behaviors and replacethem with productive, good behaviors? How can a trader overcome losingways and replace them with winning ways? Can reward and punishment beused as motivators? Why? Do not we learn much from our trading losses?These are some of the important issues that learning psychologists cananswer for us.
Thorndike pointed out that although parents and educators have usedpunishment for many years, it is only effective in speciﬁc circumstancesand is virtually ineffective in teaching new behaviors when used alone. IfI punish you every time you do a particular thing I do not like, you willstop doing that thing. However, you may still do many other things that I donot like.
I can punish you for each and every behavior I wish you to eliminatebut my battle may be a life-long one akin to picking dandelions from mylawn without removing the roots. While some new behaviors may be taughtwith punishment, the use of rewards for appropriate behaviors gets faster,better, and longer-lasting results.
(cid:2)
(cid:2)(cid:2)
Consider the ramiﬁcations for education, effective child-rearing, andpersonal development.Consider the ramiﬁcations for positive interpersonal relationships.Consider the ramiﬁcations for the trader and investor.
Yes, there are literally hundreds of behaviors and variations on thethemes of these behaviors, which can lead to losses. But there are fewbehaviors and their themes that can facilitate trading success. The unfortu-nate fact is that most traders are prisoners of their faulty early childhoodeducation and are therefore prisoners of their ineffective trading behaviorsas well.
There are many ways to lose money in the markets, but there are onlya few ways to make money. And there are even fewer ways to keep money.While traders collectively spend millions of dollars every year attendingseminars, buying books, tapes, and trading systems, they focus very littleenergy on learning the behaviors that will facilitate success. Why? Becausethe rules of trading systems, methods and indicators are very speciﬁc, oftenobjective, and frequently require nothing more than rote memorization. Inother words, they are easy to learn and easy to apply.
JWPR004-22
JWPR004-Bernstein
February 9, 2007
21:39
Char Count= 0
190
30 DAYS TO MARKET MASTERY
Behaviors, which contribute to success, on the other hand, are oftenintangible, but without a plan, you cannot be successful in isolating thesebehaviors. All you can learn without a plan is what may not work, not whatdoes work!
If you trade without a plan, your chances of success are slim to none.Yes, you may be one of the lucky few who hit it big the ﬁrst time, but theodds are minimal. Without a plan, you will ﬁnd yourself buffeted about bythe winds of chance, the opinions of others, the persuasion of newslettersand advisors, the pressures of fast-talking brokers and the bias of the media.Your responses will be whimsical. But the greatest danger is that you willnot learn anything from your behavior.
If you are unaware of what you did wrong, the consequences of youractions will not be deadly apparent to you. And you may run out of moneybefore you learn your lessons. But what exactly do I mean by a “plan?”
Here is my deﬁnition of a trading plan:
a set of indicators that will permit relatively objective evaluation ofmarket entry and exit as well as risk management.
This could mean that you are following a computerized trading systemfrom a chart book, a newsletter, astrology, or a random number generator.Regardless of where the input comes from, it must be treated as relativelyclosely as possible and as often as possible. What I recommend is thatyou employ a relatively mechanical trade entry system and a more ﬂexibleexit system. In other words, I advise against rigidity, against inﬂexibilityfollowing any plan. But to stray from a play, you must have a plan at theoutset.
There are various levels of adherence to a plan. Every trader must ﬁndhis or her level of comfort in straying from the beaten path. Some tradersfeel uncomfortable with just a minor deviation from the course and othersare able to tolerate wide variances with their plans. The ﬁnal determinantmust be your results in the marketplace.
Here are some ways to increase your odds of losing money. This is the
reverse psychology of trading:
1. Subscribe to and read as many publications as you can, watch thetelevision business news and follow the consensus of opinion, and getas much information as possible off the Internet. This is a sureﬁre wayto get confused and lose money while you are doing it. You will ﬁnd thatmost of your best trades are not only contrary to what you have read, butalso contrary to what you want to believe. If you follow a trading advisor,do so without second-guessing. Remember that the more opinions youprocess, the more confused you will get.
JWPR004-22
JWPR004-Bernstein
February 9, 2007
21:39
Char Count= 0
The Psychology and Discipline of Trading
191
2. Start with a very small amount of capital and build it up. Wrong! Thefacts show that the less you start with, the less likely your odds are ofsuccess. If you do not have enough capital to sit through a string of losses,you will not be there to get in on the big winner when it ﬁnally comes.
3. Try to pick tops and bottoms. This is another sureﬁre way to lose money.Tops and bottoms do not happen too often. Trying to pick them is liketrying to ﬁnd a needle in a haystack. You can ﬁnd seasonal lows and highswith a good degree of success. However, you are always best gettinginto existing trends and riding them. You are better off trading with theestablished trend as opposed to trying to pick a change in trend beforeit happens.
4. Get out of your winners quickly and ride your losers. Many traders getanxious when they are in proﬁtable positions. They have the urge to takethe money and run before the market takes it back from them. But whenthey are in a losing position they are patient and remorseful. They getmesmerized into a state of no action, hoping that the market will reversethe trend. They ride losses for a long time and exit proﬁts quickly. Thisis another good way to lose money in the markets.
5. Buy a better trading system. It is not the system that makes proﬁts—it is the trader. In the hand of a poor trader, a good system is useless.Spend more time developing yourself as opposed to your system and itwill be time well spent. Simple and inexpensive systems often work best.Every now and then you will run across an expensive system that holdspromise. If you decide to buy it and if you are convinced it is worthwhile,you must also make the commitment to trade it according to the rules.If you cannot do that, do not waste your money on the system.
6. Spread your position to avoid taking a loss. This little trick rarely works.In fact, it most often puts you into double jeopardy. It is just another wayto generate commissions and losses.
7. Get into trading for the action. Most traders do not understand them-selves. In fact, most traders are uncertain about their goals in the market.They will tell you that they are looking for proﬁts, but their behavior willconvey another message. Many traders trade just for the action. Sometraders enjoy telling their friends that they speculate in futures.” And yet,other traders trade just to legally satisfy a need to gamble.
Some traders trade just for the challenge. Although there is proba-bly nothing wrong with most of these goals, the fact is that most tradersdo not know that these are, in fact, their goals. They do not under-stand their motivation and, in failing to do so, they cannot direct theirintellectual energy in the appropriate direction. Self-understanding fa-cilitates attainment of goals by highlighting the best vehicle toward thedesired end.
JWPR004-22
JWPR004-Bernstein
February 9, 2007
21:39
Char Count= 0
192
30 DAYS TO MARKET MASTERY
Furthermore, the failure to understand one’s self will obscure thereasons for losses. Hence, the learning process is either slowed down ortotally ineffective. Since it is the function of losses to educate, the valueof losses will not be fully effective if it is at all beneﬁcial.
8. Believe that risk is for other traders. It would appear that there aremany trading systems, methods and timing indicators that have proﬁtpotential. Those of us who have developed and tested trading systemsknow that although proﬁtable systems are not easy to ﬁnd, they do exist.But, as the Zen philosopher said, “Every front has a back and the biggerthe back, the bigger the front.” Simply stated, every trading system, nomatter how well it performs in hypothetical testing, has its downside.
The greater the rewards promised by the system, the greater the riskexposure. The simple fact of the matter is that trading involves risk andthat there is no system, method or indicator that has ever been developedwhich does not entail risk. We accept this as a fact of trading life. Asstrange as this may sound to you, many traders do not understand thetrue meaning of risk. They feel that risk is for other traders. Only whencontrolled with the reality of risk and loss do they understand its fullimpact. Only when the threat of loss is real can they respond.
9. Trade without the skills necessary to implement a trading system ef-fectively, systematically, and in a disciplined fashion. After years ofstudy, I have concluded that trading systems, methods, and indicatorsconstitute perhaps 23 percent of the total equation for success, 15 per-cent is luck, and the remaining 60 percent depends on trader responseto the system and the markets. All traders are not created equal whenit comes to trading discipline. Some are more reactive than others are,some more tense than others are, some are too conﬁdent, others toosensitive, and others too detached.
It is the response of the trader that constitutes the single most impor-tant variable in the equation for trading success. Too many traders losein the futures markets simply because they do not possess the necessaryskills to trade effectively.
Implementation Is the Key to Everything!
When I was a practicing psychologist, I helped many patients achieve greatinsights into their behavior. I helped them understand the whys and where-fores of their behaviors. But these understandings, unless followed by ac-tions, were nothing more than romantic exercises.
There are traders who spend hours and hours developing systems thatappear to have great proﬁt potential—systems that back test beautifully,but that remain nothing more than works of art, never traded due to thefear or indolence of their developer.
JWPR004-22
JWPR004-Bernstein
February 9, 2007
21:39
Char Count= 0
The Psychology and Discipline of Trading
193
Once you have pinpointed the reasons that you have failed to realizeyour full potential, you must act immediately or the opportunity will be lost.You will fail to seize the opportunity and time will be lost. The longer youwait the less capable you will be of taking action because a lack of actionwill become comfortable to you. For all of the many ways to lose in themarket, the key to reversing the trend is to take action and implement yourplan for success.
IN CLOSING
The lessons in this book have been drawn from my more than 35 years ofexperience as a trader, market analyst, educator, and observer of trader be-havior. I have designed them to be speciﬁc and as objective as possible. Butthe lessons would not have been complete without a section on the weakestpart of the trading sequence—the trader. I hope that my experiences and themethods I have developed will prove useful or better yet, proﬁtable to you.Should you have questions, comments, or suggestions, please write to
me at jake@trade-futures.com.
JWPR004-22
JWPR004-Bernstein
February 9, 2007
21:39
Char Count= 0
194
JWPR004-IND
JWPR004-Bernstein
February 21, 2007
21:1
Char Count= 0
Index
Page numbers followed by an f indicate ﬁgures.Page numbers followed by an t indicate tables.
8OC. See Eight open/close30MBO. See Thirty-minute breakout
AAccumulation-Distribution MovingAverage (AD/MA), 94
combination. See Commitment of
Traders Report
COT commercials data, inclusion,
143f
signals, function, 95ftiming usage. See Commitment of
Traders Reporttriggers, usage, 143–144usage. See Moving average channel
Action, inhibition, 186Active markets, MAC usage, 95Active month, usage, 95Aggressive strategy, 79, 80All or nothing strategy, 80Analysis, intensiveness, 184Analytical skills, 2Anniversary dates, setup example,
3
Astrology-based systems,
171
Average proﬁt/loss per trade,
22
BBad behaviors, unlearning, 189Bearish divergence, 54
Bearish MOM divergence pattern, 54f
clarity, 62fdevelopment. See Thirty-minute
intraday corn chart
usage. See Dollar index futures
Bearish momentum divergence,identiﬁcation, 64Bearish MOM/price relationship,abnormal condition, 52–54Bearish MOM setups, application
rules, 55–57
Bearish pattern, establishment, 71fBehavioral skills, 2BES. See Break-even stopBottom
occurrence, 100selection, 191
Break-even stop (BES), 42Breakeven stop-loss, 102Breakout systems, 170. See also
Volatility breakout systemsBritish Pound futures (daily chart),MAC usage (STF inclusion),88f
Broker advice, trading, 174BSU. See Buy setupBullish divergence, abnormalcondition, 54–55Bullish momentum divergence,identiﬁcation, 64
Bullish MOM pattern. See Motorola
stock
195
JWPR004-IND
JWPR004-Bernstein
February 21, 2007
21:1
Char Count= 0
196
INDEX
Bullish MOM setup
application rules, 55–57development, continuation, 56fimpact. See Buy triggerusage. See Corn futures
Buy, MAC trigger, 86Buy pattern, 14Buy reversalpattern, 13
historical performance, 14ttrigger inclusion, results, 14t
Buy setup (BSU), 63Buy setup/trigger, cookbook method,
63
Buy signal, trigger, 56fBuy strategy, example. See Reversal upBuy trigger, 119
bullish MOM setup, impact, 64fexample. See Thirty-minute breakoutoccurrence, 32, 152
CCanadian dollar seasonal trade, trigger
(inclusion), 36t
Capital
insufﬁciency. See Starting capitalsufﬁciency, 175usage, 191Cash markets
monthly seasonal patterns,
22
weekly seasonal patterns, 22CFTC. See Commodities FuturesTrading Commission
Change, learning, 186Chart patterns, setup example, 3Civil disobedience, 183Close-only orders, 32CMC. See Cuban Missile CrisisCoffee futures, gap trades, 103fComments, entry, 160Commercials
data
examination, 136–137inclusion. See
Accumulation-DistributionMoving Average
functions. See Commitment of
Traders Report
job, 136positions, taking process, 137fproduct, needs, 136–137relationship. See Price
Commission, fee, 12Commitment of Traders Report
(COT), 133, 141. See also Largetrader COT; Small trader COT
ADMA
combination, 146ftiming usage, 144f
commercials
data, inclusion. See
Accumulation-DistributionMoving Averagefunctions, 136–137relationship. See Lumber price
trendsdata, usage, 141dual moving averages, usage, 145fMAC timing (trigger action), 142fprice trends, relationship. See Large
speculator COT
quiz, 138–139, 146–149review, 137–138, 144–146role/goal, understanding, 134–136timing triggers, 145f, 146ftriggers
impact, 141methods, usage, 141understanding/usage, 133Commodities, weekly seasonal
patterns, 22
Commodities Futures Trading
Commission (CFTC), 133Computerized spreadsheet, usage, 160Conﬁdence, usage, 180Consecutive bars, 86
pattern, usage. See Moving average
channel
Consecutive losing trades, 170Consecutive postings, 94Consecutive price bars, 91Conservative strategy, 78–79
usage, 80
JWPR004-IND
JWPR004-Bernstein
February 21, 2007
21:1
Char Count= 0
Index
Contracts
month, entry, 160trading. See One-contract trading;Three-contract trading;Two-contract trading
number, 69usage, 43–45
197
Divergence. See Bearish divergenceabnormal condition. See Bullish
divergence
pattern. See Bearish MOMdivergence pattern
usage. See Dollar index futures
systems, 170
Corn futures, weekly bullish MOM
Diversiﬁcation, 167. See also Markets;
setup (usage), 56f
COT. See Commitment of Traders
Report
Crossovers
ﬁltering, ability, 126values, requirement, 126
Cuban Missile Crisis (CMC) pattern,
117–118
example, 119ffollow-through, 119–120lesson, 121setup/trigger, 118–119signal, 120f. See also Lean hog
futures; Microsoft stock
failure, 120f
Cumulative proﬁt/loss, 22Cycles, setup example, 3
DDaily charts, 55Daily price charts, 52–53Daily reversal down, 10Daily reversal signal, 10Daily reversal up, 10Daily seasonal futures patterns,
22
Date seasonal setup, 4tDay sessions, 151–152, 154Day trading
avoidance, 175usage, 174
Deep thought, importance, 185Discipline. See Trading
absence. See Self-disciplinedevelopment, 181–182goal, 181
Discretionary trader, question,
184
Disorganization, impact, 181
Timeframe; Trading
absence. See Equity curveimpact, 162old school thinking, 162quiz, 171–172review, 171
Dollar index futures, bearish MOMdivergence pattern (usage),55
Dollar-risk stop, usage, 102Domestic policy, thoughts, 183Dow Jones Industrial Average, decline,
117–118
Downtrend, narrowing/widening
channel, 87
Dual moving averages, usage.
See Commitment of TradersReportDumb loss, 78
EEdsel trading, problem, 184Eight-bar moving average, 127Eight-bar open/close pattern
follow-through
example, 128f, 129fusage, 128–129
quiz, 130–132setup, usage, 127summary, 130trigger
example, 128f, 129usage, 127
usage, 125
Eight open/close (8OC) pattern
signals, 129fElliott systems, usage, 171E-mini S&P, 152
starting capital, 151
JWPR004-IND
JWPR004-Bernstein
February 21, 2007
21:1
Char Count= 0
198
INDEX
E-mini trading, advanced 30-minute
breakout, 151concept, 151–152quiz, 155–158review, 154–155setup, 151–152trades, example, 154
Entry price
stop loss, 22subtraction, 71f
Entry rules, 27Equity curve
diversiﬁcation, absence, 162–165
example, 164f
example, 164fExit methods, 16Exit MOC, 153Exit rules, 17Exit strategy, 16, 103Expectations, management, 180Exxon Mobil stock, gap trades, 104f
FFear
antidote, 186ﬁghting/battle, 179–180
Feelings, usage problems, 186–187Fibonacci systems, usage, 171First proﬁtable opening (FPO), 102
exit, 100
rule, 103position, 104
First proﬁt target (PT1), 70, 153
hit, 80proﬁt taking order, placement, 79Five-bar MAC pattern, example, 93fFive-bar open/close indicator, 125Five consecutive bar pattern, usage.See Moving average channel
Floor level (FL), achievement, 42Follow-through, 3. See also Cuban
Missile Crisis; Two-daybreakaway gap pattern
addition, 15–17application/approach. See Setuptrigger follow-through
details, 45–47example. See Eight-bar open/close
patternintroduction, 9, 41methods
learning, 28–29requirement, 5
practice, 47process. See Initial follow-through
processquiz, 18–19, 48–50relationship. See Power momentum
formulareview, 18, 47structure, 173types, 43–45, 128usage. See Eight-bar open/closepattern; Gap trade pattern;Thirty-minute breakout
variation, 17t
Follow-up. See Seasonal tradeFormations, setup example, 3Fourteen-period slow stochastic,
usage, 31–32
FPO. See First proﬁtable openingFrustration, venting, 183Full proﬁt target (PT2), 70
hit, 80reaching, 79
Full target price, 71fFundamentals
independence, 18usage, 21
Futures contract, active portion, 120Futures market participants, 2fFutures patterns. See Daily seasonal
futures patterns
GGains, maximization/consistency, 159
quiz, 165–166review, 165
Gann systems, usage, 171Gap days
importance, 100opening, 100
JWPR004-IND
JWPR004-Bernstein
February 21, 2007
21:1
Char Count= 0
Index
199
Gap down, occurrence, 109Gap-down pattern. See Two-daygap-down pattern
appearance, 110f
Gap-down setup/trigger. See Two-daygap-down setup/trigger
Gap higher open, 103–105Gap lower open, 104Gap setups/triggers, 102fGap signals entry/exit, 112fGap size (GS), 101amount, 102
Gap trade buy (GTB)
setup, 100trigger, schematic, 101f
Gap trade (GT) pattern, 99–100
follow-through, usage, 100–102
Gap trades. See Coffee futures; Exxon
Mobil stock
example, 113f(start to ﬁnish), sample,
103–105Gap trade sell (GTS)
setup, 100trigger, schematic, 101f
Gap up, occurrence, 109Gap-up pattern. See Two-day gap-up
patternappearance, 110f
Gap-up setup/trigger. See Two-daygap-up setup/trigger
Genesis™ clients, 64Genesis Gold, 64Gold futures, sixty-minute MOM sell
setup/trigger, 65f
HHigh-odds seasonal setups
introduction, 21quiz, 29–30review, 28–39
High-odds seasonal trade, usage. See
July hog futures
High Odds Seasonal Trades (HOST)
login procedure, 28log-in procedure, 28web site, usage, 23
HOST. See High Odds Seasonal TradesHuman nature, 173–174
IIf-then scenarios, creation
(avoidance), 179
Imagination, advantage, 178Impatience, impact, 174Imperfection, impact. See TradingImpulse trading, minimization, 182Inaccuracy/incorrectness, fear, 186Indicators. See Stochastic indicator;
Trends
number, usage, 174spreadsheet, 169fInformation Age, 184Initial follow-through process, 72fInitial proﬁt target, 61achievement, 92
Initial stop, 42Initial stop-lossclose, 112determination, 77range, 93
Google stock (daily chart), MAC usage
Intellectual ability, market success
(STF inclusion), 87fGrand Super System (GSS), 162Greed, containment, 180Growth trend. See Positive growth
trend
GS. See Gap sizeGSS. See Grand Super SystemGT. See Gap tradeGTB. See Gap trade buyGTS. See Gap trade sell
(inverse correlation), 186
Intellectual Zeitgeist, 184Intermediate term method, 144Intermediate term moves,determination, 168International policy, thoughts, 183Intraday charts, 55Intraday price, level (examination),
61–62
Intraday timeframe, MAC usage, 96
JWPR004-IND
JWPR004-Bernstein
February 21, 2007
21:1
Char Count= 0
200
INDEX
Investing, purpose, 1–2Investors Quotient, The (Bernstein),
181
JJake school of thinking, 162JBTOOLS, usage, 64July hog futures
high-odds seasonal trade, usage,
24t
seasonal trade, timing trigger
(inclusion), 34t
KKeep it simple rule, 182Kennedy, John F. (Cuban missile
crisis), 117
Key date seasonals, discovery,
23–25
LLarge speculator COT, 135
price trends, relationship, 136f
Large speculators, 133
example, 135
Large trader COT, 135fLead month, usage, 95Lean hog futures, CMC signal, 121fLearning, impact, 188–189LeFèvre, Edwin, 178Limit orders, 47Liquidity Data Bank™, 171Livermore, Jesse, 178Long positionentry, 111stop-loss, 81
Long-term method, 144Long term moves, determination,
168
Long trades report, 14t, 16t, 17tLosers, riding, 191Losing trades, types, 78Losses, learning/education, 188–192Loss producing factors, 178Lumber price trends, COT
commercials (relationship),138f
MMA. See Moving averageMAC. See Moving average channelMAH. See Moving average of the highMAL. See Moving average of the lowMargin, overextension, 175Market-on-close (MOC). See Exit MOC
order, 32, 43usage, 46
Market Proﬁle™, 171Markets
analysis, 183considerations, 185–193correlation, 165diversiﬁcation, 162, 165geometry systems, 171maturity course, purpose, 2month, entry, 160obsession, avoidance, 183opening, 101, 109participants, 134–136simplicity/complexity, contrast, 185spreadsheet, 169fsuccess, inverse correlation. See
Intellectual ability
trendiness, 168volatility, 167–168
Market structure theories, 171Mechanical trading system, usage, 175,
184
Mentoring Program, 134Methods
absence, 174spreadsheet, 169fMicrosoft (MSFT) stock
CMC signal, 121fdaily chart, MAC usage (STF
inclusion), 88f
MMS. See Money management stopMOC. See Market-on-closeModerate strategy, 79Momentum (MOM), 51
direction, 52divergence, 52–53, 165identiﬁcation, 57pattern. See Bearish MOM
divergence pattern
JWPR004-IND
JWPR004-Bernstein
February 21, 2007
21:1
Char Count= 0
Index
201
down movement, 52formula, backward working, 82normal relationship. See Price/MOMpattern. See Motorola stockpenetration, 62price, normal/abnormalrelationships, 52–55price relationship, abnormal
condition. See BearishMOM/price relationship
relationships, 52sell setup/trigger. See Gold futuressetups
application rules. See BearishMOM setups; Bullish MOMsetups
usage. See Corn futures
trends, 53ftrigger method