting to jump in, but excitement is not what good traders are after. If you do not have a specific trading plan, you’re better off taking your money to Vegas. The outcome will be the same, but at least there they’ll throw in some free drinks.
If you are serious about learning to trade, start with a relatively small account and set a goal of learning to rade rather than making a lot of money in a hurry. Keep a trading diary and put a performance grade on every trade.

2. Constant Evaluations and Ratings The progress of a flying cadet or a medical student is measured by hundreds of tests. Teachers constantly rate knowledge, skills, and decision-making ability. A student with good results is given more responsibility, but if his performance slips, he has to study more and take more tests. Do traders go through a similar process? As long as you have money in your account, you can make impulsive trades, trying to weasel your way out of a hole. You can throw confirmation slips into a shoebox, and give them to your accountant at tax time. No one can force you to look at your test results, unless you do it yourself.
The market tests us all the time, but only a few pay attention. It gives a performance grade to every trade and posts those ratings, but few people know where to look them up. Another highly objective test is our equity curve. If you trade several markets, you can take this test in every one of them, as well as in your account as a whole. Do most of us take this test? No. Pilots and doctors must answer to their licensing bodies, but traders sneak out of class because no one takes attendance and their internal discipline is weak. Meanwhile, tests are a key part of trading discipline, essential for your victory in the markets. Keeping and reviewing records, as outlined later in this book, puts you a mile ahead of undisciplined competitors.

3. Training until Actions Become Automatic During one of my finals in medical school I was sent to examine a patient in a half-empty room. Suddenly I heard a noise from behind the curtain. I looked, and there was another patient—dying. “No pulse,” I yelled to another student, and together we put the man on the floor. I began pumping his chest, while the other fellow gave him mouth to mouth, one forced breath for four chest pumps. Neither of us could run for help, but someone opened the door and saw us. A reanimation team raced in, zapped the man with a defibrillator and pulled him out.
I never had to revive anyone before, but it worked the first time because I had five years of training. When the time came to act, I didn’t have to think. The point of training is to make actions automatic, allowing us to concentrate on strategy. What will you do if your stock jumps five points in your favor? Five points against you? What if your future goes limit up? Limit down? If you have to stop and think while you’re in a trade, you’re dead. You need to spend time preparing trading plans and deciding in advance what you will do when the market does any imaginable thing. Play those scenarios in your head, use your computer, and get yourself to the point where you do not have to ruminate about what to do if the market jumps.

The mature trader arrives at a stage where most trading actions have become nearly automatic. This gives you the freedom to think about strategy. You think about what you want to achieve, and less about tactics of how to achieve it. To reach that point, you need to trade for a long time. The longer you trade and the more trades you put on, the more you’ll learn. Trade a small size while learning and put on many trades. Remember, the first item on the agenda for a beginner is to learn how to trade, not to make money. Once you’ve learned to trade, money will follow.

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