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will work for successful traders. The problem is not that the market canand will get overextended; the difﬁculty is in calculating when that pointis reached. Oscillators and indicators are notorious for being lagging indi-cators  for  the  simple  fact  that  they  are  historical and  not  predictive.  Inmost cases, due to the historical nature of these calculated mathematicalconcepts, they have often identiﬁed a reasonable overbought or oversoldarea but by the time the signal is veriﬁed, the 72-hour/bar rule (from Rule#25) has come into play. The market you suspected was overextended hasalready  begun  correcting  the  other  way,  and  usually  that  distance  hasbeen a substantial move already. Also, most oscillators and indicators aretrend following; they help you get positioned in a trend but will never getyou positioned at the turn. In addition, by the time the signal to enter thetrend is veriﬁed and you execute, the very next correction will likely beright back to your entry price or a bit lower. No real progress in any case.The  newest  class  of  oscillators  and  indicators  attempt  to  be  predic-tive in nature. Many of them are based on extremely complex computa-tions that can only be done in real time by computers. We call traders whouse them the “black box” traders. Again, there is nothing wrong with thiskind of approach except that it simply cannot account for the most criticalpart of trading: What is the crowd thinking?
It is crucial to remember when you are using oscillators or indicatorsof  any  kind  that  they  are  only  mathematical  computations.  They  are  allmoving averages in various degrees of complexity and performance. Theyare based on assumptions about the nature of markets and they work un-der the theory of probabilities. Behind all of these attempts to ﬁnd a betterway to do what is already known to work is the issue of historical versuspredictive.  If  you  are  willing  to  accept  that  indicators,  oscillators,  andtechnical analysis are historical and not predictive, you are left with theonly indicator you really need: Who is getting in and who is getting out?
That brings us to the study of volume and open interest. In my view,this is the only indicator you really need because this is the only indicatorthat discloses fairly accurately what the crowd is thinking. Either peopleare  getting  into  the  market  or  they  are  leaving  the  market.  Since  we  al-ready know that most active traders are losing every day, then we knowthat a change in open interest means people don’t want to play, are con-vinced they will win, or can’t take the pain any more. If open interest riseswe can fairly safely assume that traders are conﬁdent to get into the mar-ket from both sides. If open interest is dropping we can safely assume thelosers can’t take the heat anymore. If all of this is accompanied by higheror lower volume, then we can fairly safely judge the level of fear, panic, orhope that traders are expressing.
Now, to be fair with everyone, correctly reading volume and open in-terest is not as simple as I make it sound. But the underlying psychology
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will always be the same. By understanding the relationship between priceaction,  volume,  and  open  interest,  you  can  get  a  fairly  accurate  read  onwhat the crowd is thinking. Of course, this is an art form and not science.Markets can change in character in a heartbeat and your understanding ofV/OI may have been completely accurate 20 minutes ago but at this pre-cise moment something has changed. That is the dynamic part of tradingand  part  of  what  makes  V/OI  so  useful.  V/OI  is  the  ﬁrst  indicator  devel-oped, and everything after is an attempt to improve upon what V/OI cando with one important difference: V/OI has no time/price relationship.
V/OI is historical from the point of view that it discloses how big themarket is or whether that has changed somewhat. V/OI also discloses howthick the market is and whether that, too, is changing. When you combinethis information with a price advance or decline, you can discern whethermore shorts or longs are opening positions or covering, whether they areexecuting more often or not, whether they are losing conﬁdence in theirpositions, and a host of other types of information that make it possible toanticipate (not  predict!)  what  is  most  likely  to  happen  next.  Once  themarket closes for the day and this data is compiled and released by the ex-changes,  you  have  a  fairly  accurate  picture  of  the  mind  of  the  marketwhen you compare what you see to the price action and other indicators.But because V/OI has no time/price component, you may see clearlythat the market is setting up for a price advance or decline but there is noway  to  know  how  soon  or  how  fast  that  change  in  price  will  occur.  Al-though V/OI is the single most important indicator because it discloses themost likely thought process behind how prices got to be where they are, itstill  cannot  predict  or  expose  whether  that  thought  process  is  ripe  forchange or whether the change is imminent. That is the whole purpose ofall the so-called improved indicators and oscillators: to ﬁnd the time/pricerelationship for that imminent change. The V/OI indicator shows you it isthere; the others try to say the time is now.
If you personally had to choose between the two indications, “Some-thing in the market has changed” and “Whatever is coming, it will come at11:00  A.M. tomorrow,”  which  would  you  rather  have?  In  the  case  of  themarkets,  knowing  that  something  has  changed  is  the  better  choice  be-cause only one option is available: a reversal in price. Does it really matterif that reversal happens in the coming 20 minutes or if it will take 20 days,as long as you know that the change will most likely be in only the otherdirection?
As I have said many times before, I am not trying to oversimplify theissue  of  timing  your  trades.  My  intention  is  to  help  you  understand  thatthe  ﬁrst  and  best  indicator  will  always  be  volume  and  open  interest  be-cause it provides a more critical component: the issue of a change to thestructure  of  the  market. In most cases, a change to the structure of the
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market means a price reversal of some kind because the traders who putthe  price  where  it  is  are  no  longer  in  the  market.  The  thinking  of  thecrowd has changed. Just knowing that piece of information can give yourtrading  a  distinct  advantage.  You  just  don’t  know  precisely  when  thechange will result in a price reversal.
Before we close out this rule I want to sum up a few things. First, thestudy of V/OI is not a small one. You need to make a consistent effort to un-derstand  how  V/OI  can  and  does  change.  It  would  be  impossible  in  thisbook to have a discussion about all the different ways you can begin to in-terpret  V/OI  in  the  space  we  have.  I  have  included  titles  in  the  Recom-mended Reading section that will help you better understand this importantmarket study. Second, you must remember that all the other indicators andoscillators developed in the past 150 years are attempts to better quantifythe price/time relationship with V/OI as the foundation to start from. V/OIquantiﬁes the depth and nature of the game as it has been played to date;V/OI  tells  you  a  change  has  happened  or  is  happening.  What  you  do  withthat data is a reﬂection of your skill at anticipating what is likely to happennext based on your understanding of the crowd’s needs.
Last, V/OI is never predictive. No indicator or oscillator can be predic-tive. No form of analysis can predict future price action with any degree ofconsistency.  The  important  issue  is  to  have  the  tools  you  need,  and  toknow how to use them to improve upon what already works.
Samuel Clemens and the traders of his era didn’t have V/OI or any otherindicator. If he did, he would have known exactly how to use it and what itmeans because he understood the basics to begin with. Focus your energyon learning the basics, then understanding V/OI. At that point the rest of yourtrading stands a good chance of falling into place as a winning approach.
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RULE #27
StudyWinningTraders
We should accustom the mind to keep the best com-pany by introducing it only to the best books.
—Sydney Smith, Forbes Thoughts 
on Opportunity
M ost people would agree that learning to do anything well involves
many things working together in harmony. Various parts of the ed-ucational process carry different weight with each individual, andin  today’s  world  we  suffer  from  information  overload.  Education  as  aprocess needs to be prioritized for each person differently because eachindividual may begin from a unique starting point. Reducing informationoverload is a critical part of the process, I feel, because with the Internetnow in full swing, we can literally see everything ever discussed on anytopic, if we have the time or the interest. Trading is no different. There is avoluminous  amount  of  data  available  at  the  click  of  a  mouse,  most  ofwhich won’t help you succeed, in my view. You need to know how to pri-oritize what you evaluate.
Narrowing your focus to get the best trade education can be done alot better by taking a step back and asking yourself a few questions. Thebest one is: Who speciﬁcally should I listen to? The answer is that there re-ally are only two people you absolutely need to be listening to. The ﬁrst isyou. In Rule #10 we discussed record keeping as part of the process of ed-ucating ourselves to become better traders. By documenting our behaviorwe gain insight into our thinking. We can get the same beneﬁt from otherpeople’s documentation if we choose. In addition to Rule #28, “Be a student
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of yourself,” I think it is equally important to learn what has worked forother  successful  traders.  No  one  in  this  business  has  a  mortgage  on  thetruth, and anyone who is a consistent net winning trader has somethingvaluable to say. That information is contained in the books they write orthe books that have been written about them. So the only person besidesyourself  you  should  listen  to  is  every  other  successful  trader.  Betweenthese  two  people  you  will  eventually  get  100%  of  what  you  need  to  de-velop and maintain a winning approach.
Now, when I say “Listen to other successful traders,” I don’t mean“Listen to people who have a product to sell.” That may not be a goodthing for the limited resources most people have when they begin trad-ing. One of the more confusing parts of developing a winning trade ap-proach is that there is a lot of market-related information out there tolook  at.  Between  the  books,  magazines,  trading  systems,  audio  series,seminars, free data, and so on, you could spend all kinds of money andwaste  all  kinds  of  time  and  never  get  any  farther  along  than  you  arenow. In fact, I am part of that process. I personally offer a live six-weekseminar  designed  to  improve  your  market  presence,  and  one  of  the objections I always get from potential attendees is, “How is this coursegoing  to  help  me  trade?”  Rather  than  take  time  here  for  those  kinds of arguments or issues, let me just say that you have to weed through a  lot  of  poor-quality  information  to  get  to  the  things  that  will  help you. Personally, I don’t teach people to trade. I teach them to think forthemselves.
The point is that you as a trader can shorten your learning curve byeducation, but you need to be careful how you approach the educationalprocess. You run the risk of investing a large amount of your personal re-sources into places that will not help you advance your trading career. Inorder to prevent that from happening, I want to offer you a few sugges-tions  about  how  to  narrow  your  focus  and  get  truly  high-quality  marketeducation for the money you have to invest in that direction.
Be  sensitive  and  focus  on  the  difference  between  trading  systemsand trading. Trading systems are methodologies for improving trade se-lection—in other words, ways to ﬁnd a better place to go long or short.These trading systems are based on probabilities and past market perfor-mance, and they are often designed by people with little trading experi-ence. Often trading systems are computer software programs you can buyor try for free, books that describe the method and illustrate it with pastmarkets, or even multiple-day seminars taught by the developer of the sys-tem directly. This is learning a trading system, not trading.
Trading is the far more critical element and needs to be the centralissue in your education. Many very good trading systems are worthlessto most users of that system because the real issues of trading are never
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addressed.  Learning  to  trade  involves  learning  how  to  avoid  commonmistakes,  control  your  behavior,  avoid  emotional  interference,  and  ef-fectively manage risk. A great trading system will not work if the userkeeps second-guessing the trade signals, doubling up on trades that arelosing,  scaring  himself  out  of  a  winner  too  soon,  or  making  a  host  ofother  missteps.  Simply  stated,  a  winning  trading  system  is  completelynegated by poor trading.
All successful traders learned how to avoid bad behavior while devel-oping or using a system. The surprising thing they all will tell the develop-ing trader is that the trading system is the smallest part of their approach.Every  winning  trader  uses  a  slightly  different  approach,  and  they  coverthe gamut of potential behaviors. Some winning traders are day traders,some scalpers, some position or swing traders, some spread traders; thelist is endless. Trading systems can vary, but trading cannot.
In  my  opinion,  the  best  use  of  your  educational  capital  is  to  divideyour education into both parts but spend more time on learning trading.Personally, I invest a few hundred dollars each year on books, tapes, andseminars.  Since  I  don’t  need  to  learn  a  system  methodology  anymore,  Ibuy resources that are biographical in nature. I study winning traders, nottrading systems. Every year I go hear winning traders speak, read booksthey have written, or listen to audios they have recorded. By far the great-est return on investment has been focusing on how winners think ratherthan how winners trade. Because trading is a subjective and personal ex-perience,  it  is  unreasonable  to  think  that  some  other  trader’s  approachwill be compatible with my own or with my trading nature. It is far moreplausible to expect that winning behaviors are learned from experience,and  that  by  seeing  someone  else’s  experience  as  similar  to  my  own,  Icould learn how to improve my own behavior or avoid developing bad be-havior. Most winning traders will tell you they had a combination-type ex-perience  of  their  own.  They  had  to  ﬁnd  or  develop  a  trading  systemcompatible with their personality or nature, but the biggest thing for themwas learning to effectively trade.
The  best  way  to  communicate  this  difference  and  why  it  is  so  im-portant  is  to  draw  an  illustration  from  something  that  really  counts.Imagine you are a soldier sent to the front of the action. Regardless ofwhat you would like to believe about the nature of this particular mili-tary conﬂict, the fact is someone on the other side of the battleﬁeld istrying to kill you. It is not a video game or a training exercise. This timeyou are under real threat for your life. You don’t have a choice at thispoint, and certainly you are not the person to negotiate a peaceful reso-lution to the conﬂict; at this particular moment it is a question of kill orbe  killed.  Your  enemy  is  faced  with  the  exact  same  situation,  and  youcan rest assured that he is thinking the same thing about you. You don’t
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want to die and neither does he. By the end of the day this situation willchange and one of you will be dead.
Up walks the commanding ofﬁcer and he gives you an order. He or-ders you and your squad of soldiers out into the heart of the conﬂict to es-tablish a forward position for the coming offensive. You turn around andsee  that  your  commanding  ofﬁcer  is  a  23-year-old  ﬁrst  lieutenant,  justgraduated  from  West  Point  Military  Academy.  He  is  assuming  his  ﬁrstcommand after graduation and his orders are, “Go establish a forward po-sition.”  You  are  being  ordered  into  combat  by  someone  with  little  or  nocombat experience, and if he makes a mistake you run the risk of goinghome in a body bag right then and there.
Obviously,  a  trained  soldier  would  execute  that  order,  and  I  am  notsuggesting that new military ofﬁcers are not qualiﬁed. I am illustrating thepoint that, like it or not, book knowledge is different from combat experi-ence. Our hypothetical soldier would feel a lot less conﬂict about estab-lishing  a  forward  position  if  the  commanding  ofﬁcer  was  a  three-stargeneral who has fought for his life many times and has personally beatenthis particular enemy army twice before. That general will most likely notorder a soldier into a losing position. At one point, that three-star generalwas a ﬁrst lieutenant newly graduated from West Point as well, along witha group of other potential combat ofﬁcers that year. They are all dead andhe is not. He learned how to apply the book knowledge better under com-bat and that is why he is a three-star general. Most likely he will see thetraps and pitfalls the enemy might try to set, and because he has beatenthis enemy more than once he knows how to exploit the weakness the en-emy can’t see.
Trading is a lot like that. It really is a kill-or-be-killed environment. Allthe book knowledge you have will not help when you are on the wrongside of the net order ﬂow; you are losing the war at that point. Only com-bat experience will help you. Net winning traders have developed winningbehaviors from being in the heat of the battle and not getting themselveskilled. You as a developing trader will learn more from studying winningtraders than you will from studying theory, just like winning military ofﬁ-cers learn more from combat than they do from books.
The list of Recommended Reading at the end of this book includes ti-tles I found very helpful for the study of winning traders. All of the booksare  readily  available,  and  if  you  read  them  all  you  will  most  likely  learnmore.  I  would  encourage  you  to  continue  making  the  study  of  winningtraders a regular part of your trading approach. I am not suggesting thatyou ignore new developments in the art and science of market analysis. Inmy view, I think you will come to the same conclusion that I have. Afterenough  time  most  of  the  market  study  you  explore  is  all  saying  prettymuch the same thing. By balancing your education between trading sys-
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tems  and  trading,  you  will  shorten  your  learning  curve,  without  goingaround in circles while you trade your way to zero equity.
To make this rule work for you, your best bet is to discipline yourselfto spend enough time daily to read one chapter of a good trader biographydaily.  Within  one  year  you  will  have  read  several  biographies  of  peoplewho have won the war more than once. You will leverage their experienceinto your own.
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RULE #28
Be a Studentof Yourself
In the land of the blind, the one-eyed man is king.—Old Yiddish saying
I think the hardest thing for most people to develop is a truly transpar-
ent point of view about themselves. All of us have strengths and weak-nesses. We all have degrees of misconceptions about ourselves and theworld around us. We have character ﬂaws and unique talents. We have allmade mistakes and we have all had successes. No matter how you slice it,every human being is an individual ﬁrst before being part of a group. Thatindividuality  is  expressed  differently  by  each  person.  The  sum  total  ofthose  individualities  becomes  our  circle  of  inﬂuence,  our  friends  andneighbors, our towns and governments, and ultimately part of the total hu-man experience—the history we participate in.
Within that moment-to-moment expression of our individuality as itbecomes our history, there is the corresponding potential that some ofus (as individuals) will choose to express the negative, dark side of ourpotentials.  The  individual  who  refuses  to  accept  the  responsibility  tobehave  reasonably  becomes  the  criminal  we  have  to  incarcerate;  thecircle of friends who all think in that criminal way becomes the streetgang we have to be protected from; the government more interested initself than in its people becomes the rogue nation that threatens every-one; and so on.
Each of our individual expressions, for better or worse, becomes thenever-ending  cycle  of  group  behavior,  which  in  turn  becomes  economicgood times and bad, the daily pleasures and pains we have in life, laws we
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have to follow, the times of war and peace—and, believe it or not: the cy-cle of bulls and bears. When the individuals form into a group, the group isat the mercy of the prevailing total of the individuals’ input. The market-place is unique because even though the market is a group and subject togroup  behavior,  each  individual  can  participate  at  any  time  he  or  shechooses,  while  the  total  group  goes  on  with  or  without  that  individual.Our individual participation helps create the group and we can exploit thegroup, but that is also an individual choice too.
In my opinion, the single biggest problem facing each of us as tradersis knowing where to draw the line in our individual thinking as it then be-comes  our  individual  actions  imposed  on  the  group.  We  need  to  under-stand  what  creates  our  urge  to  action.  Every  one  of  us  has  a  uniqueexpression of how we handle data input and what that means. For someof us, a sharp rally in a market stimulates our desire for a proﬁt by focus-ing  on  the  market  getting  “too  high”;  we  might  be  looking  for  a  short.Other traders will see that as a breakout and will jump on the market fromthe buy side. Some will do nothing and wait for a pullback to buy, or see apullback as a conﬁrmation of a failed high before selling.
In all cases, the price action is simply there; it just is. All of those vari-ous ways of making a conclusion are unique to the individual. They comefrom inside of us and are solely determined by how we personally chooseto see things. Every trader participating in every market is choosing to seethings a certain way; they are all unique individuals using the markets as aform of expression for this conclusion-making process. We all execute ourtrades from a unique point of view. But in all cases, the price action itselfis  the  same  for  everybody.  We  as  individuals  form  the  conclusion  as  towhat it means. The group itself is impervious to this. The group just goeson, with or without us.
In your trader development you will sooner or later be faced with alosing trade that makes no sense to you. This is a factor of how you at-tached  meaning  to  the  price  action  that  created  your  urge  to  action,your  participation.  The  group  had  nothing  to  do  with  that  evaluationand  conclusion-making  process.  Once  you  join  the  group  in  progress,you  are  at  the  mercy  of  the  group’s  behavior  as  a  sum  total  of  everyother trader’s individual participation, too. If the trade you selected is aloser, that loser had nothing to do with how you came to the conclusionthat it was time to participate; it is a factor of everyone else’s participa-tion. Your choice came from inside you; your results came from insidethe group.
It is for this reason that your personal, unique individual expression ofyour conclusion-making process needs to become as transparent to youas you can make it. Unless your conclusion is of the sort that the grouppotential is in your favor, you have little or no chance for a gain once you
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execute and place yourself at risk. This transparency is something that isnot  a  natural  state  for  most  people,  for  the  simple  reason  that  our  dailylives do not require it. You can go through life never once working on yourcharacter imperfections or your weaknesses and still have a very nice life,for  all  intents  and  purposes.  It  is  usually  only  when  our  weaknesses  orﬂaws become glaringly obvious that we are willing to address them, suchas an addiction problem. The world is full of horrible people who get onjust ﬁne no matter how much destruction they create around them. Theworld is also full of wonderful people who get on just ﬁne. Once we all de-cide to trade in the same markets, and create a group none of us has con-trol over, everything changes. The biggest idiot in the group can proﬁt ifhe is on the right side of the net order ﬂow, and the Nobel Prize winnerwill have a loss if he is on the wrong side. It’s as simple as that.
So why do we need to study ourselves? Because when we understandwhy we do what we do the way we do, we are no longer at the mercy ofthe  group.  Until  our  thinking  and  behavior  is  divorced  from  the  group’sthinking and behavior, we cannot see the group’s thinking or behavior forwhat it really is. The crowd or group is behaving from its conclusion-mak-ing  structure.  That  structure  is  called  the  herd.  Until  we  can  see  clearlyhow a herd functions, we cannot know when to get out of the way of theherd or steer the herd.
We must rise above the average thinking process coming from an un-regenerate mind. We must study our own thinking and behavior to recog-nize when it is destructive or proﬁtable. When we see the herd choosing tobehave  destructively  we  have  the  opportunity  to  behave  proﬁtably.  Be-cause  the  market  is  a  crowd,  a  group,  and  a  herd,  it  will  never functionfrom anything except the sum total of the individuals’ behavior—and thatis always at the lower end of the spectrum as long as the group is made ofpeople  who  can’t  see  they  are  destructive.  Most  traders  have  net  lossesbecause  they  think  and  behave  very  similarly  to  every  other  member  ofthe group. When a trader chooses to think and behave differently, he is theonly one available for new information about the structure of the group.This  difference  comes  from  self-analyzing  your  thinking  and  dissectingyour behavior until you see clearly how you are performing exactly likethe  crowd  or  in  some  other  unique  manner.  Once  you  know  this  differ-ence, and it doesn’t have to be by a wide margin, you will ﬁnally buy weak-ness and sell strength often enough to win.
It is easy to say “Be a student of yourself,” but what are the practical
aspects of making a commitment to develop this skill of transparency?
No matter your personal state of development, you have to come tothe  understanding  that  this  process  of  developing  transparency  is  aboutlifting the veil of illusion. The price of knowledge is the destruction of illu-sion. People who will not let go of their illusions are the ones who suffer
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the most. In the trading arena the illusions we operate under come to fullconfrontation very quickly. Some traders call this process forced aware-ness. By this they mean that your personal conclusion-making process iswhat it is and when you have losses in your account you are wrong. If atrader excuses his loss in any manner, he is operating under illusion untilhis money is all gone. Now the trader has only one choice: Admit that hehas an illusion problem or deny it further. If the trader is truly on the path-way  to  transparency,  the  total  loss  in  his  account  came  from  forcedawareness. The trader cannot deny that the results in his account are be-cause  of  his  actions  alone.  This  is  why  self-study  leading  to  self-aware-ness  is  so  important.  Without  it 