you do notaddress this issue before beginning. We have seen the results ofabandoning this advice. Upset spouses and a lack of support arenot positive elements to deal with, so set your foundation rightfrom the beginning and do not avoid this dialogue between youand your partner in life.Another rule for the mind is Lose the labels. Market participants don’t need titles. You’re trading your capital on your electronic system with no one to answer to except you and yoursignificant other. Those that give themselves titles like “technician,” “expert,” or “guru” are implanting false signals into theirown minds. Why limit yourself by calling yourself a technician?Many market events can lead to successful trades that are fundamentally driven, psychological indications through the tape andLevel II, and so on. Labels pigeonhole your mind into a narrowfocus that constricts broad-based thinking rather than enhancingspecialization. Those that have ego-driven motives are the first touse labels; unfortunately, the paradox is that they often earn thelabel of failure or loser because of those very qualities. My adviceis, walk softly and carry a big stick. If a label is really important,though, how about “student?” Become a student of the market;there is always something new to learn.Another critical rule of trading is, Learn to pace yourself. Aword of caution: good times can still be dangerous. When almostevery trade you put in works and your account is growingrapidly, slow down; you do not have the Midas touch. The risknow is overtrading. Jumping into higher-risk trades because youare doing so well is common and a mistake. You need to take acold shower and review every trade based on the rules you havedeveloped for yourself. That is one of the big reasons you mustput your daily plans on paper—so that you can go back and makesure you are doing what you are supposed to be doing. When Iam hot, I have learned to cool myself down. I know arroganceand overconfidence usually lead to a lesson in humility. This hasnot only made me a better trader but also a better judge of myown behavioral patterns.This understanding of your own psychology will teach youto Follow your instincts. Nobody, not even Freud or Maslow, can
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fully explain what is in your head; hence the revelation fromFreud, “The best psychologist is within your own head!” Whentrading, you are attempting to foretell the future. This is obviously impossible. This is what makes your instincts such animportant tool, your sixth sense. Find out early on if you havegood instincts for the market or not. That is important because itis your instincts that you will often rely most heavily on.Learn to be totally honest with yourself. When your instinctswork in your favor, imprint those feelings in your mind. It’s likemaking a perfect swing with a golf club. When you feel thegroove, you must imprint it in your mind so that you can repeatit. On the other hand, if you take a profit totally by accident, beable to separate this feeling from the feeling you had when youhonestly followed your instincts. Accidental incidents are notrepeatable, but instinctual ones are. Big difference: Instincts arenot mystical; they are instead ever-changing and evolving attributes that you should not ignore, but rather embrace. Instincts aredeveloped over time and through experience, and surviving themarket first will allow you to thrive in it later.Another rule that is much more important for the mind thanpeople think is to Find your own game or recipe for success. AsI mentioned earlier, a sound financial and educational base isimperative and makes for a great beginning, but that is all it is: abeginning to a journey. At some point, the more you search foranswer from others, the more you divert yourself from findingthat understanding of yourself. Learning from others is imperative, but relying on others is a mistake. There is a difference.As you develop your own unique trading style, you alsomust consider a reality for all traders. This rule for the mind hasa low acceptance rate; but remember, the best traders are in theminority, and the best traders, Learn to lose. Day trading is “riding the edge,” pushing the envelope of your capability. Theextreme! The ultimate crescendo to trading. The most aggressiveand exciting realm of market engagement.Because active day trading is “on the edge,” one of the trulydifficult psychological barriers to accept is learning to acceptlosses. It is a major component of active trading and simply partof the endeavor. With the acceptance of this fact, traders seelosses differently, knowing that every loss has a lesson within it.Traders must embrace losses and see them as a cleansing process
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to rid them of the mental anguish that losses bring. The deeperthe loss, the greater the burden, and the losses can weigh on youlike useless cargo that has no value or upside. By developingsuch a paradigm, you begin to train your emotions and yourmind to cut them quickly, moving you ever closer to understanding trading.This brings us to the next rule—Make trading a habit. Donot try to trade when you have a minute. You always need focus.You always must be at your best. You always must be able to concentrate 100 percent. Set a regular trading schedule. If you cannot devote the necessary time to trade, don’t, because the markethas no room for luck or incompetence. As I said, the market isboth unforgiving and very rewarding. Mistakes are rarely tolerated, but hard work and the adherence to these critical rules areusually rewarded. If for some reason you are not able to makethis kind of commitment, wait until you are able to become atrader. A false start in this business rarely allows for a secondchance. Better to be patient and begin wisely than to be exuberant and destroy your most valued asset, your attitude towardtrading. Which leads to the next rule for this chapter:Never Let Your Attitude Suffer. Trading is not a professionfor the depressed or moody. Most active traders during the 1000trade learning curve lose on more trades than they make. It issimply a fact of trading. One of the most important keys to psychological health and trading success is that you accept this factand realize it is part of the tuition we all have paid. The earliestsigns of failure I see are from those who do not accept this fact orresponsibility. These individuals seem to be in the majority andhave a propensity to pass the blame of losses during this verynormal learning process. Once you begin to pass the blame, youhave a serious decision to make. Should you continue trading orgive it up? Are you tough enough to take the pounding the market gives us all from time to time? Unfortunately, it is most severeduring this learning stage. Occasionally, we all get to the pointwhen we have taken enough punishment or are under so muchstress that we just yell “Uncle!” Time to take a break. Just walkaway and rest until you really want to come back and trade. Butpassing blame on others will never be the formula for success;therefore, realize now that this learning process is tough on yourattitude, but it is worth the effort.
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Though I believe we all need a break now and then, I havebeen accused of being a workaholic. In a sense I guess I am whenit comes to trading, but a workaholic is not a bad thing if properly defined. To me, a workaholic is more a state of mind than astate of time. Taking the time required to rest and recharge yourbatteries is important, but it makes more sense to “press” harderwhen you have the groove and rhythm of the market than to walkaway from it. There will be times that you are in almost perfectharmony with the market, and you should stay with your systemduring these times. If that means the pattern lasts for an extendedperiod of time, stay with it and do nothing to dismiss it. If that isthe definition of a workaholic, I can live with that.I think about attitude in terms of support and resistance levels in one’s mind. Arrogance, cockiness, and close-mindednesslive at the resistance levels. When strong trading patterns occurto the point where I begin to develop some of these negativequalities, I remind myself to be humble by remembering this critical rule, The market is always right, and it has a unique way ofpunishing these qualities. Maintaining a support level in yourmind means remembering what brings success. Like the trendsof markets and stocks, a trader is best served by avoiding thebreakouts and breakdowns in attitude. Manic-depressive swingsbased on performance can bring only failure. Traders who learnto control emotions will fare much better.In conclusion, many people are in search of some magic tohelp them find easy money. While this view seems a bit cynical,it is true for the masses. Few possess the motivation required tobe a true professional trader. As their experience grows, I believetraders continually adjust the ratio of cognitive intelligence andemotional intelligence toward the latter, whether the balance ofpower to be successful in trading is 80 percent emotional intelligence and 20 percent cognitive/mechanical intelligence, or90/10, or some other ratio. The likelihood is that it is probablydifferent for everyone. What is the same for all traders is thatadopting rules of thought and a proper perception of the marketis, and will remain, the best approach to trading stocks. The nextchapter will introduce you to some of these professionals. Yourmindset and attitude are the greatest tools and allies you have, sodon’t ignore their value.
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hat is most fascinating about traders is that, while theyall have differing opinions on strategy and marketengagement, they share many common opinions on therules for the mind and on trading psychology. Out of the manyinterviews I have conducted, I have decided to share the viewsand insights of the particular five traders presented in this chapter not only because of their profitable and consistent results butalso because of their mindset and activity that lead to the result.Unlike false seers who sell their services promising greatsuccess for all that subscribe, these gentlemen put their capital atrisk each and every day, walking the talk, and making their owndecisions. No chat rooms, subscription services, or falseprophets are in their lives, just hard work born of their passion totrade. None of them have been paid to volunteer their insights,nor do any of them have an ax to grind. They simply share a common attribute that many successful traders possess, a willingnessto pass along what they have learned from many great tradersbefore them. While it is my belief that great traders are few, thosewho have conquered the art of trading are often too successful tofeel the need to write and share knowledge, unless there is someother motivation to do so. In the case of these five professionals,all shared a somewhat humble philosophy of life that I foundparticularly attractive. As I have stated throughout this book,many of the attributes required to trade successfully are the samevirtues we hope to possess in other facets of our lives: humility,grace, passion, patience, generosity, and discipline. All are rarequalities singularly, and it is even rarer for a person to possessthem all. I have come away with this simple belief: Those wholack any of these qualities usually lack most if not all of them,and those who possess any of these qualities usually possessmost if not all of them. This is comparable to the extreme polarends that we often see in the market: those who make great
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money versus those who lose big, with very little population inbetween. Because of these virtues, these men were willing toshare what knowledge they have acquired so far on their journey,all the while acknowledging it is just that, only a journey and nota destination.
DARIN CORTI could not help but like this young speculator. At first glance heseemed conservative and reserved, even quiet. It didn’t takelong, however, to realize this 31-year-old professional possessesa rare combination of aggressiveness and intelligence. Hisaggressiveness came through in many ways, including his passion for sports and his highly competitive nature. I made the mistake of telling him I liked to wrestle for fun (after a few socialbeers) only to find myself the victim of very quick hands thatobviously have greater application than just rapid-fire trade execution on the keyboard!Q: Darin, how and when did you get started trading? And howdid you do?A: I started trading three years ago in early 1997 with $50,000 incapital. My good friend was already trading and finding success, and I was very unfulfilled with my career in banking.Within the first six months I had lost $26,000 of my stake andpromised myself that if I drew down my account by 50 percent I would quit, and that is what I did. I returned to mybanking background with substantial reservation. Part of merefused to admit I had failed, and the other part of me knew Iwasn’t chasing my passion. Neither realization was verypalatable.Q: How did you make it back?A: I recapitalized myself and returned with $35,000 to trade.Being properly capitalized is important, and I knew I wasundercapitalized, but the lessons I had learned during my
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first run at trading taught me to forget about the money andtrust my instincts and training. I knew the odds were againstme with this amount of capital, but my short time awayallowed me to clear my head and reach a level of focus I didnot have before. I felt this would be my edge. This translatedto having conviction when I had an idea, instead of beingoverly literal in terms of losses, measuring every loss strictlyby price. I learned that making trading decisions goes farbeyond just prices relative to my cost basis and has more todo with where stocks are strong and weak based on volumeand activity. This proved to be a breakthrough for me.Q: If you were to teach your best friends or a close relatives totrade, what advice would you give them?A: I would have them sit next to me while I traded and madesure they had ideas and insights to offer me as they learned.Once new apprentices have thoughts and opinions about themarket, they begin to activate the neural networks withintheir own mind. They show they are becoming independentthinkers, relying on themselves and not others. They begin toknow themselves as a trader, which I consider to be the greatest advantage. Once their level of confidence is evident, Iwould have them engage the market. I make this statementwith the caveat that they must have the mechanical skills totrade first. I would then have them spend 20 to 30 minutesreviewing their trades every day and keeping a journal ofwhat had transpired. They need to know why they makedecisions. If I make a trade for the right reasons, I don’t evaluate the decision based on my P&L. I base the decision on mydiscipline to work the trade within the parameters I set. Iknow the odds will work toward my favor in the long run if Ido. If I have been disciplined to follow my plan and the netresult is a loss, I don’t punish myself for that; in fact, I journalthis and remind myself I still did the right thing. I wouldmake sure a new trader I was teaching did the same thingsfrom day 1. When an abandonment of the discipline exists,even if the trade is profitable, I am equally critical of myselffor not being disciplined so I do not confuse this activity withskill when, in fact, it is luck. These are some of the lessons Iwould teach.
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Q: It sounds as though you know exactly what you would teach,but what about setting financial goals?A: I do have unwritten financial goals, but I am more interested insetting activity goals that lead to the desired result. Most ofthese goals are centered on discipline. I expect to make$100,000 per month at this stage, but my goals are more associated with maintaining my disciple of looking for low-risk–highprobability trades. For example, I will not risk a dollar to makea dollar. I want setups where I risk 25 cents to make a dollar, forexample. If I can consistently do that and remain patient forthese opportunities, I realize my financial objectives anyway, somy financial goals take care of themselves.Q: Do you have a bias of the market in terms of the long sideversus the short side?A: I trade both sides. I have no real bias, although I do go longabout 60 percent of the time and short the remaining 40 percent. I guess from my actual experience, I am more weightedto the long side, but that is really a function of the market andmy ability to measure its direction more than it is a result ofany mental bias I have.Q: Do you have a strategy that you employ more than others? Afavorite strategy, so to speak?A: Yes I do. I like to step in front of the market. For example, Iwill buy stock a level above a support level when I see indications of a turning point. I will also short a stock a levelbelow a resistance level. I feel this ensures that I am in thetrade early on when most others are waiting for an impendingmove to show itself. That way I get into more trades and earlier when other people seem to be missing them. I find thatthe tendency to chase a trend is more likely once a move orturning point is in play, and this is the most difficult scenarioto make money at. It also flies in the face of my discipline,looking for lower-risk–higher-opportunity trades. When themarket provides these opportunities and more importantlywhen I recognize them, I trade aggressively. To me that iswhat trading is about, knowing when to press and knowingwhen to stand aside.
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CHRIS JOHNSTONChris started his trading career in Canada on the Ontario StockExchange. The skills necessary to trade on the floor are verymuch the same as the skills needed in the electronic environment. This training has served Chris very well, and he nowtrades full time electronically. Chris has a very competitive spiritthat shines through his otherwise very likable and direct manner.You know almost immediately that Chris is profitable. He isquick to answer questions and make decisions and does not haveto think about things very long. This is not to say he is not thinking things through but rather, that he is very decisive anddirect—qualities that serve traders well. On average, Chris trades100,000 shares a day and averages over 2 million shares permonth.Q: Do you do research, and if so, how much time do you spendon average each day?A: I am definitely a believer in research. A lot of day traderswant to trade in a vacuum with no news or outside noise tojade their thinking, but I differ in that sense. I want to studythe market every day, which I do religiously one to two hoursbefore the open each day. I like to review charts and technicalpatterns because it helps form a broader bias for the stocks Iplan on trading each day. I will not trade a session withoutknowing exactly what I am trading for that day; that way I amnot wasting time surfing the market looking for ideas. I knowwhere I am trading in terms of sectors and stocks before theopening bell. If my stocks are flat or stale for the day, so be it.I do not believe in forcing something to happen.Q: How active are you on the short side of the market?A: Shorting is my strategy as a whole. The research I do is tolook for overbought situations that rise rapidly on overreactions. I short 70 to 80 percent of the time.Q: Why is shorting so attractive to you?A: I believe the natural flow of the market is definitely bullish,but so many stocks run ahead of the herd, so to speak, that
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they stand out. I like to sell into those stocks when the levelsand trends show they get tired. Also, you make more moneywhen they come in.Q: What strategy or technique do you employ when shorting?A: I hate the answer I am going to give you, but most of tradingis psychological—the psychology for yourself and the markets’ psychology. I believe in the end it is touch and feel. Thisis difficult to teach. I can tell when pressure is building in astock; for example, when prints are active at a price level, yetstill not able to penetrate that level, I find that many issueswill come in a bit and then get strong again, sucking in a lotof dumb money to the long side. I stopped falling for thatyears ago. I remember where those thick spots are in the stockfollowing a weak up-trend, and therefore like to short into thetop end of that minor trend. I think the odds are much morewith me than against, and I think the trader who can see abroader perspective of the market on tape over the course oftime forms a better feel than the super microtrader.Q: What about risk. Isn’t shorting a riskier play especiallywhile shorting into a strength move?A: I think shorting for the short-term trader is less risky if youhave discipline and will cover when prices drive throughthose thick spots. If I am short, and the stock makes a higherhigh within the trend I am studying, I buy and cover. It is thatsimple to me. But when I am right and the stock falls, it’s abeautiful thing! The profit opportunities are greater when ahouse of cards falls. If I can control my losses, the profitabletrades will take care of themselves. I also believe panic andfear are easier to spot in the market than greed. Lots of peoplewill stare at a move and never get in because the perceptionis that it is already over, but most people will bail out oncethey get their fill of a bad trade. I like to be there when thathappens.Q: What is the sole reason for your success?A: No secrets in this game! I work really hard. I treat trading likea business because it is a business to me. I get seven to eight
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hours sleep every night before trading, I don’t drink on“school nights,” and I am dedicated to trading. Also, I love towin, but not because I am thinking about the money. I don’tthink too much about the money anymore. I consistentlymake it, so it has to be something else for me. I guess youcould say I work for the medals as well as the money. I amproud to say I am a trader. I like what I do and work hard tokeep my job. It is my passion, period.
RICHARD LACKEYWhen I think of the word discipline, the first thing that pops intomy mind is trading, the second is martial arts. Discipline andmartial arts always seem to go together, and, in Richard’s case,that is definitely true. Richard earned two black belts, one at age13 and the other at age 18. His early training serves him well as ahighly successful and disciplined trader. Today, Richard makeshis living sharing his time between trading and mentoring newtraders as an instructor. His success at both translates in thisinterview into some very insightful advice from which everytrader can benefit.Q: Richard, of all the people you have trained, what do you findto be the single common denominator of the successfultraders?A: The best traders I find are those that treat this truly as a business. Like an entrepreneur who opens a new business, mostdon’t expect to be profitable right away. People who engagetrading with the same philosophy seem to possess many ofthe right qualities that trading requires. Those wanting tobecome professional traders should begin the endeavor asthey would if they were intelligently approaching startingany new business. Learn everything possible from peoplethat are already successful and follow the rules and reasoningthat they share. Most importantly, have a plan. Have a planfor learning the art and science of trading. Follow a plan thatallows you to start small and build your trading size and vol-
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ume at a rate consistent with your improvement in both proficiency and consistency.Q: What is the biggest reason traders fail?A: Proficiency and consistency: We have little problem makinggood trades. It is making good trades more often than poortrades or, perhaps more importantly, limiting the losses of thepoor trades consistently that is the discipline of great traders.It is a psychological breakthrough when a trader realizes thateffective trading has nothing to do with being aggressive versus conservative; it has to do with combining an understanding of calculated risk, a feel for the momentum of a market ora stock, and a measure of instinct drawn from experience. Inmy experience there are two polar ends: One is instinct andone is discipline. I have known traders with great instinctthat blow themselves up because they have a few bad days.Even with great insights and instincts, there is no way to becorrect all the time, and the only sure-fire way to maintain asteadily increasing income is to maintain some standard ofdiscipline.Q: How do traders acquire this quality of discipline that seemsso elusive?A: I give new traders exact numbers by which they can measuretheir progression (or regression, as is occasionally the case)from managing a single trade to managing a month of trading.People perform better when there is structure to their trading.I recommend a military-like approach through which everyone starts by using the same rules and guidelines until theyreach a certain competency level. When they have pushedtheir way through our required levels of proficiency and consistency, they are able to develop a more personal, moreunique trading style of their own while maintaining a consistent profitability. On the other hand, there are people who areincredibly disciplined and follow all the rules but have verylittle feel for the market or for momentum. The good news isthese people rarely lose much of their capital. The bad newsis they must work just as hard to develop instinct as theinstinctual trader must work to develop discipline. The best
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traders seem to be in the middle. Finally, traders are successful by being micromanagers of the market and even of a security. If there is any concern at all, they exit their positionimmediately. If they change their mind or find reason to getback in a security, they can do so just as quickly. There is noreason to take inordinate risk with instant access to the markets and falling commission rates.Q: When you recruit new traders, which I know is a big part ofyour job, what do you look for?A: I look for what you talk about a lot. Passion. The drive to besuccessful is not quite the same as the love for the sport. Inpro sports today we have a lot of great athletes who are drivenby the money. Mind you, there are a lot of great things youcan do with money, but the greatest traders, like the greatestathletes, have a passion for the game. I love to trade. I love tomatch myself, my abilities, and my instincts with the masses.My work is one of my favorite hobbies. I do other things justbecause I enjoy doing other things, but I really love to trade.Q: What is your core strategy?A: I love volatility. Almost without exception the best tradersmake the most money day in and day out in volatile markets.It is much easier to assess the direction of a tiger than a snail.It is much easier to steer a bicycle that is moving than onethat is standing still. Stocks that are moving, whether up ordown, are simpler to trade than those going sideways.Q: Words of wisdom in a few words or less, and don’t make mecount!A: Keep it simple. The best traders use simple measures to makedecisions. Start with only a few stocks and very simple charts(two to three minimum of candlestick of stock, and ND/SPfutures). Trade these until you are consistently profitablebefore you try new things. When starting out, spend moretime learning how to exit trades turning against you thanlearning how to find more trades to enter. Goal number 1should be preservation of capital. You can’t earn a return onsomething you don’t have. I use the example that if you start
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with 100K and lose 70K or 70 percent, you are in an uphillbattle in that coming from a losing trend, you now have tochange the direction of the trend, which is difficult in and ofitself, but you also must earn significantly more than a 70 percent return to get back to even. In fact, with only 30K youmust earn more than 330 percent to get back to where youstarted. Ben Franklin’s urging that a penny saved is a pennyearned really doesn’t do justice to the real cash flow crunchthat can be created by the inability to produce such a dramatic change in your rate of return.
JOHN WALTERS NICK, JR. (JACK)Jack was a specialist and member on the New York StockExchange (NYSE) for 17 years. As a specialist, Jack has mademarkets for many listed stocks and has transacted millions oftrades. The lessons that Jack has learned over these years of trading on the world’s most vibrant exchange are not only invaluablebut also transferable if the words you are about to read are internalized and trusted.Q: Jack, let’s cut to the chase. What are the single most important words of advice you can give to a trader, new or experienced?A: You are not going to believe this. . . . Specialize! After yearson the floor as a specialist, this is my great word of wisdom!I’m serious. I truly believe that when individuals learn tofocus on just a few stocks, as I have over my trading career,they know those stocks so well that the only real reason theylose money in those stocks while trading them is becausethey abandon discipline and ignore the actions that theyknow to be correct. I am talking about knowing when to cut aloss but not doing it. When you specialize in a few stocks,you gain strong insight about where key price levels are,where these levels get thick with volume, and where theygrow strong or weak. This gives you a tremendous advantageand to ignore these signals is simply an abandonment of dis-
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cipline. In my opinion, specializing gives you the singlegreatest advantage, period.Q: But Jack, didn’t you have a huge advantage on the floor as aspecialist, if not even an unfair advantage?A: At one time I did, but not as much today. This is why I amnow an electronic trader rather than a floor specialist. Yes,there are great advantages to seeing order flow, but the obligations to provide liquidity and buy and sell stock as lastresort when supply and demand imbalances occur put a greatburden on the specialist. Additionally, the capital needed toprovide liquidity as a specialist in a given issue, not to mention the increasingly stringent rules we as specialists neededto follow to protect the public, all contributed to my decisionto trade off the exchange through electronic technology.Therefore, what I took away from the floor in terms of advantages is my belief that specialization in a few securities is thesingle greatest advantage a trader can have, and because oftechnology, everyone can now have it.Q: Do you still concentrate on listed stocks?A: I still have a bias for listed stocks because they are what Iknow best. I also believe that there is less room for manipulation of listed stocks in comparison to NASDAQ issues, due tothe multiple market-maker system of NASDAQ. But, I alsolike to trade NASDAQ stocks because of the transparent access to the market now available.Q: Jack, how can a day trader benefit from what a formerexchange specialist like yourself has to teach?A: I apply my trading knowledge from the floor to the electronicmarket by focusing on this simple-yet-undeniable fact.“Buyers stay together when stocks are strong, while sellers stay together when they are weak.”What this means is that when stocks are strong, thebuying crowd, which has the capital to move a market, willcontinue buying strong stocks at the onset of a move, knowing that by the time the public reacts to the buying, the stockwill have already moved significantly upward relative to its
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level prior to the buying and money flow into the stock. Professionals know that amateur buying will continue to movethe stock higher, but only very temporarily. Therefore, professionals who wish to exit the stock with a profit will do soduring the buying stage. This provides the professional liquidity needed to exit the