INDIVIDUAL PSYCHOLOGY
7. SELF-DESTRUCTIVENESS
Trading is a very hard game. A trader who wants to be successful in the long run has to be very serious about what he does. He cannot afford to be naive or to trade because of some hidden psychological agenda.
Unfortunately, trading often appeals to impulsive people, to gamblers, and to those who feel that the world owes them a living. If you trade for the excitement, you are liable to take trades with bad odds and accept unnecessary risks. The markets are unforgiving, and emotional trading always results in losses.
Gambling
Gambling means betting on games of chance or skill. It exists in all societies, and most people have gambled at some point in their lives.
Freud believed that gambling was universally attractive because it was a substitute for masturbation. The repetitive and exciting activity of the hands, the irresistible urge, the resolutions to stop, the intoxicating quality of pleasure, and the feelings of guilt link gambling and masturbation.
Dr. Ralph Greenson, a prominent California psychoanalyst, has divided gamblers into three groups: the normal person who gambles for diversion and who can stop when he wishes; the professional gambler, who selects gambling as his means of earning a livelihood; and the neurotic gambler, who gambles because he is driven by unconscious needs and is unable to stop.
A neurotic gambler either feels lucky or wants to test his luck. Winning gives him a sense of power. He feels pleased, like a baby feeding at a breast. A neurotic gambler always loses because he tries to re-create that omnipotent feeling of bliss instead of concentrating on a realistic long-term game plan.
Dr. Sheila Blume, director of the compulsive gambling program at South Oaks Hospital in New York, calls gambling "an addiction without a drug." Most gamblers are men who gamble for the action. Women tend to gamble as a means of escape. Losers usually hide their losses and try to look and act like winners, but they are plagued by self-doubt.
Trading stocks, futures, and options gives a gambler a high but it does appear more respectable than betting on the ponies. Moreover, gambling in the financial markets has an aura of sophistication and offers a better intellectual diversion than playing numbers with a bookie.
Gamblers feel happy when trades go in their favor. They feel terribly low when they lose. They differ from successful professionals who focus on longterm plans and do not get particularly upset or excited in the process of trading.
Brokers are well aware that many of their clients are gamblers. They often try to avoid leaving messages for traders with their wives, even when they call to confirm a trade. Amateurs are not the only ones involved in gambling-quite a bit of it goes on among professionals. Sonny Kleinfield describes in his book, The Traders, the endemic betting on sports events on the floors of financial exchanges.
The key sign of gambling is the inability to resist the urge to bet. If you feel that you are trading too much and the results are poor, stop trading for a month. This will give you a chance to re-evaluate your trading. If the urge to trade is so strong that you cannot stay away fiom the action for a month, then it is time to visit your local chapter of Gamblers Anonymous or start using the principles of Alcoholics Anonymous, outlined later in this chapter.
Self-sabotage
After practicing psychiatry for many years, I became convinced that most failures in life are due to self-sabotage. We fail in our professional, personal, and business affairs not because of stupidity or incompetence, but to fulfill an unconscious wish to fail.
A brilliant and witty friend of mine has a lifelong history of demolishing his success. As a young man, he was a successful industrial salesman and was sacked; he entered training as a broker and rose near the top of his firm but was sued; he became a well-known trader but busted out while disentangling himself from previous disasters. He blamed all his failures on envious bosses, incompetent regulators, and an unsupportive wife.
Finally, he hit bottom. He had no job and no money. He borrowed a quote terminal from another busted-out trader and raised capital from a few people who had heard that he had traded well in the past. He knew how to trade and made money for his pool. As the word spread, more people brought in money. My friend was on a roll. At that point, he went on a speaking tour of Asia but continued to trade from the road. He took a side trip into a country famous for its prostitutes, leaving a very large open position with no protective stop. By the time he returned to civilization, the markets had staged a major move and his pool was wiped out. Did he try to figure out his problem? Did he try to change? No- he blamed his broker!
It hurts to look within yourself for the cause of your failure. When traders get in trouble, they tend to blame others, bad luck, or anything else.
A prominent trader came to me for a consultation. His equity was being demolished by a rally in the U.S. dollar, in which he was heavily short. He had grown up fighting a nasty and arrogant father. He had made a name for himself by betting large positions on reversals of established trends. This trader kept adding to his short position because he could not admit that the market, which represented his father, was bigger and stronger than he was.
These are just two examples of how people act out self-destructive tendencies. We sabotage ourselves by acting like impulsive children rather than intelligent adults. We cling to our self-defeating patterns even though they can be treated - failure is a curable disease.
The mental baggage from childhood can prevent you from succeeding in the markets. You have to find your weaknesses in order to change. Keep a trading diary - write down your reasons for entering and exiting every trade. Look for repetitive patterns of success and failure.
The Demolition Derby
Almost every profession and business provides a safety net for its members. Your bosses, colleagues, and clients can warn you when you behave dangerously or self-destructively. There is no such support in trading, which makes it more dangerous than most human endeavors. The markets offer many opportunities to self-destruct without a safety net. All members of society make small allowances to protect one another from the consequences of our mistakes. When you drive, you try to avoid hitting other cars and they try to avoid hitting you. If someone swings open the door of a parked car, you swerve. If someone cuts in front of you on a highway, you may curse, but you will slow down. You avoid collisions because they are too costly for both parties.
Markets operate without normal human helpfulness. Every trader tries to hit others. Every trader gets hit by others. The trading highway is littered with wrecks. Trading is the most dangerous human endeavor, short of war. Buying at the high point of the day is like swinging your car door open into the traffic. When your buy order reaches the floor, traders rush to sell to you - to rip your door off along with your arm. Other traders want you to fail because they get the money you lose.
Controlling Self-Destructiveness
Most people go through life making the same mistakes at sixty that they made at twenty. Others structure their lives to succeed in one area while acting out internal conflicts in another. Very few people grow out of their problems.
You need to be aware of your tendency to sabotage yourself: Stop blaming your losses on bad luck or on others and take responsibility for the results. Start keeping a diary - a record of all your trades, with reasons for entering and exiting them. Look for repetitive patterns of success and failure. Those who do not learn from the past are condemned to repeat it.
You need a psychological safety net the way mountain climbers need their survival gear. I found the principles of Alcoholics Anonymous, outlined later in this chapter, to be of great help. Strict money management rules also provide a safety net.
If you seek therapy for your trading problems, choose a competent therapist who knows what trading is about. You are ultimately responsible for your own therapy and must monitor its progress. I usually tell my patients that if a month goes by without clear signs of improvement, then therapy is in trouble. When therapy shows no progress for two months, it is time to seek a consultation with another therapist.
8. TRADING PSYCHOLOGY
Your feelings have an immediate impact on your account equity. You may have a brilliant trading system, but if you feel frightened, arrogant, or upset, your account is sure to suffer. When you recognize that a gambler's high or fear is clouding your mind, stop trading. Your success or failure as a trader depends on controlling your emotions.
When you trade, you compete against the sharpest minds in the world. The field on which you compete has been slanted to ensure your failure. If you allow your emotions to interfere with your trading, the battle is over.
You are responsible for every trade that you make. A trade begins when you decide to enter the market and grids only when you decide to take yourself out. Having a good trading system is not enough. Most traders with good systems wash out of the markets because psychologically they are not prepared to win.
Bending the Rules
Markets offer enormous temptations, like walking through a gold vault or through a harem. Markets evoke powerful greed for more gains and a great fear of losing what we've got. Those feelings cloud our perceptions of opportunities and dangers.
Most amateurs feel like geniuses after a winning streak. It is exciting to believe that you are so good you can bend your own rules and succeed. That's when traders deviate from their rules and go into a self-destruct mode.
Traders gain some knowledge, they win, their emotions kick in, and they self-destruct. Most traders promptly give their "killings" back to the markets. The markets are full of rags to riches to rags stories. The hallmark of a successful trader is his ability to accumulate equity.
You need to make trading as objective as possible. Keep a diary of all your trades with "before and after" charts, keep a spreadsheet listing all your trades, including commissions and slippage, and maintain very strict money management rules. You may have to devote as much energy to analyzing yourself as you do to analyzing the markets.
When I was learning how to trade, I read every book on trading psychology I could find. Many writers offered sensible advice. Some stressed discipline: "You cannot let the markets sway you. Do not make decisions during trading hours. Plan a trade, and trade a plan." Others stressed flexibility: "Do not enter the market with any preconceived notions. Change your plans when markets change." Some experts suggested isolation - no business news, no Wall Street Journal, no listening to other traders, just you and the markets. Others advised being open-minded, keeping in touch with other traders and soaking up fresh ideas. Each piece of advice seemed to make sense but contradicted other equally sensible advice.
I kept reading, trading, and focusing on system development. I also continued to practice psychiatry. I never thought the two fields were connected until I had a sudden insight. The idea that changed how I trade came from psychiatry.
The Insight That Changed My Trading
Like most psychiatrists, I always had some patients with alcohol problems. I also served as a consultant to a major drug rehabilitation program. It did not take me long to realize that alcoholics and addicts were more likely to recover in self-help groups than in classical psychiatric settings.
Psychotherapy, medications, and expensive hospitals and clinics can sober up a drunk but seldom succeed in keeping him sober. Most addicts quickly relapse. They have a much better chance to recover if they become active in Alcoholics Anonymous (AA) or other self-help groups.
Once I realized that AA members were likely to stay sober and rebuild their lives, I became a big fan of Alcoholics Anonymous. I began sending patients with drinking problems to AA and related groups, such as ACOA (Adult Children of Alcoholics). Now, if an alcoholic comes to me for treatment, I insist that he also go to AA. I tell him that to do otherwise would mean wasting our time and his money.
One night, many years ago, I stopped by a friend's office on the way to a party at our department of psychiatry. We had two hours before the party, and my friend, who was a recovering alcoholic, said: "Do you want to take in a movie or go to an AA meeting?" I had sent many patients to AA but had never been to a meeting, since I have never had a drinking problem. I jumped at a chance to attend an AA meeting - it was a new experience.
The meeting was held at a local YMCA. A dozen men and a few women sat on folding chairs in a plain room. The meeting lasted an hour. I was amazed by what I heard - these people seemed to talk about my trading!
They talked about alcohol, but as long as I substituted the word "loss" for "alcohol," most of what they said applied to me! My account equity was still swinging up and down in those days. I left that YMCA room knowing that I had to handle my losses the way AA handles alcoholism.
9. TRADING LESSONS FROM AA
Almost any drunk can stay sober for a few days. Soon, the urge to drink overwhelms him again and he returns to the bottle. He cannot resist his urge because he continues to feel and think like an alcoholic. Sobriety begins and ends inside a person's mind.
Alcoholics Anonymous (AA) has a system for changing the way people think and feel about drinking. AA members use a 12-step program for changing their minds. These 12 steps, described in the book Twelve Steps and Twelve Traditions, refer to 12 stages of personal growth. Recovering alcoholics attend meetings where they share their experiences with other recovering alcoholics, supporting each other in their sobriety. Any member can get a sponsor - another AA member whom he can call for support when he feels the urge to drink.
AA was founded in the 1930s by two alcoholics - a doctor and a traveling salesman. They began meeting and helping each other stay sober. They developed a system that worked so well, others began to join them. AA has only one goal - to help its members stay sober. It does no fund-raising, takes no political positions, and runs no promotional campaigns. AA keeps growing thanks only to word of mouth. It owes its success only to its effectiveness.
The 12-step program of AA is so effective that people with other problems now use it. There are 12-step groups for children of alcoholics, smokers, gamblers, and others. I have become convinced that traders can stop losing money in the markets if they apply the key principles of Alcoholics Anonymous to their trading.
Denial
A social drinker enjoys a cocktail or a glass of wine or beer but stops when he feels he's had enough. An alcoholic's chemistry is different. Once an alcoholic takes a drink, he feels an urge to drink more, until he gets drunk.
A drunk often says that he needs to cut down on alcohol, but he cannot admit that his drinking is out of control. Most drunks deny that they are alcoholics. Try telling an alcoholic relative, friend, or employee that his drinking is out of control and damaging his life and you will run into a wall of denial.
An alcoholic often says: "My boss fired me 'cause I was hung over and came in late. My wife took the kids and left 'cause she had no sense to begin with. My landlord is trying to kick me out of the apartment 'cause I'm a little behind on the rent. I'm gonna have to cut down on my drinking, and everything will be all right."
This man has lost his family and his job. He is about to lose the roof over his head. His life is spinning out of control but he keeps saying that he can cut down on his drinking. This is denial!
Alcoholics deny their problems while their lives are falling apart. Most of them nurse the fantasy of being able to control their drinking. As long as an alcoholic believes that he can "control his drinking," he is headed downhill. Nothing will ever change, even if he gets a new job, a new wife, and a new landlord.
Alcoholics deny that alcohol controls their lives. When they talk of reducing drinking, they talk about managing the unmanageable. They are like a driver whose car spins out of control on a mountain road. When the car careens down a cliff, it is too late to promise to drive carefully. An alcoholic's life careens out of control while he denies he's an alcoholic.
There is a starkparallel between an alcoholic and a trader whose account is being demolished by losses. He keeps changing trading tactics, acting like an alcoholic who tries to solve his problem by switching from hard liquor to beer. A loser denies that he has lost control over his course in the market.
Rock Bottom
A drunk can begin his journey to recovery only after he admits that he is an alcoholic. He must see that alcohol controls his life and not the other way around. Most drunks cannot accept this painful truth. They can face it only after they hit rock bottom.
Some alcoholics hit rock bottom when they develop a life-threatening illness. Others hit rock bottom after being rejected by their family or losing a job. An alcoholic needs to sink to a point so low, so deep down in the gutter, so unbearably painful that it finally penetrates his denial.
The pain of hitting rock bottom feels intolerable. It makes an alcoholic see how deeply he has sunk. This pain penetrates his denial. He sees a stark and simple choice-either turn his life around or die. Only then is an alcoholic ready to begin his journey to recovery.
Profits make traders feel powerful and give them an emotional high. They try to get high again, put on reckless trades, and give back their profits. Most traders cannot stand the pain of a string of severe losses. They die as traders afrer hitting rock bottom and wash out of the markets. The few survivors realize that the main trouble is not with their methods, the trouble is with their thinking. They can change and become successful traders.
The First Step
An alcoholic who wants to recover has to go through twelve steps - twelve stages of personal growth. He needs to change how he thinks and feels, how he relates to himself and others. The first step of AA is the hardest.
The first step an alcoholic has to take is to admit that he is powerless over alcohol. He must admit that his life has become unmanageable, that alcohol is stronger than he is. Most alcoholics cannot take that step, drop out, and go on to destroy their lives.
If alcohol is stronger than you, then you can never touch it again, not a sip for as long as you live. You have to give up drinking forever. Most drunks do not want to give up that pleasure. They destroy their lives rather than take the first step of AA. Only the pain of hitting rock bottom can supply the motivation to take that first step.
One Day at a Time
You have probably seen bumper stickers on cars that say "One day at a time" or "Easy does it." Those are AA slogans, and people who drive those cars are probably recovering alcoholics.
Planning for life without alcohol can seem overwhelming. That's why AA encourages its members to live sober one day at a time. The goal of every AA member is to stay sober today and go to bed sober tonight. Gradually, days become weeks, then months, then years. AA meetings and other activities help each recovering alcoholic stay sober, one day at a time.
Recovering alcoholics receive - and give others - invaluable support and fellowship at these meetings. They are held at all hours, all over the world. Traders have much to learn from those meetings.
An AA Meeting
One of the best things that a trader can do is go to an AA meeting. I especially recommend it to a trader on a losing streak. Call Alcoholics Anonymous and ask about the next "open meeting" or "beginners' meeting" in your area.
A meeting lasts about an hour. You can sit in the back of the room and listen carefully. There is no pressure to speak, and nobody asks for your last name.
Each meeting begins with a long-term member getting up and speaking about his or her personal struggle for recovery from alcoholism. Several other members share their experiences. There is a collection to cover expenses - most people give a dollar. All you have to do is listen carefully, and every time you hear the word "alcohol," substitute the word "loss" for it. You will feel as if the people in the meeting are talking about your trading!
10. LOSERS ANONYMOUS
A social drinker enjoys an occasional drink, but an alcoholic craves alcohol. He denies that alcohol controls and destroys his life - until he reaches a personal crisis. It may be a life-threatening illness, unemployment, desertion by a family member, or another unbearably painful event. AA calls it "hitting rock bottom."
The pain of hitting rock bottom punctures an alcoholic's denial. He sees a stark choice to drown or to turn and swim up for air. His first step to recovery is to admit that he is powerless over alcohol. A recovering alcoholic can never drink again.
Loss is to a loser what alcohol is to an alcoholic. A small loss is like a single drink. A big loss is like a bender. A series of losses is like an alcoholic binge. A loser keeps switching between different markets, gurus, and trading systems. His equity shrinks while he is trying to re-create the pleasurable sensation of winning.
Losing traders think and act like alcoholics, except that their speech is not slurred. The two groups are so much alike that you can predict what a loser will do by using alcoholics as a model.
Alcoholism is a curable disease-and so is losing. Losers can change if they start using the principles of Alcoholics Anonymous.
The Urge to Trade
Successful traders treat drawdowns the way social drinkers treat alcohol. They have a little and stop. If they take several losses in a row, they take that as a signal that something is wrong: It is time to stop and rethink their analysis or methods. Losers cannot stop- they keep trading because they are addicted to the excitement of the game and keep hoping for a big win.
One prominent trading advisor wrote that the pleasure of trading was higher than that of sex or flying jet aircraft. Just as an alcoholic proceeds from social drinking to drunkenness, losers take bigger and bigger risks. They cross the line between taking a business risk and gambling. Many losers do not even know that line exists.
Losers feel the urge to trade, just as alcoholics feel the urge to drink. They make impulsive trades, go on trading binges, and try to trade their way out of a hole.
Losers bleed money from their accounts. Most of them bust out, but some turn to managing other people's money after they lose their own; still others sell advisory services, like burned-out drunks who wash glasses in a bar.
Most losers hide their losses from themselves and from everyone else. They keep shuffling money, keep poor records, and throw away brokerage slips. A loser is like an alcoholic who does not want to know how many ounces of liquor he drank.
Into the Hole
A loser never knows why he loses. If he knew, he would have done something about it and become a winner. He keeps trading in a fog. A loser tries to manage his trading the way an alcoholic tries to manage his drinking.
Losers try to trade their way out of a hole. They switch trading systems, buy new software, or take tips from a new guru. They act out a rescue fantasy - a charming belief in Santa Claus. Their desperate belief in magic solutions helps many advisors sell their services to the public.
When losses mount and equity shrinks, a loser acts like an alcoholic threatened with an eviction or a firing. A loser grows desperate and converts outright positions into spreads, doubles up on losing positions, reverses and trades in the opposite direction, and so on.
Losers get as much good from these maneuvers as an alcoholic who switches from hard liquor to wine. A losing trader careens out of control, trying to manage the unmanageable. Alcoholics die prematurely, and most traders bust out of the markets and never come back. New trading methods, hot tips, and improved software cannot help you until you learn to handle yourself. You have to change how you think in order to stop losing and begin your recovery as a trader.
Losers get drunk on losses; they're addicted to losses. Traders prefer profits, but even losses provide plenty of excitement. The pleasure of trading is very high. Few losers are actively trying to lose - but then few alcoholics are consciously trying to end up in the gutter.
A loser keeps getting high from trading while his equity shrinks. Trying to tell him that he is a loser is like trying to take a bottle away from a drunk. A loser has to hit rock bottom before he can begin to recover.
Rock Bottom
Hitting rock bottom feels horrible. It is painful and humiliating. You hit it when you lose money you cannot afford to lose. You hit it when you gamble away your savings. You hit it after you tell your friends how smart you are and later have to ask them for a loan. You hit rock bottom when the market comes roaring at you and yells: "You fool!"
Some people hit rock bottom after only a few weeks of trading. Others keep adding money to their account to postpone the day of reckoning. It hurts to see a loser in the mirror.
We spend our lifetimes building up self-esteem. Most of us have a high opinion of ourselves. It hurts a smart and successful person to hit rock bottom. Your first impulse may be to hide, but remember you are not alone. Almost every trader has been there.
Most people who hit rock bottom die as traders. They slink away from the market and never look back. Brokerage records indicate that 90 out of 100 people trading today will probably be gone from the markets a year from now. They will hit rock bottom, crumble, and leave. They will try to forget trading as they would a bad dream.
Some losers will lick their wounds and wait until the pain fades away. Then they will return to trading, having learned little. They will be fearful, and their fear will further impair their trading.
Very few traders will begin the process of change and growth. For these rare individuals, the pain of hitting rock bottom will interrupt the vicious cycle of getting high from winning and then losing everything and crashing.
When you admit that you have a personal problem that causes you to lose, you can begin building a new trading life. You can start developing the discipline of a winner.
The First Step
An alcoholic needs to admit that he cannot control his drinking. A trader needs to admit that he cannot control his losses. He needs to admit that he has a psychological problem with the losses and that he is destroying his trading account. The first step of an AA member is to say: "I am an alcoholic, I am powerless over alcohol." As a trader, you have to take your first step and say: "I am a loser, I am powerless over losses."
A trader can recover using the principles of Alcoholics Anonymous. Recovering alcoholics struggle to stay sober, one day at a time. Now you have to struggle to trade without losses, one day at a time.
You may say this is impossible. What if you buy, and the market immediately ticks down? What if you sell short at the bottom tick, and the market rallies? Even the best traders lose money on some trades.
The answer is to draw a line between a businessman's risk and a loss. A trader must take a businessman's risk, but he may never take a loss greater than his predetermined risk.
A storekeeper takes a risk every time he stocks new merchandise. If it does not sell, he will lose money. An intelligent businessman takes only risks that will not put him out of business even if he makes several mistakes in a row. Stocking two crates of merchandise may be a sensible business risk, but stocking a full trailer is probably a gamble.
As a trader, you are in the business of trading. You need to define your businessman's risk - the maximum amount of money you will risk on any single trade. There is no standard dollar amount, just as there is no standard business. An acceptable businessman's risk depends, first of all, on the size of your trading account. It also depends on your trading method and pain tolerance.
The concept of a businessman's risk will change the way you manage your money (see Chapter 10, "Risk Management"). A sensible trader never risks more than 2 percent of account equity on any trade. For example, if you have $30,000 in your account, you may not risk more than $600 per trade, and if you have $10,000, you may not risk more than $200. If your account is small, limit yourself to trading less expensive markets, or mini-contracts.
If you see an attractive trade but your stop would have to be placed where more than 2 percent of equity would be at risk-pass that trade. Avoid risking more than 2 percent on a trade the way a recovering alcoholic avoids bars. If you are not sure how much to risk, err on the side of caution.
If you blame excess commissions on a broker and slippage on a floor trader, you give up control of your trading life. Try to reduce both, but take responsibility for them. If you lose even a dollar more than your businessman's risk, including commissions and slippage, you are a loser.
Do you keep good trading records? Poor record-keeping is a sure sign of a gambler and a loser. Good businessmen keep good records. Your trading records must show the date and price of every entry and exit, slippage, commissions, stops, all adjustments of stops, reasons for entering, objectives for exiting, maximum paper profit, maximum paper loss after a stop was hit, and any other necessary data.
If you bail out of a trade within your businessman's risk, it is normal business. There is no bargaining, no waiting for another tick, no hoping for a change. Losing a dollar more than your established businessman's risk is like getting drunk, getting into a brawl, getting sick to your stomach on your way home, and waking up in the gutter with a headache. You would never want that to happen.
A Meeting for One
When you go to an AA meeting, you will see people who have not had a drink in years stand up and say: "Hello, my name is so-and-so, and I am an alcoholic." Why do they call themselves alcoholics after years of sobriety?
Because if they think they have beaten alcoholism, they will start drinking again. If a person stops thinking he is an alcoholic, he is free to take a drink, then another, and will probably end up in the gutter again. A person who wants to stay sober must remember that he is an alcoholic for the rest of his life.
Traders would benefit from our own self-help organization-I'd call it Losers Anonymous. Why not Traders Anonymous? Because a harsh name helps to focus attention on our self-destructive tendencies. After all, Alcoholics Anonymous do not call themselves Drinkers Anonymous. As long as you call yourself a loser, you focus on avoiding losses.
Several traders have argued against what they thought was the "negative thinking" of Losers Anonymous. A retired woman from Texas, a highly successful trader, described her approach to me. She is very religious and thinks it would not please the Lord for her to lose money. She cuts her losses very fast because of that. I thought that our methods were similar. The goal is to cut losses due to some objective, external rule.
Trading within a businessman's risk is like living without alcohol. A trader has to admit that he is a loser, just as a drunk has to admit that he is an alcoholic. Then he can begin his journey to recovery. This is why every morning before trading I sit in front of the quote screen in my office and say: "Good morning, my name is Alex, and I am a loser. I have it in me to do serious financial damage to my account." This is like an AA meeting- it keeps my mind focused on the first principles. Even if I take thousands of dollars out of the market today, tomorrow I will say: "Good morning, my name is Alex and I am a loser."
A friend of mine joked: "When I sit in front of my quote machine in the morning, I say, 'My name is John, and I'm gonna rip your throat out."' His thinking generates tension. "Losers Anonymous" thinking generates serenity.
A trader who feels serene and relaxed can focus on looking for the best and safest trades. A trader who is tense is like a driver who freezes at the wheel. When a sober man and a drunk enter a race, you know who is more likely to win. A drunk may win once in a while thanks to luck, but the sober man is the one to bet on. You want to be the sober man in the race.
11. WINNERS AND LOSERS
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.
Emotional Trading
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 freg 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 Haward 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 (see the sections on technical analysis).
- 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 (see Chapter 10, "Risk Management").
- 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.
Nhà đầu tư nên tránh: quá tự tin, nghe theo đám đông, tính toán sai thời điểm thị trường, quá tự tin vào khả năng kiểm soát tình hình, không hạn chế chi phí đầu tư…
Năm 2009 có lẽ là năm đáng nhớ với rất nhiều NĐT, bởi đây là năm “gỡ gạc”, thậm chí là cơ hội tốt để “lên đời” với không ít NĐT mạnh dạn tham gia thị trường và có thêm phần may mắn.
Tình hình khủng hoảng kinh tế đã khiến cho các doanh nghiệp niêm yết gặp không ít khó khăn trong những tháng đầu năm 2009, nhưng trong 3 quý trở lại đây, tình hình kinh doanh của các công ty đã có nhiều khởi sắc. Bàn về năm 2010, nhiều chuyên gia cho rằng tình hình sẽ còn khả quan hơn năm 2009.
