Innerworth featured articles

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The markets are driven by fear and greed. When money is risked and can possibly be lost, it's natural to fear losing it. When the masses see any sign that the current price is going against their trading plan, they have a strong tendency to bail out quickly. But seasoned traders rarely act on their fear. Through experience, they've learned to control it. And through practice and concerted effort, you can too, if controlling fear is an issue for you.

What is fear? Fear is an emotion that signals impending doom. When the human psyche perceives a threat to the self, psychological and physical assets are mobilized. The tendency to experience fear has biological and genetic bases. Fear can be very adaptive for survival, and is related to the fight-or-flee response. It's a very basic response that animals use to survive in the wild and it's controlled by very primitive parts of the brain. When harm is perceived, a wild animal must mobilize resources and make a quick decision to either fight the opponent or flee to safety. All energy is focused on the threat. Fear is almost instinctual, and if left unchecked, it can sabotage even the most foolproof trading plan.

While fearful, it’s hard to concentrate. All attention is mobilized and focused on the threat. When fearful, it's almost impossible to focus on scanning all possible options while in the midst of a trade. That's why it is crucial to control fear and prevent it from undermining a well-designed plan. Fortunately, there are a few key strategies that can be used effectively to control fear.

Manage Your Risk: It's very difficult to control fear when you have a great deal of money on the line. That's why most traders tend to risk relatively small amounts of capital on any single trade; they also use protective stops and have clearly defined exit strategies. Putting less money on the line with each trade is an effective way to decrease fear of losing money. Similarly, it's important to trade with money you can afford to lose. If you trade with money that you badly need to pay basic living expenses, you will have a valid reason for fearing a loss. It will be difficult to fool yourself, so don't bother trying. If you can't afford to lose your stake, build up your account balance and stand aside until you can calmly put a bet down without concerning yourself with the adverse consequences of a possible loss.

Admit Your Fears: Some people were taught as children to hide their fear, to pretend that they were courageous in the face of adversity. But trying to hide your fear often makes it even more difficult to control. It's better to just admit that you are afraid, and admit that there is, indeed, a good chance that you will lose money on your trades. You'll find that once you admit the possibility of loss, you'll feel much better, and control fear more easily. In his book, "Trading to Win," Dr. Ari Kiev offers a quick and sometimes effective way of controlling fear: Acknowledge you are afraid and the feeling will pass. Refuse to acknowledge fear and it will perpetuate. So admit you are afraid and the fear will disperse.

Know Your Personality: Humans differ in their ability to control the fight-or-flee response. Some people are easily frightened. Their nervous systems are rapidly aroused and once energized, it's hard to calm down. Other people are fearless. They tend to stay calm across a wide range of situations, even those that would frighten most people. It takes a lot to get their nervous system aroused and energized. It's important to know where you stand on the fear-tolerance continuum. If your tolerance for fear is low, it's going to be harder to control your fear than others, and you'll do yourself a disservice by acting as if you do not have a problem with fear. It's essential to have a specific fear control plan. Those with a low tolerance for fearful situations may need to paper trade until they master their fears. Others may need to seek professional help to learn structured techniques, such as systematic desensitization. For others, it may be necessary to adjust one's trading strategy. One may be so prone to experience fear that it may be necessary to make only long-term investments, where quick decisions are less urgent. Or when trading in the shorter term, it may be useful to use the automatic settings on trading software to exit, or place specific orders with a broker over the phone. Regardless of the strategy one uses, it's vital to gauge one's fear tolerance and take appropriate steps to compensate.

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"Be a rugged individualist. Think independently. Take a contrary position occasionally. Anticipate changes in market conditions, and be ready with alternative plans."

These are common, yet somewhat abstract, themes in investment psychology; each can be illustrated with countless examples in the history of the markets. But let's try to simplify things for now, and consider a few simple, basic examples, even if they may seem a little oversimplified to some. In our first example, for today's newsletter, let's consider the impact of a basic difference in market conditions between that late 1990s and post-2000.

The difference between the way traders approached the markets before and after 2000 illustrates many concepts in investment psychology, but it is a classic example of how market conditions can change, and how with this change, it was even more necessary to think independently and act like a rugged individualist. In several of our Master Interviews, for example, we talked with traders and investors who made seemingly impressive profits before the markets changed in 2000. Back then in the late 1990s, a "profitable" trader didn't necessarily need to be much of an individualist or take a contrary position. It seemed as if everyone was trading. You could walk into almost any office in those days and find nearly everyone talking about the huge profits they made in the markets. Optimism was high and the expectation was that the prices were going to go "up, up, up." These were ideal market conditions, the kind of conditions that draw many into trading (who later find out that it's harder than they initially thought). In some ways, all one had to do was to pick a stock that the masses thought would go up (such as an Internet company back then) and wait for the price to move upward. And it did, back then, because there were so many new amateur participants entering the markets every day. They were ready to buy, put their money into the markets, and the prices went higher and higher. Simple adages applied in these ideal conditions: "Buy high, sell low. The trend is your friend." You could actually "follow the crowd" in these conditions. In all likelihood, the price of a popular stock would go up because there were plenty of buyers behind you, ready to buy your stock as the price increased. It was a matter of getting in at a low price and just waiting for the price to go up. You found people, who knew relatively nothing about trading, making substantial profits. Ironically, the "herd instinct" was somewhat useful when so many amateur buyers were willing to invest in the markets. If you were unsure of yourself, you could just wait to see if masses agreed with your hunch, and join them as the price edged up. Now it wasn't exactly that easy, but you see the main point: compared to today, all you had to do was find a good indicator that momentum was building, get in early and wait for additional buyers to raise the price, so you could sell at a profit. If only conditions were as ideal today. Today, the "waves" are much shorter, and there are fewer naпve amateurs ready to continue the buying spree once it starts. These days, you need to think more creatively and independently.

In several Master Interviews, our interview candidates tell a familiar story, "I learned to trade in a bull market, and I wrongly thought I knew how to trade." What they usually say next is that market conditions changed and they quickly found they couldn't make a dime. When you look at those traders who reported big wins before 2000, you tend to find that many haven't consistently made very much since. So that's one common idea addressed: A trading approach may work impressively until the markets change. When they change, one can't simply follow the crowd or let the "trend be your friend." It's not that easy. You've got to evaluate the markets from multiple perspectives, rely on your own instincts, and think independently.

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Do you remember the days when you would throw temper tantrums when things weren't going your way? If you carefully think about it, this hasn't changed much for most adults. When an event, person or anything else disappoints, angers, or frustrates such a person, the person will tend to change his behavior from the norm and will tend to act irrationally, in a way that is completely different from what they perceive to be the "proper" way to deal with such an occurrence. This is far more common than you might think, and usually, when an adult has a conniption, it is a last ditch effort to get himself heard or to change the situation (much like temper tantrums are a child's last major effort to get what he wants).

Consider a case where your actions were somehow involved or related to an event that disappointed, angered, or frustrated you to such an extent that you had or nearly had a fit. We can describe the case in the following manner:



Consider that your decisions and actions are also in the initial group of actions that cause the occurrence of some other event (Event A). Your control over this group of actions (which may involve others) and Event A is limited (you can only control the actions that are yours). However, you have complete control over the effect of emotional disturbance you experience and your out of norm behavior (provided, of course, that you do not have any unique mental imbalance).

Now, let's apply this to trading...



Decisions and actions made out of the scope of your trading plan will result in further losses, causing you to have a major losing streak. Successful and experienced traders have mastered the art of preventing this cycle from occurring.

There are several points in the cause/effect chain at which you can prevent yourself from making losing trades. The first and best way is to make winning trades (consistent with your trading plan) to begin with. In the event that you do make a losing trade, the next best way is to make sure that the loss does not affect you emotionally. If you haven't yet mastered the art of doing this, you then need to make sure that your emotional imbalance doesn't influence your actions, causing you to make trades that aren't justified according to your trading system.

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The quality of being calm and even-tempered is critical to your trading success. You've probably already learned that you need to be free of emotional bias and influence as you're trading. Very few traders find that they naturally have this ability or can easily achieve it. Understanding the related issues will help you develop effective techniques to help you achieve equanimity quickly.

Most people have a natural tendency to respond emotionally to activities and events from which they perceive some kind of pressure or stress. Watching someone make their first series of trades makes this apparent, regardless of whether that person knows or is aware of the issues involved with trading or responding to trade results emotionally. He may have studied it for years and he may "hide" his emotional responses to a certain extent, but the bottom line is, unless he is naturally inclined to think without emotions, he will respond emotionally and it will be apparent in his subsequent trades.

The basic emotional responses to trade results are the feeling joy when there's profit made and pain when there's a loss taken. The "results" of no-action trades also tend to elicit emotional responses, joy or pain, depending on how the trader views the missed winning trade or the missed losing trade. Generally, as a trader gains more experience, the emotional affects of trade results tend to soften or mellow. For novice traders, however, they can set the trader on a long and painful losing path.

One of the most interesting and insightful points about traders influenced by their emotions is that very often, these traders are not trading for the sake of the activity or to make the right decisions. Instead, they are trading for the motivation of money and possibly even prestige within their community. The correlation is that the more a trader feels the emotions of joy and pain and associates them with the distinct events of making profit and losing money, respectively, he is less committed to the activity of trading.

Many of the currently successful and experienced traders have initially gone through a stage when they had a lack in commitment to the activity but a committed preoccupation with the fringe benefits of trading (like the profit and prestige). They surpassed that stage to go on to success. The more trades you make while consciously preventing your emotions from getting involved, the closer you will be to achieving equanimity.

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The main appeal of mechanical trading systems is the promise that they will somehow free us from the stresses of decision-making. But can they really do this? And if so, why do so many traders seem to spend years dabbling with various systems without ever getting rich? Of course, it is natural to want to reduce the stress of a particular job, and few occupations produce greater levels of stress than trading. So it should not surprise us when we hear of trading systems that are sold for $5,000 or more in some of the specialized magazines geared toward active traders.

Often in these ads, an impressive claim is made concerning the profitability of a particular trading system -- usually a software application that crunches real-time stock market data to produce buy and sell signals.

But anecdotally, how many traders do we know of who have become rich using such systems? More often, we hear of traders who have tried numerous automated systems, only to achieve mediocre results. Still, there are indeed a few who do quite well with a mechanized approach, and it behooves us to ask why. Could it be that they are the type of traders who would have succeeded anyway, with or without a mechanical system? The answer, probably, is yes. And one quality that all of them would likely share is that they take a systematic approach toward trading. Which is to say, their methods and decisions are rooted in disciplined behavior that can be applied consistently in a wide variety of circumstances. This is learned behavior, though, and many would-be traders make the mistake of thinking the requisite skills can be acquired easily. In fact, achieving rock-solid discipline is a process that one can never complete, since the stock market will always challenge and assail our confidence in new and unexpected ways.

Armed with discipline and a sound trading system, however, we can categorize and map these inevitable challenges so that they will seem more familiar to us each time we experience them anew. For it is only when we are firmly anchored that we can attempt to make sense of the seemingly chaotic eddies and currents around us. A mechanical trading system can help us not only to observe stock market activity objectively, but also to measure and fine-tune our reactions to it. For that reason, it matters little which trading system one uses, so long as it has a reasonable track record, and provides a consistent and immoveable vantage point on the market. The important thing is to stick with the system for long enough so that you can apprehend and understand the fundamental rhythms of the market. For example, by meticulously observing the interaction of, say, two different trendlines over a long period of time – to come to know them like the proverbial back of your hand – is to gain sufficient knowledge about them to be able to exploit them profitably. But trading systems offer no easy path to riches; only patience and diligence can make them winners.

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Trading is difficult to master, especially for scientists and engineers who are trained extensively to understand complex systems in an effort to account for all possible adverse events and gain control over them. It's possible to look at the markets in a similarly comprehensive manner, trying to search for consistency, all possible predictors of price trends, and interactions among predictors. But such an approach complicates trading more than necessary. Many trading coaches and seasoned master traders advise against taking such an overly complex approach. "Keep it simple" is their mantra, and it's useful to remind yourself that professional traders tend to take a simple, straightforward approach to the markets rather than a complex one. If you need convincing, look at the traders at the Chicago Mercantile Exchange. There's something simple and basic about what they do. Ask traders who have been there. They all say that CME traders just look at a few key pieces of information as a guide, such as price and volume, and go out on the floor and trade. They stick with these key variables and don't make trading more complex than necessary. So if you're looking for a profession that is similar to the way traders actually trade, a scientist, mathematician, or engineer isn't it. One of the more apt professions is that of a pilot. Indeed, some trading instructors have noted that former pilots seem to make some of the best traders. Let's look at some of the similarities to understand why.

In many ways trading stocks and flying airplanes are very similar. As with flying, you have choices when it comes to managing your money. You can fly commercially and let a professional take you to your destination or you can fly yourself and take personal control. But just as with piloting your own plane, you would be wise to avoid taking matters too lightly. It's crucial for your survival that you build up the requisite skills and take proper precautions to protect yourself from a graveyard spiral, in flying as well as trading.

Pilots and traders work with basic forces (such as support and resistance), and they trust their instincts and intuition, while simultaneously looking toward objective indicators to gauge significant parameters. When flying an airplane you monitor the instrument panel to glean several pieces of key information from the airspeed indicator, altimeter, and directional gyro. This information is vital for keeping you on the right direction. When managing your own money (electronically), the trading platform similarly provides key information: price, volume, and momentum. These key factors help you navigate and plot a course of action. On the other hand, neither the pilot nor the trader should make things too complex. It's vital to focus on the ongoing process of trading, anticipating potential changes in the trading climate and taking decisive and immediate action. One doesn't need to be an aerospace engineer to fly a plane, and it's probably better that one is not. It's crucial to focus all attention on flying the plane, rather than mulling over esoteric issues, such as laws of motion, aeronautics, or other theoretical factors that keep the plane up in the air. It's crucial to focus all attention on just flying the plane. Traders should also just focus on trading, rather than pondering similar impractical issues, such as the validity of the random walk theory.

It's also necessary to remain logical and unemotional. Professionals don't let their feelings and biased perceptions get the best of them. Pilots rely on their instruments rather than their feelings and beliefs. It's possible, for example, to believe one is flying "up" when one is actually flying upside-down. Pilots are warned to “trust your instruments.” As with flying, it's vital to keep your perceptions and feelings in check while trading. You can't let feelings of panic, fear, or greed interfere with your cold and objective view of the markets. You must carefully and objectively develop a trading plan, trust it, and execute it skillfully. You can't let emotions get you excited and cause you to trade irrationally. In flying and trading, managing emotions, remaining objective, and taking decisive action are key components for survival.

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In formulating his psychoanalytic theory of personality, Sigmund Freud postulated two biologically deep-rooted instincts as the driving forces behind all human behavior: life instincts and death instincts. The life instinct works on the pleasure principle. Humans are driven to seek out pleasure and avoid pain at all costs. The need for continual pleasure and gratification is a strong and pervasive motive that must be curtailed.

In Beyond the Pleasure Principle, Freud postulated the death instinct.
The death instinct is less conspicuous and less powerful than the life instinct. Freud noted that all humans ultimately end up dead, and so it's logical to postulate, "the goal of life is death." Well, maybe? Although we may all die in the end, do people secretly strive to kill themselves off? Is there a pervasive and basic human motive to seek out death and self-destruction? I doubt it. Towards the end of his life, Freud doubted it also.

Freud didn't have very much evidence to support his idea of the death instinct. All of his evidence was anecdotal. For example, he noted that his patients kept mulling over their past defeats in life rather than picking themselves up and moving forward. He also noted that many solders had a difficult time forgetting past trauma experienced during battle upon returning home from war. Although this "evidence" does not necessarily support the existence of a death instinct, it does show that it is often easier for people to stay put than move forward.

It may be reassuring to know that while you are putting on your trades, there is not a core biological motive secretly compelling you to naturally destroy yourself. So, what are the origins of self-sabotage? The origins are socially learned rather than inherited and biological. Self-sabotage is closely related to the concept of fear of success. Individuals with a fear of success have heard societal messages that they will not succeed in certain realms. For example, women hear the message, you can't succeed in a "man's world." Ethnic minorities are told they can't break through racial barriers, and children from a working class neighborhood are told that they would be better off pursuing work in a blue-collar job. In many ways, it's much easier to stick with one's familiar environment than break out into a new direction. It's ironic that at the heart of self-sabotage lies a strong desire to achieve success in an area that had previously been closed. Although a person strives to break through a societal or psychological barrier to be more than their parents or society told them they could be, they may experience a psychological "tug-of-war" between striving for success and secretly believing the societal impositions against success one heard while growing up. In the end, overcoming a fear of success concerns identifying these societal impositions, recognizing that one secretly believes them, and convincing oneself that they are false. That's a lot easier said than done, but that's part of the struggle to maintain one's existence and defeat the "motive" for self-sabotage.

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The number of psychological theories to explain human behavior seems endless. It's as if every psychologist wants to propose his or her own theory, and convince the rest of the psychological community that it offers a new perspective. A few psychologists have extended psychological theory to the study of the markets, and have presented their theories in investment psychology books.

But in a rare example, Dr. Karl E. Scheibe, a psychology professor at Wesleyan University, has done the opposite; he uses investor behavior in the stock market to support a general theory he has proposed about human motives. In his book "The Drama of Everyday Life," Dr. Scheibe argues that everyday life is replete with numerous dramas that are played out over and over. As humans, we seek out drama. "Drama relieves human beings from the boredom and sameness of repetition," according to Dr. Scheibe. Throughout his book, Dr. Scheibe describes several examples where people in their everyday lives seek out drama as an antidote to boredom. In a chapter entitled, "Fear and Greed," he discusses how people find drama in the stock market.

As you've probably heard countless times by now, market behavior is motivated by fear and greed. Dr. Schiebe tries to expand this position. He notes an asymmetry between fear and greed: a loss is more fearsome than a gain is pleasing. Tversky and Kahneman's studies on risk aversion provide the best scientific illustration of this principle. For example, when asked to make a choice, people accept a sure profit of $100 over a 50% chance of winning $200. People don't like risk and will always take the sure profit. The consequence of risk aversion for investor behavior is that, in general, people's losses exceed their gains. That is, most people will be primarily motivated to avoid the unpleasant feelings of a possible loss, and thus, liquidate their positions prematurely. And because of their insatiable greed, they will keep reinvesting in the markets. This cycle of selling prematurely and reentering the markets means that most investors will lose overall rather than profit. So why do most investors continue to invest in the markets when they will continue to lose? It isn't merely greed, since the greed motive is less powerful than the motive to avoid risk. If it isn't greed, then what is it? They need the drama. To fight off tedium and boredom, they invest. They create a dramatic interplay. They become excited about winning but get scared about losing, and sell to protect what they have left. But then boredom sets in again. The desire to make big profits excites them, and they enter the markets again. And so the drama repeats over and over.

Dr. Schiebe notes that the search for drama is not restricted to amateur investors, but extends to professional money managers as well. All professional money managers are aware that the vast majority does not outperform the indexes. They would be better off purchasing a representative set of securities and just leaving it alone for a year. They could go fishing, relax by the beach, or climb a mountain, do anything but touch the investments. By doing so, their funds would at least match the annual growth of the index, which is better than what most fund managers achieve. So why don't they do so? It's the need for the drama. It's not very exciting to leave the investments alone. They sought out exciting professions as fund managers, and so they continue to go to work everyday, try to beat the index, and add more drama to their lives, even though the majority would do better to just leave the funds alone.

Dr. Schiebe's psychological analysis of stock trading may not provide very many new insights, but it is interesting, nevertheless. Behavioral economists and seasoned traders have long noted that market trends are a function of the fear and greed of the masses. But why people are drawn to the markets in the first place is a matter of debate. Dr. Schiebe's explanation that people invest so as to satisfy a motive to seek out drama and ease boredom is a reasonable explanation.

What does this psychological account offer to the professional trader? It's useful to understand the motives of the masses and see how irrational they are behaving. By seeking out thrills and excitement, they will buy stocks, but sell them prematurely for a loss, out of panic. As a trader, you can be right there, ready to take their money. While they buy and sell stocks to add drama to their lives, the professional trader can anticipate how they act on their fear and greed and make money from their predictable moves. But on the other hand, it's vital to acknowledge one's own powerful need for drama and excitement. A professional trader is just as human as an amateur trader, and thus, has a need for drama and excitement in everyday life. Everyone needs drama and excitement, but it is vital to keep these needs out of your trading life. Trading can often be tedious, repetitious, and boring. One must systematically execute a trading strategy consistently, over and over. It's a mistake to fall prey to the need to seek out drama. The solution? Make sure you get your drama and excitement in a different arena, outside of trading. If you satisfy this need somewhere else, you can deal with the relatively boring and repetitious nature of methodically trading your plan. The markets are exciting and offer drama, but make sure that you stay professional, and don't let the drama of the market undermine your trading plan.

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As we’ve said in this space many times, trading is not rocket science. It compares easily and accurately to horse racing, poker, sports, and many other endeavors where an average person with the right attitude and sensibilities can excel.

That’s why it’s important to return to bedrock principles, from time to time,
and remember the essential elements that you must bring to trading the markets if you want to separate yourself from your less-successful colleagues. Here’s a quick rundown:

Have A Positive Attitude: Trading success tends to be an expression of your approach to life and to trading. Generally speaking, whether you expect the worst, or the best, you’ll get it.

Learn From Your Experiences: Success in the markets can be built upon experience. If you never take a course or read a book, you can learn all you need to know for success as a trader by looking deeply enough into your past trades - both individually and the patterns they form.

Do What You Know To Be In Your Best Interests: Most traders who blow up start by going through a phase of knowing what they should do, but being unable or unwilling to do it. If you make sure to make the right trades, and get out at the right times, you’ll have a much better chance of staying on track for success.

Yesterday’s Trades Are Over With, Tomorrow’s Count More: Most traders who fail in the markets are mixed up on the relative importance of past and future decisions. While never entirely valueless, what you’ve done is always far less important that what you’re going to do next.

Trading Results Have Nothing To Do With Your Value As A Person: Don’t let your ego or any other part of your psyche get tangled up with your account balance. The two are completely separate. Never get confused on this point.

Everyone Experiences Peaks And Valleys: Many traders pressure themselves to win an inordinate amount of time. This hurts their performance. Top traders are generally much more forgiving of their drawdowns, their slumps, and their learning curve. If your standards are too high, you’ll definitely disappoint yourself by not meeting them.

Nothing Is Certain: The markets are entirely unpredictable. The only way to win is to position yourself as often as you can so the odds are as much in your favor as possible. If you’re certain you know exactly what will happen next, you’re probably wrong.

Worry Never Improved Anything: Trading successfully requires concentration, mathematical calculations, memorization, absorption of past patterns, and the like. If you’re going to waste brainpower chewing over issues you cannot fix, don’t be a trader.

If It Doesn’t Work, Stop Doing It: Successful traders are the ultimate realists. They recognize when a key doesn’t fit a lock, and they don’t try it again. If you feel like the next try might open the door, you’re not cut out for trading.

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There’s a certain air about a seasoned, successful trader. It’s not hubris. It’s not pomposity. It’s not self-absorption. But it does reflect an unshakable degree of confidence in his or her own ability to survive and even thrive in the markets.

One reason is that most successful traders have weathered periods of significant drawdowns and major lapses in their trading records, and have come all the way back to a higher level of success than ever before. Generally, less successful traders either haven’t yet suffered the same kind of drawdowns, or haven’t yet made such a stirring comeback. Either way, they’re uncertain of the future because they’re unproven against adversity in the past.

It’s not possible to fake the successful trader’s air of confidence and self-assuredness, although many try, as you can see in our Master Interviews with less-experienced traders. But you can begin to strengthen your honest feelings of self-worth with several simple exercises:

Remember Where You’ve Been: Whether it was only a few dollars or a major fortune, even the least experienced trader has suffered losses that were personally important. Think back to that unpleasant event in your career that still has great meaning for you. Use this loss to fuel your future success. For example, consider it a baseline for how you ought to protect yourself, or as a paradigm of what can happen when you ignore your own tolerance for risk.

Remember What You Know: Trading depends on a great deal of highly specific knowledge. Even an average trader knows a great deal more than the vast majority of stockholders. Take confidence from all this specialized information, experience, and skill. Consistently work to increase your store of knowledge. Over time, you’ll find this detailed background provides you with an undeniable basis to feel better about your efforts in the markets.

Remember Who’s The Man: Nearly every trader has had moments when he or she called the turn of the market, or picked a stock that everyone else had written off, or discerned a trend and got in at the low. Consciously cherish these triumphs - not merely for the monetary rewards they can generate, but for the emotional solidity they can contribute to your trading personality. Take time every now and then to remind yourself that “you’re the man,” and your trading will inevitably improve.

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Ever watch a hard-fought football or basketball or soccer game? When it’s over, who’s more tired? Who’s more bloodied? Who’s more used up? But who’s more elated?

At the end of the day, the raw effort required to win is not that much more than the effort required just to participate, and yet lose. Even more important, the rewards from the effort involved in achieving 99% of a victory are almost nonexistent compared with the rewards you get from working just a little harder, and putting a “W” in your column. So if you’re going to be tired, bloodied, and used up either way – isn’t it better to win?
That’s why successful traders are unwilling to curtail their efforts short of victory. They don’t know, of course, whether a given trade will succeed or fail.

But they don’t want to allow for the possibility that it might fail just because they were a little lazy, or because they followed the easy way to make the trade, instead of the right way.

Since the difference between winning and losing is so small, you can follow these suggestions to keep yourself more often on the winning side of the markets:

Make The Right Choices: Many times there’s only a subtle, small difference between having a winner or a loser – for example, a moment’s doubt may be enough to force you to exit, only to see the trade work out right afterwards. That’s why it’s important you try to make every decision as though it were the most important of your life. Part of that requires sticking closely to your plans. If you make the right choices as often as you can, you’ll collect far more winners than you otherwise would.

Be Consistent: There are so many forces in the markets, acting in so many different directions, that varying your own approach and response to conditions only adds to the chaos. The winningest traders tend to be very consistent in what positions they put on, when they put them on, and when they take them off again.

Sharpen Your Focus: The markets offer exceedingly diverse environments in which to make money. You can’t possibly master them all. That’s why successful traders specialize very narrowly. This allows them to build their expertise and narrow their attention, to give themselves an edge – albeit in a very small area. This edge generally translates into profits.

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There’s no question about it: trading is a high pressure business. It all comes from the continually progressing markets and the continually evolving environment in which traders operate, combined with the need for split-second decisions in conditions of uncertainty and ambiguity. Anyone who doesn’t feel the pressure is out of touch or delusional.

But pressure brings with it major problems. The human body is not able to handle high levels of stress and pressure for long periods of time. It’s not healthy. And it eventually results in poor judgment that will cost you plenty on the trading floor.

So for traders who want to be successful over the long haul, there’s really no other choice: You must learn how to relieve the pressure, or you won’t survive very long in the markets.

Fortunately, successful traders who must survive amid the pressure have found techniques to help them cope. You can use them, too, and increase your ability to trade successfully under high pressure conditions. These techniques include:

Trade Smaller: One of the primary sources of pressure is the risk involved in your open positions. You can therefore tailor the total level of risk, and to a degree, the level of pressure you’re feeling, by adjusting the sizes of your open positions.

Blow Off Steam: Many traders spend time every day in physical exercise, meditation, and other activities that allow them to release the pressure they build up when they’re working in the markets. Physical exercise, including active sports, martial arts, weight-lifting, and similar pursuits have the added advantage of getting you into better shape, which by itself will usually improve your trading.

Get Out Completely: Pulling the plug on your trading activities – whether for an hour, a day, or long enough for a vacation – is a quick, simple, and practical way to cut back on the pressure you’re feeling. Unfortunately, it works only for a short while with most inveterate traders. Within a few days or weeks, being out of the markets and missing those profitable opportunities tends to make them begin to feel even more pressure than when they were trading.

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Many people think the best way to cope with unacceptable ideas is to pretend that they are irrelevant and just don't matter. It seems easier to deny the unpleasant or unacceptable than acknowledge it. But ironically, denial uses up precious psychological resources. Trading is difficult and it's essential that you mobilize every bit of limited psychological energy you have, and focus it all on trading. Consciously or unconsciously denying thoughts and ideas about trading that are hard to accept interferes with your ability to maintain concentration and freely look at the market from a carefree and objective perspective. One of the best ways to free up psychological energy is to simply acknowledge all possible ideas you have trouble accepting. For some people that's all it takes: Acknowledge the unpleasant idea, realize it may be true, accept it, and move on. For others it is a little more difficult. They must write down the idea, write down instances where the idea may prove true, and the reasons to move on despite the veracity of the idea. But wherever you stand on your ability to acknowledge the unacceptable and move on, the process can start only after you review the ideas you find the most unacceptable. Let's study a few possible examples.

A novice trader may believe, "Maybe I'm not a very skilled trader. Perhaps, I've just had a run of good luck." For novice traders, early success may actually reflect a run of good luck. In all likelihood, a novice trader runs "hot" for a while, but eventually a lack of skills catches up with him or her. If you feel that this statement is true for you, even just a little bit, it is worth acknowledging it. Why not admit your limitations? By pretending that you can trade with skills you really don't have, you will waste your limited psychological energy denying your limitations. It's a very passive approach to coping with the stresses and strains of trading. You'll tend to spend more psychological energy trying to deny an undesirable possibility, rather than using your limited energy efficiently. And if you trade without the requisite skills, you may also lose quite a bit of money. It would be better to use your time wisely by actually gaining more trading experience, and honing your trading skills so that you can trade consistently. A related idea is, "I can prepare for hours but I may still fail." This is a hard fact to deal with. Many would-be traders put intense effort into learning to trade, yet they still fail. It's a hard idea to accept, since the next logical thought is, "If trading is so hard, then why am I doing this?" It is vital to acknowledge this idea and deal with it in your own way.

"Perhaps I was a good trader at one time, but the market conditions have changed and I may not be able to keep my reputation up." This is an issue that all traders face at some point: keeping up their reputation. When one makes big profits trading, it's tempting to tell neighbors and friends how well you are doing. It's great when you're making the big profits, but keeping up appearances is often the downfall of even the most astute trader. Again, denying your need for fame and glory, or pretending that you can maintain an unrealistic reputation, will use up your psychological energy and interfere with your ability to concentrate. Huge profits tend to go to the humble, so try not to build up your reputation. Admit that you will have difficulty keeping up appearances and just quit doing it.

One fact that traders wrestle with continuously is the notion that, "Trading is not a legitimate job." Many traders struggle with the legitimacy of trading. Some traders find that they can simply remind themselves, "Trading provides liquidity and helps control prices." Other traders, however, think this isn't good enough and need to find more meaning in their daily trading activities. For example, they may focus on how trading helps them provide for their family, or may plan to donate some of their profits to charities they view as personally valuable. The point is, don't deny the possible truth to such ideas. You will be better off acknowledging and working through them, and then just moving on. Denying they exist, on the other hand, will use up time and energy.

Unacceptable beliefs tend to lie in the back of your mind. They remain there, lurking, and when you are vulnerable, they can powerfully influence your outlook. So acknowledge unacceptable ideas, and once you admit the possible validity of such ideas, you will neutralize their potential influence. This will free up limited psychological resources, allowing you to focus all your energy on trading profitably and consistently.

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Finding the Right Blend

The ideal trader personality style consists of a combination of experience, skill, knowledge, discipline, and intuition. The problem with ideals, however, is that they sometimes exist only in our imagination, with few actual candidates who fit the bill. Consider, for example, the traits of discipline and intuition. A profitable trader must trade the plan, and that means following rules. But most rule followers live "by the book." They tend to seek out security and certainty, and prefer facts to abstract theories and ideas. Yet there is an intuitive side to trading that is equally important. The market only follows the rules when it does; the rest of the time it goes another way. There are an endless number of inputs and it takes an intuitive mind to piece them all together to come up with a reasonable plan of action.

Perhaps no person has the ideal trader personality. At best, all we can hope for is the right blend of core personality traits. And thus, it is useful to know where you stand in terms of your personality, so you can adapt and change, and bring your trader personality closer to the ideal. Appreciate the characteristics that accentuate your trading while recognizing the characteristics that don't. Once you identify your personal limitations, you can either develop the personality traits you need, or devise trading methods to work around your limitations.

The typologies proposed by philosophers and psychologists are numerous and complicated. But a common and simple way many people classify people is to focus on the extent to which they approach life as an artist or as a scientist. The artsy person thinks in abstract rather than concrete terms. He or she knows how to use intuition to look at the world. The artist sees reality as a subjective illusion, with each person creating his or her own reality. The scientist, in contrast, believes that there is a single true, objective reality. "If you can't measure it, it isn't there" is a credo most scientists live by. "There are cold hard facts out there and it is possible to find them." Perhaps few artists are steadfastly so abstract, and few scientists believe in a universal reality. But as fuzzy categories, these are useful stereotypes, and ones that are apt to trading.

Which type describes you? Are you more of the scientist or the artist? Are you a blend of these two types? Some traders are 90-10 in favor of science. They are usually interested in developing computerized trading systems that generate automatic buy and sell signals with as little discretion as possible. This type of trader may fall into the trap known as paralysis-by-analysis, an ailment in which far too much time is spent tinkering with the computer program than trading. One may spend more time backtesting and mining historical data than decisively putting on a trade. It is useful for these traders to work at bringing the blend into more of a balance by injecting more art or human intuition into the trading process. And for these people, it's useful for them to practice trusting their intuition and taking action rather than being stunned by indecision.

The opposite end of this spectrum is the all-art, no-theory type traders. Their perception of the market is based entirely on abstract feelings, and a spontaneous emotional response to stimuli. Naturally, this rarely works. Although an intuitive feel for the markets is useful, it's essential to also look at some "objective" inputs, consider them carefully, and make a sound decision based on the data.

What type of trader are you? Where do you fit in the spectrum between art and science? Take some time to find out and adjust your trading personality accordingly. You'll find that the right blend will help you trade profitably and consistently.