Buy low, sell high. Short high, cover low. Traders are like surfers, trying to catch good waves, only their beach is rocky, not sandy. Professionals wait for opportunities but amateurs jump in, driven by emotions—they keep buying strength and selling weakness, bleeding their equity into the markets. Buy low, sell high sounds like a simple rule, but greed and fear can override the best intentions. A professional waits for familiar patterns to emerge from the market.
He may notice a new trend with rising momentum, indicating higher prices ahead. Or he may detect the feebleness of momentum during a rally, indicating weakness. Once he recognizes a pattern, he puts on a trade. He has a clear notion of how he’ll get in, where he’ll take profits, and where he’ll accept a loss if the market turns against him. A trade is a bet on a price change, but there is a paradox. Each price reflects the latest consensus of value of market participants. Putting on a trade challenges that consensus. A buyer disagrees with the collective wisdom by saying the market is underpriced. A seller disagrees with the wisdom of the entire group, believing the market is overpriced. Both the buyer and the seller expect the consensus to change, but meanwhile they defy the market. That market includes some of the most brilliant minds and some of the deepest pockets on Earth. Arguing with this group is dangerous business, and it has to be done very cautiously.
 
An intelligent trader looks for holes in the efficient market theory. He scans the market for brief periods of inefficiency. When the crowd is gripped by greed, the newcomers jump in and load up on stocks. When falling prices squeeze the fingers of thousands of buyers, they dump their holdings in a panic, disregarding fundamental values. Those episodes of emotional behavior dilute the cold efficiency of the market, creating opportunities for disciplined traders. When markets are calm and efficient, trading becomes a crapshoot, with commissions and slippage worsening the odds. Crowd mentality changes slowly, and price patterns recur, albeit with variations. Emotional swings provide trading opportunities, while efficient markets chop up and down, offering no edge to traders, only piling up their costs. Technical analysis tools will work for you only if you have the discipline to wait for patterns to emerge. Professionals trade only when markets offer them special advantages.
According to chaos theory, many processes—the flow of water in a river, the movement of clouds in the sky, the changes of prices in the cotton markets—are chaotic, with transient islands of order, called fractals. Those fractals look similar from any distance, whether through a telescope or a microscope. The coast of Maine looks just as jagged from a space shuttle as it does when you drop down on your hands and knees and look at it through a magnifying glass. In most financial markets, the long-term weekly charts and the short-term 5-minute charts look so similar, you cannot tell them apart without markings.
Engineers have realized that they can achieve better control over many processes if they accept them as chaotic and try to capitalize on temporary fractals, the islands of order. That’s exactly what a good trader does. He recognizes the market as chaotic and unpredictable much of the time, but expects to find islands of order. He trains himself to buy and sell without quibbling when he finds those patterns. Successful trading depends on the 3 M’s—Mind, Method, and Money. Beginners focus on analysis, but professionals operate in a threedimensional space. They are aware of trading psychology—their own feelings and the mass psychology of the markets. Each trader needs to have a method for choosing specific stocks, options, or futures as well as firm rules for pulling the trigger—deciding when to buy and sell. Money refers to how you manage your trading capital.
Mind, Method, Money—trading psychology, trading method, and money management—people sometimes ask me which of the three is more important. It is like asking which leg of a three-legged stool is the most important. Take them away one at a time and then try to sit down. In Part 2 we focus on those three foundations of market success.

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