the masters.
han,
The futures trader is interested infinding the correct target, taking aimat it, pulling the trigger and baggingthe prey.
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Qualities of a Successful Futures Trader
The futures trader must be consistent, efficient, adapt-able and persistent. Because futures trading is uniqueamongthe many different avenues that are open to traders, it has its
 
12 / The Psychology of Trading ¢ 133
unique brand of psychology. In this chapter, I will acquaintyou with the major issues that the futures trader faces and,moreover, suggest methods that you can use to overcomeyour limitations and maximize your strong points.Trading Discipline
One aspect of universal agreement among the masters isthe importance of discipline. This is probably the most worn-out term in futures trading. Saying the word is one thing;truly understanding its definition on an operational orbehavioral level is another.
Discipline is not just the ability to develop a trading planand to stay with it; it is also the ability to know when yourplan is not working and therefore when to abandon it.
Discipline is the ability to give your futures tradingpositions sufficient time to work in your favor or, for thatmatter, sufficient time to work against you,
Discipline is the ability to trade again once you've takena loss, to ignore extraneous information and to avoid inputsthat are not related to the system you are using.
Discipline is the ability to maintain reasonable positionsize and to avoid the motion that leads to overtrading.
Discipline is the persistence required to maintain yourtrading systems and to calculate consistently the necessarytiming indicators during the day, either manually or bycomputer.
Discipline, above all, is the ability to come back to thetrading arena every day, regardless of whether you won,lost or broke even the day before.
As you can see, discipline consists of many differentthings. Discipline is not any one particular skill.
Discipline’s Component Behaviors
Perhaps the best way to understand trading discipline isto examine some of its component behaviors.134 Market Masters
Be Persistent
__ As I've said earlier, this is perhaps the single mostimportant quality a trader can possess. Futures tradingrequires the ability to continue trading even when resultshave not been good. Due to the nature of markets andtrading systems, good times frequently follow bad times,and bad times frequently follow good times. Some ofa trader'sgreatest successes occur following a string of losses. This is whytraders mustbe persistent in applying their trading methodsand continue using them for a reasonable period of time.Consider the lessons learned from Larry Williams, GeorgeLane and Conrad Leslie.
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Futures trading requires the ability tocontinue trading even when resultshave not been good.
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Individuals who quit too soon will not be in the marketswhen their systems begin to work; those who quit too latewill run out of trading capital. Therefore, although persis-tence is important, itis also important to know when to quitand not play any longer using the existing system.
How do you develop persistence? While the answerappears simple, the implementation is not. You developpersistence by being persistent. While this may sound like acircular answer, it truly is not. The only way to be persistent isto force yourself initially to do everything that must be doneaccording to the dictates of your system or method.
If you're having difficulty, try this. Make a commitmentto a trading system or method. Follow through with thatapproach for a specific amount of time; take every tradeaccording to the rules or, if the system is subjective, attemptto trade the system with as much consistency as possible. If
12 / The Psychology of Trading ¢ 135
you are consistent in applying your rules, in most cases youwill have profits to show for your efforts. Even if yourtrading is not successful, you will have learned a great deal.You will have learned that you can follow a system ormethod, that you can trade in a disciplined fashion and,moreover, that the only way to do so is to be persistent byfollowing as many of the trades and rules as possible.
Compare the above scenarios to the ignorance and con-fusion that come from haphazardly trading or inconsis-tently applying trading rules. Think back to your experi-ences as a trader. Remember your worst losing trades. Youwill find that losses that were taken according to a system ormethod are easier to accept psychologically, whereas those thatwere not accepted according to the rules often turned into terriblemonsters, ultimately costing you much, much more than theyshould have financially as well as psychologically. To master theskill of persistence, you need to practice it. Make the com-mitment, and you will see some wonderful results, evenover the short term.
Accept Losses
Another important quality that the market masters em-phasized is the ability to accept losses and to take thempromptly. Perhaps the single greatest downfall of all tradersis the inability to take a loss when it should be taken. Losseshave a nasty habit of becoming worse rather than better.Unless they are taken when they should be, the results willnot be to your liking.
Although it is easier on one hand for the day trader totake a loss than it is for the position trader (since a loss mustbe accepted by the end of the trading day), it is still thedownfall of many futures traders who are unwilling toaccept the loss when it is a reasonable one. The good futurestrader must have the ability to take a loss when the time totake that lossis right. What's right is dictated by the particu-lar trading system or risk management technique you areusing. From my experience and observations, perhaps 75136 Market Masters
percent or more of all large losses are due to not taking losses when
they are small or relatively small or when they should be taken.
an
The good futures trader must have theability to take a loss when the time totake that loss is right.
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Ican certainly speak from experience when I say that mylargest loss resulted from the fact that I refused to take the losswhen the time was right. | allowed a $500 loss to turn into a$5,000 loss. Fortunately, that was the first and last time I wasguilty of that serious a transgression. Unfortunately, manytraders refuse to take losses when the time is right. Thefutures trader has two opportunities to take a loss. The firstopportunity is at the stop loss point as determined by a system orat the predetermined dollar risk stop. The second point is at the endof the day.
Here are some suggestions as to how you can improveyour ability to take losses when they should be taken:
¢ Formulate your stop loss rules specifically whetherthey relate to systems or dollar risk amount, and type orwrite your rules in large print. Place the hard copy closeto your quotation equipment, the computer that you usefor trading or the telephone from which you place yourorders. If you do not use a computer or quotation systemfor your trades, keep your rules handy on an index card,and refer to them frequently during the day.
+ Make the commitment to accept completely your nextten losses as dictated by your system. Once you havedone this, the behavior will become habitual, and losseswill be easier to accept.
¢ If you trade with a full-service broker or a tradingpartner, make your broker or partner aware of where
12 / The Psychology of Trading ¢ 137
your stop loss will be and have him or her remind youthat you must exit your position accordingly. You mayalso give your broker or partner the authority to do so foryou, ifyour relationship is close enough to allow forsucha procedure.
« Place your stop loss as soon as your entry order hasbeen filled. This procedure is much simpler althoughone that I do not necessarily recommend at all timesbecause of the nature of futures trading.
Avoid Overtrading
Too many futures traders feel that they must trade everyday. Let’s face it, some traders are addicted to trading. A daywithouta trade for themis like a day without a meal. The factis that some days offer few if any trading opportunities. Thefutures trader who wishes to preserve capital and avoid losses aswell as unnecessary commission charges should understand thatfutures trading is not an everyday event. There will be dayswhen no trades are indicated. This is for the best.
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... futures trading is not aneveryday event.
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One of the telltale signs of the futures trader about to goastray is the searching-for-a-good-trade syndrome. Have youever found yourself sitting at the computer or quotationscreen, bored because there were no trades that day? Haveyou ever found your fingers idly rambling over the key-board as you searched chart after chart for markets to trade?This is the first sign of trouble. If you ever find yourself in thisposition, do yourself a favor and stop looking. Good futurestrading opportunities do not occur every day.138 ¢ Market Masters
Set standards as to which markets you will trade. If thereare no trades in these markets, do not allow yourself toendlessly search for trades in obscure or thinly tradedmarkets. This may work occasionally, but the odds of suc-cess are slim. The successful futures trader will specializeonly ina handful of markets and will do well at these. Do notattempt to spread yourself too thin by looking for trading
opportunities where they do not exist. This brings me to mynext point.
SpecializeSuccessful futures trading is a time-consuming under-taking that requires close attention. Many of the marketmasters whom | interviewed specialized in certain marketsor groups of markets. In most cases, successful tradingrequires diligence, follow-through and persistence. Becausemost trading techniques require close attention, tradersshould not be involved in too many markets at one time. Isuggest that five to seven markets are sufficient for mosttraders. In fact, for new traders, Irecommend specializing inone or two markets and attending to them thoroughly todevelop your skills and increase your overall profits.What should the new futures trader trade? Naturally,the answer to this question changes as a function of marketconditions. Some markets are better to trade than others, forexample, the currencies, S&P futures and Treasury bonds.However, other markets, such as silver, soybeans, the petro-leum complex markets and other currencies, also makegood futures trading vehicles under certain market condi-tions. Pay attention to any market that becomes active andvolatile. For the newcomer I recommend a very limitedportfolio of markets until techniques have been masteredand self-confidence has been achieved.
Begin with Sufficient CapitalPerhaps one of the worst blunders that any trader couldcommit, whether trading from the day time frame or from
12 / The Psychology of Trading ¢ 139
a position trade perspective, is to trade with insufficientcapital. Virtually all the market masters agreed on this point.The argument may be made that the futures trader does notneed to have substantial capital in his or her account sincetrades are closed out at the end of the day and therefore thenecessity for sufficient margin to maintain positionsis elimi-nated. While this may be true, those with limited fundscannot play the game as long as those with larger funds. Inany venture it is important to start with sufficient capital sothat the trader will not feel pressured to perform and canallow the particular trading system or methods sufficientopportunity to ride through periods of poor performance,
The trader with limited capital will be a nervous traderwho looks to minimize losses beyond the point of realistictrading. Frequently, the anxious trader is knocked out of thegame after a series of losses, before his or her tradingmethods have had the opportunity to perform. Conse-quently, capitalize your trading account sufficiently, ordecide ahead of time that you will trade only a very limitedportfolio consistent with your available capital. Do not startwith an undercapitalized account. To begin trading withsufficient capital, the aspiring trader will have to be realisticand, above all, patient enough to gather the speculativecapital that will be needed.
Use News to Your Advantage
Many a trader has learned the hard way that followingthe news frequently leads to losses. However, I have discov-ered waysin which the trader can use the fundamental newsor developing international, domestic or political news tohis or her advantage. Do not be a follower of the news; rather“fade” the news. Use the news to exit positions that youprobably established before the news became public knowl-edge. | firmly believe in the old market dictum: Buy on ru-mor, sell on news. On an intra-day basis, markets are verysensitive to news well before the news is known by mosttraders. Insiders buy and sell on expectation, sometimes140 ¢ Market Masters
based on rumor, frequently based on fact. They establishpositions before the general public is aware of the news;once the news has become public knowledge, they takeadvantage of the surge or the drop in prices to exit positions.
arn.
Buy on rumor, sell on news._
Therefore, to use the news to your advantage, you mustbe a contrarian. This is especially true from the futurestrading perspective. While there is nothing wrong withfollowing intra-day trends, frequently these trends reactstrongly to news developments. If you are following a validtrading system or method, you will most often be on thecorrect side of the market when such news develops. Takeadvantage of price surges or declines to exit your position.This requires self-control and the ability to see the news as
your opportunity to get out, not as your opportunity to holdon for even more profit!
Take Advantage of Brief Price Surges
To trade profitably, you must also learn to take advan-tage of brief flurries in prices. At times, markets will drop orrally quickly, seemingly in response to no news. What maybe happening is a rumor on the trading floor, a large buyeror buy order, or large seller or sell order of which you areunaware. Such brief price surges or drops are opportunitiesfor you to exit positions consistent with the price move.
Regardless of the source, consider all price rallies ordeclines that occur quickly within the day’s trading sessionas an opportunity for you either to exit your current positionat a profit or to establish a new position using support andresistance methods that were outlined previously. It is im-portant to develop this quality as a futures trader since it isentirely consistent with the futures trading objective.
12 / The Psychology of Trading 141
Too many futures traders assume that bulges or sharpdeclines in price within the day are basically meaningless.Believe me, they’re not. They are tailor-made for the futurestrader. The futures trader who is committed to taking aprofit out of the market every day must take advantage ofthese price moves. If you decide not to do so, you must eitherraise or lower your stop loss (depending on your position),or you must use an appropriate mental stop loss that isadjusted to the change in price. Simply, this means: Use atrailing stop loss in the event that the price move is negatedshortly after it begins. In this way, you will have givenyourself an opportunity to lock in a larger profit that youmight not otherwise have had.
Stick to Your Goals
Above all, remember that as a futures trader you have onemajor goal: to make money. To do so, you must be particularlyaware of your net profits at all times. My advice, which isbased on many years of futures trading, is to set yourselfspecific standards and conditions under which you willbegin to liquidate positions. My advice is to do so while thetrend is still in your favor. You may either begin to close outyour positions at that time or you may use a follow-up stoploss procedure to “lock in” existing profits.
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... as a futures trader you have onemajor goal: to make money.
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To achieve your goals, you need to internalize them andkeep them foremost in your mind at all times. What is rightand proper for the position trader or for the short-termtrader is not necessarily good for the futures trader. If youfind yourself wanting to ride profits or losses overnight, you142 ¢ Market Masters
are notbeing true to your goal asa futures trader. If you wishto day trade and position trade as well, I urge you to do soin different accounts to avoid confusion. Keep your goal inmind, and you will be less likely to stray from it.
Use Market Sentiment To Find Short-Term andDay-Trading Opportunities
Ihave already discussed the importance of going againstthe majority opinion to find profitable futures trading op-portunities. I believe that this is one of the most importantqualities a futures trader can possess, While there is certainly agreat deal of money to be made in futures trading with theexisting trend, it is also important to know when the existingtrend has reached a possible turning point. One of the best ways,if not the best way of doing this, is through the use of marketsentiment. Although I discussed the particulars of applyingmarket sentiment for the purposes of futures trading, | wantto stress its importance. The futures trader must also be acontrarian. This does not mean that you must buck the trend,but it does mean that you must always be aware of whethersentiment is very high or very low. This will give you importantclues as to whether you should be quick to take profits,whether you can allow profits to run and whether youshould look for trading opportunities on the opposite side ofthe existing trend.
My Conclusions about Trader Psychology
While there are many other qualities that a successfulfutures trader must either possess or acquire, these are themost significant ones. If you strive to develop these qualities,your odds of success as a futures trader will certainly be better. |have learned, after many years of trading, that the majordifference between those who are successful traders and thosewhoare not is found in their psychological makeup and in the skillsthey have acquired as traders rather than in the trading systems
they use.
12 / The Psychology of Trading @ 143
While it is certainly helpful to have an effective tradingsystem, even the best trading system in the hands of anundisciplined trader is nothing more thana destructive tool.Consequently, you must develop your skills as a futurestrader along the guidelines provided in this chapter. ne
Occasionally, traders have idiosyncratic difficulties inthe markets that must be addressed on an individual basis.If this is the case, identify your particular problem as suc-cinctly as you can. If you cannot formulate a good methodfor minimizing the problem that this behavior causes, con-tact a professional for assistance. If you are not successful inyour search for help, please drop me a line. | may have somehelpful suggestions for you.
Finally, I urge you to carefully study the words of themarket masters. Take their observations and experiencesseriously. Learn from their examples and insights. Yourtime will be well spent.Es
Conclusion
 
The process of writing this book has been particularlyeducational. I do indeed feel privileged to have had theopportunity to evaluate and analyze responses to theseimportant questions from fellow traders and analysts whosework I have respected for many years.
While the process of conducting and analyzing theseinterviews was certainly enjoyable, I would not want it toobscure the importance of the learning that resulted fromthese interviews. I would like to recap what I have learned,what! can share with you and what you asa trader can learnfrom discussions within these pages.
The Ultimate Capitalist Tool
Of all vehicles that are available to capitalists, the mostblatant is without a doubt speculation in stocks and futures.If the goal of a capitalist society is to create more money by
145146 ¢ Market Masters
using money, the goal of the stock or futures speculator isalso to create more money by “less” money. By this I meanthat the speculator in stocks may buy stocks on margin,borrowing money in the hope of using leverage to producelarge percentage gains.
The futures trader is the ultimate capitalist since themargin requirements in most futures markets are often lessthan ten percent of the total contract value. Naturally, thereare two sides to the leverage coin. The negative side is that,in spite of the benefits that leverage can provide, its limita-tions are considerable.
While the use of margin can facilitate larger gains, it alsoopens the way to losses that may easily be far greater thanthe amount invested. Hence, the game of speculation isdifficult to win. There are many, many losers and only arelative handful of winners. The leverage vehicle may facili-tate large gains or may prompt large losses due to theemotional response it evokes among traders. Emotion is thechief enemy of the speculator unless it is used to his or heradvantage.
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Emotion is the chief enemy of thespeculator unless it is used to his orher advantage.
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Although the situation for investors using 50 percentmargin in stocks (or even futures) is not nearly as exagger-ated as itis for those who speculate in futures using minimalmargin, it is similarly difficult for the investor to be consis-tently successful. Both investors and speculators are victimsof human error, poor judgment, emotion and lack of self-confidence.
13 / Conclusion ¢ 147
To achieve consistent results in the ultimate game ofcapitalism, it is necessary to play the game skillfully andaggressively. However, the game is not readily learned norwillingly taught. Precisely for this reason, those who learn toplay the game profitably are respected, honored, rewardedand revered. Even those who are marginally successful areadmired because even minimal success is often extremelydifficult to achieve.
This is true in virtually any field of endeavor. Those whohave achieved great things are respected and studied so thattheir students may have the opportunity to achieve greatresults. | hope that by studying the methods that greatinvestors and traders have used in their struggles for suc-cess, you will find a way to illuminate yourroad to profitable
investing.To answer the question at the end of Chapter 1, why beconcerned about these issues? . . . because they will make
success more likely.ily,
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i,
 
IndexAThe Adam Theory of Markets, 100, interview analysis, 55-57103 interview with, 49-55Advance Breakthroughs in Day Behaviors, changing negative,Trading, 32 28-29Allman, Dave, 90 Bernstein, Jake, 2, 19-26American Psychological Learn- Beyond the Investor's Quotient, 2ing Theory, xviii The Business One Irwin Guide toAmericom Corporation, 100 Trading Systems, 48, 54
Angell, George, 6, 31-37biographical sketch, 31-32desire to trade, 32, 35hindsight, 34, 37interview analysis, 35-37interview with, 32-35
Appel, Gerald, 6, 39-46biographical sketch, 39-40desire to trade, 40, 43hindsight, 43, 45interview analysis, 43-46interview with, 40-43
Attitude versus luck, xi-xii
B
Babcock, Bruce, 6, 47-57biographical sketch, 48-49desire to trade, 49
Cc
Capital, sufficient, 138-139
Change, being open to, 12-13
Commodity Traders ConsumerReport, 47, 48
Computers versus emotions infutures trading, 90-91, 96-97
Contrarian attitude, 79-80, 130
Cutten, Arthur, 29
Cycles and RSI, 60
D
Day trading, 33, 142
The Definitive Guide to FuturesTrading, Volumes I & II, 111
Delta Phenomenon, 102
The Delta Phenomenon, 100
151152 ¢ Index
Delta Sciences, Inc., 100Delta Society, 100Demark, Tom, 113, 117Det, Richard, 64Diamond, Dick, 89, 95Discipline, 18, 57, 133component behaviors of,133-142versus trading system, 54—55Dow Theory, 95Drawdown, xixdealing with, 104
E
Elliott, R.N., 85Elliot Wave Commentary, 86Elliott Wave International, 86Elliott Wave Theorist, 7, 86Elliott Wave theory, 7, 85and human psychologicalresponse, 91, 97Emotionsin trading, 33, 36, 42-43, 45,65, 68versus computers, 90-91,96-97The Essential Secrets of Day Trad-ing, 32Ethics, 1
F
Fear, as an inhibiting force, 115,118Foundation for the Study ofCycles, 87Futures tradingcomputers versus emotionsin, 90-91, 96-97
the constant struggle, 16—-19
separating winners fromlosers in, x-xi
G
Gann, W.D.,29, 103, 105, 107,117Goals, sticking to, 141-142Gold, Gerald, 24
H
Haller, Gil, 113, 117
Hill, Napoleon, xii
How I Made One Million DollarsTrading Commodities, 111, 113
How Seasonal Factors InfluenceCommodities, 111
How To Make Profits in Com-modities, 105
How To Prosper in the ComingGood Years, 111
How To Triple Your Money EveryYear with Stock Index Futures,31
Human behavior, 17
Investor's Business Daily, 77The Investor's Quotient, 2, 131
J-L
Lane, George, 6-7, 59-68, 80, 134biographical sketch, 60-61desire to trade, 61, 66hindsight, 65, 68interview analysis, 65-68interview with, 61-65
Leslie, Conrad, 7, 69-83, 134biographical sketch, 70
desire to trade, 71-72, 79hindsight, 78interview with, 