you  will  experience  forced  awareness.Which do you prefer?
To avoid experiencing forced awareness, you can start the process ofconfronting your personal depth of illusion anytime. Most people do notlike what they see about themselves when they do, or will not accept theyreally have that particular issue. This is why an intervention can be so ef-fective  when  confronting  people  with  addiction  problems,  because  untilthat  point,  the  addict  really  doesn’t  think  he  has  a  problem.  When  con-fronted with a choice between the drug and the friendship, the die is cast.The responsibility is now with the addict. In trading, you must be both theproblem and the solution. You have to confront yourself or the market willdo it for you. It is a choice—keep the illusion or keep your money. Whichdo you want most?
To consistently confront myself, so that I reduce the amount of illu-sion I might be operating under, I have a stack of note cards with ques-tions  written  on  them.  I  ask  myself  every  day,  “Am  I  hoping  the  marketwill go my way?” “Am I afraid to execute?” “Am I trusting something be-sides myself to earn a proﬁt today?” or numerous other questions. I alsohave note cards with reminders on them such as “Wait for the market tohit the stops before executing,” “The market does not know my position,”“Follow your rules 100%,” and others as well. The point is that for me per-sonally I have found that my tendency to illusion is lessened if I remindmyself daily what the basics are and what the rules are. I no longer havethe conversations with myself or others that involve opinion about priceaction, what the fundamentals will do to prices, what some talking head inthe press has to say, and so on. I no longer think like the crowd, so I nowknow how to exploit that crowd thinking.
I have to do this daily because I also know I have a tendency to over-conﬁdence. When I am winning consistently I am tempted to think I knowwhat I am doing. That is an illusion as well, and right about then I start los-ing. Since I am tired of losing and don’t want to do it any more, I am will-ing to do whatever it takes to remain a winner, even if that means my petillusions about myself end up in the trash can.
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Please understand, in this short description of this rule it is impossi-ble to give you a detailed pathway for developing transparency and avoid-ing forced awareness. Again, the Recommended Reading section includestitles that will provide you with great places to start this process of chang-ing your thinking enough to exploit the crowd. But there is no easy way.Always remember that every trader had to learn to trade. No one at thetop of his or her game got there by accident, and all successful traders willtell you that the ﬁrst blowout taught them not to rely on illusion. It startedthem on the pathway to true understanding.
That  understanding  is  that  the  market  is  created  inside  your  ownhead.  How  you  see  things  determines  how  you  will  trade.  Learn  to  seethings in a new way. All the other rules are designed to keep you in thegame until you can see clearly how to out-think the crowd.
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Conclusion
Remember,  the  market  doesn’t  beat  a  player.  Itmerely gives him the chance to beat himself.
—The 1989 Commodity Trader’s Almanac
I really  enjoyed  writing  this  book.  As  I  said  in  the  Introduction,  I  took
time to answer questions I hadn’t thought of before. In looking at thingsfrom a fresh perspective and attempting to write concisely, I rediscov-ered old truths in a new way while becoming reacquainted with the basicsmore completely. I sincerely hope you have enjoyed reading and that youhave acquired at least one new concept you can apply to improve yourapproach. I know I have. But seeing as this is for you, let me offer you aconclusion.
Trading is not what people think it is. It is tempting to believe that suc-cessful  speculation  is  a  factor  of  economic  fundamentals,  political  inﬂu-ences, supply and demand, being in the right place at the right time, and alittle  foresight,  all  rolled  into  one.  We  can  convince  ourselves  that  withenough  study  and  enough  knowledge,  combined  with  enough  persever-ance and some critical timing, we will ﬁnd our fortune waiting on the otherside of our hard work like a pot of gold at the end of the rainbow. But thetruth of trading is more like the sirens calling over the waves, wooing us toa certain shipwreck if we aren’t careful.
As you put together your trading approach and look for your edge, Ithink this whole book can be summed up with the understanding that yoursuccess is not outside of you. Your success is inside of you. If you havebeen reading between the lines, you probably have come to the conclusionthat every trading rule is related to every other rule on some level. All ofthese rules that work have an underlying psychology that includes nonat-tachment to results, the recognition that anything can happen, and the un-derstanding  that  the  crowd  doesn’t  know  what  it  is  doing.  Since  weoperate from a certain point of reference in order to create opportunitiesfrom the apparent randomness of price action, all we really need to do isremain vigilant enough to get out when we are losing and stay in when weare winning. The less energy we put into forming value judgments about
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prices, expecting the market to do one thing over another, or trying to ﬁxwhat isn’t broken, and the faster we will admit we are wrong, the more po-tential  for  net  gains  we  will  have.  When  you  think  about  the  underlyingpsychology of that kind of behavior you come to the inescapable conclu-sion that we control our destiny as traders with more certainty than wecontrol the rest of our lives. When we realize that, our potential tradingwill truly be effortless and without inner conﬂict.
I think that most traders will admit that up to a certain point, or evencurrently,  their  trading  has  been  frustrating,  painful,  irritating,  or  ﬁlledwith some other negative emotional conﬂict. All of what we surround our-selves with as part of our daily trading routine are often designed to helpminimize or eliminate this inner conﬂict. But almost all of what we feel asinner conﬂict has nothing to do with the market. We create that conﬂictfrom how we choose to view what is happening or from internalizing whatit all means for our trading balance. The market is just a machine process-ing orders. How can a machine create so much conﬂict in our daily lives?The  machine  has  nothing  to  do  with  the  conﬂict.  Stop  and  thinkabout how silly it is to get angry with your car if you run out of gas. Thecar told you very clearly it needed gas with that little ﬂashing light nextto the “E” on the gas gauge. You created the conﬂict by ignoring the veryclear signals the car itself was giving you. You don’t have to experiencethe  conﬂict;  just  stop  and  get  gas.  If  that  means  you  will  be  late  for  adate, then your problem is time management; that is not the car’s fault.For some people, trading is like driving with a broken gas gauge down adeserted country road between towns. They have no idea when the carwill  quit,  so  every  mile  is  a  sense  of  impending  doom.  In  trading,  theproblem is not with the market (the machine) but in our failure to man-age ourselves.
The point of Trading Rules that Work is to free your mind from theconsequences  of  your  emotional  state.  If  you  are  still  developing  yourtrade  approach,  controls  on  your  behavior  will  prevent  you  from  exe-cuting  bad  trading  behavior.  Bad  behavior  will  surely  result  in  losses,and if those losses are complicated by severe negative emotions, yourmental energy is taken up with trying to eliminate pain instead of ﬁnd-ing opportunity. That is exactly how the crowd is thinking; that is whyso many traders have net losses when they don’t have to. Can you imag-ine a road full of people tearing their hair out, yelling at their out-of-gascars, when there is a gas station at every intersection as far as the eyecan see?
Traders  tend  to  complicate  things  needlessly  when  they  add  emo-tional pressure on top of basic pressures. Losses in the market are a factof life, and many are avoidable. But when you beat yourself up for the loss
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and  wonder  ceaselessly  if  the  loss  could  have  been  avoided,  you  addstress to a process that is stressful enough without your help. There is noneed for that. Take a step back and think.
To develop your full trading potential you need a different paradigmof thought. This doesn’t mean you have to change your entire world andlife view (although that helped me). All you really need to do is ask your-self  really  good  questions  and  have  the  courage  to  answer  those  ques-tions  honestly,  without  kidding  or  deluding  yourself.  All  of  the  rulesdiscussed  in  this  book  are  places  to  connect  with  that  new  paradigm.While  you  are  altering  your  point  of  view  to  be  more  in  line  with  thescope of market/crowd thinking and behavior, the controls on your be-havior  prevent  you  from  giving  away  all  your  capital.  Change  is  notsomething that happens overnight anyway, so I think it is unreasonablefor any trader to think he will make money without some basic educa-tion. The rules you create and impose for yourself are like having a settime to go to class every day. You won’t get educated without going toclass, and you have to be at class on time. You won’t make money trad-ing until you learn what you need to know, and the rules insure you willbe in class. Once you have your education, you don’t have to go to class.Once you know how to trade, you can change and improve your rules ifyou choose to keep them.
Regardless of how you want to look at it, the problem and the solutionlies within you—not the market. Try to remain the sort of trader who fullyaccepts responsibility for his results. Remember that you choose to exe-cute. No matter what you use to gain enough conﬁdence to pull the trig-ger, you and you alone make that choice. Your analysis, fear, greed, hope,and lack of knowledge are all parts of that decision-making process untilyou  reach  the  point  of  full  control  of  your  actions.  Having  controls  onyour behavior puts you in a place where your inner conﬁdence can growwhile  you  develop  better  outer  behavior.  As  you  see  that  your  behaviorcan  be  consistent  and  proﬁtable,  you  gain  conﬁdence  in  what  will  workfor  you.  You  learn  to  execute  better,  you  accept  your  results  no  matterwhat  they  are,  you  discover  your  trading  strengths,  and  your  tradingweaknesses are addressed in a way that you can accept. Once you fullyaccept your responsibility and fully control your actions, trading becomeseffortless and pleasurable instead of frustrating and painful.
But  all  of  that  change  happened  inside  you.  The  market  is  just  themarket  and  would  have  been  there  with  or  without  you  while  thosechanges  were  made.  So  in  the  ﬁnal  analysis,  you  created  your  opportu-nity—not the markets.
Before we close I want to give you a few particulars that will help youdevelop  your  personal  rules  from  these  28  guidelines.  First,  your  rules
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have to be personal. They need to be from inside you. I suggest you use alot of “I,” “me,” and “my” in your rules. For example, don’t make the rule“Only risk 30 points on a trade.” Make the rule: “I only risk 30 points on myinitial trade.” When you personalize your rules they have a greater impacton your thinking. The rules are no longer just good ideas ﬂoating aroundout there; they are personal behaviors you do every day.
I  also  suggest  that  you  write  them  inside  quotation  marks  to  makethem your words when you read them, and read them out loud so you canhear them in your own voice. Have you ever had the experience when youwere  about  to  do  something  and  you  heard  your  mother’s  voice  insideyour head telling you not to do that? Whether or not you did the behaviorisn’t the point. I bet for certain you stopped and thought about it beforeyou did or did not do it.
Second, review your rules at least twice a day. I read my rules in themorning before I get to my desk and after I do my daily market study atthe end of the day. I am in the habit of opening my trading day and closingmy  trading  day  with  a  review  of  my  rules.  Psychological  studies  haveshown that if you begin and end the day with a consistent positive rein-forcement you sleep better, and you also perform better the next day. Thatis  probably  why  kids  always  want  to  be  tucked  into  bed  at  night.  Theyseem to have no problem getting up early . . .
Also, make a consistent time away from the trading desk to do yourmarket analysis. I ﬁnd that when I am not staring at a computer screen Iam not tempted to reevaluate my trading in real-time. Following Rule #14is much easier if you are sitting somewhere away from the market doingyour analysis with a paper printout and a calculator. At the end of the day,I print out my charts and any relevant information or studies and lock my-self in one of the unused cubicles in my ofﬁce. I ﬁnd that when I am awayfrom the actual price action and totally alone without distraction, I can fo-cus a lot better. Often I have remembered something or made a decisionabout something that I would have missed if I was in the heat of battle.
Last, next to all the rules in Part II, I think Rule #21 is the most impor-tant  rule  to  follow  as  a  new  trader  while  you  are  developing  your  ap-proach. Once you have settled on a risk-control strategy to cut losses, thenext thing is to block out everything and think on your own. Of course,you need market research and commentary, but it is the way you use itthat  will  make  all  the  difference.  Rather  than  accept  at  face  value  whatyou  read  and  hear,  ask  good  questions  about  what  traders  would  betempted to do with that data. Sooner or later all market data creates anurge  to  action,  which  results  in  a  trade  creating  pressure  on  the  orderﬂow.  Ask  yourself,  “What  have  traders  done  already  with  this  data?”  or“What will other traders think this means?” When people around you offermarket commentary, politely excuse yourself or tell them outright to shut
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up. The single best way to get a tipster to stay away is to ask him to showyou his account balance. In my opinion, nothing will slow you down fasterthan failing to follow Rule #21.
Other  than  these  few  thoughts,  the  ﬂoor  is  open.  Every  reader  willhave a different way of enforcing these 28 guidelines. I would love to hearhow you personally have been able to apply what you are learning. Feelfree to drop me a line in care of Wiley; they will see that I get it. Also, read-ers are welcome to join me for my regular daily Internet broadcasts. De-tails are at my web site, www.proedgefx.com. Thanks for reading.
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Recommended Reading
There is no end to the discussion of things. Endlessdevotion to books and the study of opinion is tire-some and wearying to the mind.
—King Solomon, Ecclesiastes 12:12
I have read hundreds of books relating to the markets, trading, and psy-
chology.  At  one  time  my  library  of  related  material  was  larger  thanmost people’s total libraries combined. I also had piles of newspapers,trade magazines, audio/videotape series, and general notes from seminarsI attended. Once I reached a certain point in my education as a trader, I de-cided that most of it was all saying the same basic thing with usually oneor two ﬁne points that really mattered. I took the point of view that what-ever I had spent in dollars was an investment into my trading skill, and aslong as I learned one thing that helped me add one more winning trade orprevent one more losing trade, this was all money well spent.
After a certain point I found myself focusing on a few books that Ifelt were the important ones. That is not to say that the other data I hadcollected  wasn’t  useful.  It’s  just  that  there  is  virtually  an  unlimitedamount  of  data  you  could  expose  yourself  to  if  you  wanted  to,  espe-cially with the available Internet resources, not to mention the huge in-vestment  you  could  make  of  both  time  and  money.  At  some  point  youneed to narrow your focus—otherwise you could ﬁnd yourself spendingmore time studying than trading, and more money on education ratherthan trade capital.
I  felt  it  was  time  to  clean  house.  I  threw  out  or  gave  away  hugeamounts of market-related data but decided to keep what I felt were theessential needed things. I now have a much smaller library and also don’tbuy  as  much  new  stuff.  As  I  wrote  in  Rule  #27,  I  still  invest  a  certainamount of time and money in continuing education, but it is a lot less andmore  focused  now.  I  think  that  as  a  trader  you  can  gain  a  lot  from  thispoint of view because it will help you spend less time and money by notacquiring  the  same  basic  information  compiled  into  another  format.  Youcan also beneﬁt because your learning curve may be shortened.
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RECOMMENDED READING
The books listed in this section are the ones that I feel cover the es-sential  elements  to  developing  a  winning  trade  approach  and  creatingtrading rules that will work for you. I think it is important to reiterate thatall  the  rules  you  choose  to  use  for  yourself  are  self-created  and  self-im-posed. The reason I feel these books cover the basics well is because theyall have a common theme. All of these books start from the premise thatthe trader himself is the most critical component to lasting success. All ofthe  building  blocks  discussed  that  are  market  related,  such  as  technicalindicators  and  so  forth,  usually  are  covered  in  deep  enough  detail  thatvery little more can be added to the discussion. Also, most of the psychol-ogy  discussed  as  it  relates  to  rule  making,  trading  approaches,  moneymanagement, and so on, continues to support the point of view that the in-dividual needs to become fully in control of his actions when he trades.We can’t control the market; we can only control ourselves.
Some of the books are not market related at all, but I included thembecause I feel they expose the crowd thinking/behavior connection well.The books are listed in alphabetical order by author—no special endorse-ment for any one book or author is intended. I include a brief descriptionof why I like each one. And ﬁnally, no compensation was given to me toselect these books. I genuinely feel the author and the subject are valuableenough to include them in the list.
Abell, Howard, and Robert Koppell. The Inner Game of Trading. Chicago: ProbusPublishing, 1994. Focuses on the relationship between thought and action. Helpsclarify the difference between intents and desires.
Carret, Philip L. The  Art  of  Speculation. Burlington, VT: Fraser Publishing Com-pany, 1930. Great book on tactics, several useful methods for effective positioning,lots on equities.
Douglas, Mark. The Disciplined Trader. New York: New York Institute of Finance,1990. Critical discussion of zero-sum psychology. Lots on staying focused on yourmethod.
Douglas, Mark. Trading in the Zone. New York: Prentice Hall, 2000. More on thedaily discipline to your method, seeing trading as a holistic experience.
Koppel,  Robert.  The  Tao  of  Trading.  Chicago:  Dearborn  Financial  Publishing,1998. Point of view includes focus and understanding regarding consistency. Howworld and life view affects execution.
Le  Bon,  Gustave.  The  Crowd:  A  Study  of  the  Popular  Mind.  Atlanta:  CherokeePublishing Company, 1895. (Reprinted by Fraser Publishing Co., 1982) Early workon deﬁning the factors that contribute to and disclose crowd behavior.
Lefèvre, Edwin. Reminiscences of a Stock Operator. Burlington, VT: Fraser Pub-lishing Company, 1928. (Reprinted by John Wiley & Sons, 2006.) Autobiography ofJesse Livermore. In my view the best all-around work on what makes or breaksthe trader. A must-have in any trader’s library.
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Longstreet, Roy W. Viewpoints of a Commodity Trader. Greenville, SC: Trader’sPress, 1967. Lots of small one- or two-page thoughts on maintaining a strong mar-ket presence. Great for keeping thoughts and emotions balanced.
Mackay, Charles. Extraordinary Popular Delusions and the Madness of Crowds.New York: Harmony Books, 1841. (Reprinted by Three Rivers Press, 1995.) Excel-lent historical documentation of failed beliefs, manias, panics, and eccentric be-havior accepted as current scientiﬁc truths.
Millman, Gregory J. The Vandals’ Crown. New York: The Free Press, 1995. Historyof the rise of FOREX trading. Documents the failure of governments to accountfor or control currency pricing.
Neill, Humphrey Bancroft. The Art of Contrary Thinking. Greenville, NC: TradersPress, 1954. Deﬁnitive book on thinking outside the box.
Rogers,  Jim.  Hot  Commodities.  New  York:  Random  House,  2004.  Current  mega-trends on consumables. Will be out of date someday but still outlines great long-term  potential  in  current  markets  plus  thoughts  on  how  to  ﬁnd  great  long-termtrades.
Schwager,  Jack  D.  Market  Wizards.  New  York:  New  York  Institute  of  Finance,1987. Interviews with top traders from all markets. Timeless.
Schwager, Jack D. The New Market Wizards. New York: HarperCollins, 1992. Up-dated interviews with more top traders, new focus on trading styles.
Shaleen, Kenneth. Volume and Open Interest. Chicago: Probus Publishing, 1991.Critical study on market structure, how crowd behavior can be disclosed by V/OI,effective tools for identifying potential trend changes.
Sperandeo,  Victor.  Methods  of  a  Wall  Street  Master.  Canton,  NJ:  John  Wiley  &Sons,  1991.  Great  all-around  work  on  trader  discipline.  Trader  Vic  is  completelyhonest and very well-thought-out discussions are provided.
Tolle, Eckhart. The Power of Now. Novato, CA: New World Library, 1997. Tolle’sexperience  with  enlightenment.  How  the  Western  mind  defeats  itself  (in  all  en-deavors) and what will make a critical difference.
X,  Trader.  Dancing  With  Lions.  Ashland,  OH:  Bookmasters,  1999.  Autobiogra-phy—author focuses on detachment and the power of conviction. Detailed discus-sion on trader evolution, some basic trade methods also.
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About the Author
Jason  Alan  Jankovsky  is  a  full-time  trader  working  from  downtown
Chicago.  He  began  his  career  as  a  Series  III  Commodities  Broker  inMay  1987  after  trading  as  an  independent  customer  for  more  than  ayear prior. During the intervening years he has been involved in almost allfacets of the futures industry and also the cash FOREX markets. Currentlyhe  works  on  behalf  of  public  traders  as  an  educator  for  the  customergroup of Inﬁnity Brokerage Services and their sister company ProEdgeFX,both headquartered in downtown Chicago. In addition to broadcasting livea twice-daily foreign exchange commentary, he contributes to several reg-ular online publications, is a regular commentator on FOREXTV.com, andteaches the “Psychology of Trading” course for traders around the globe.He is a private pilot and avid sailor.
Details  of  Mr.  Jankovsky’s  broadcasts  can  be  found  at  www.proedgefx.com. He can be reached directly at Inﬁnity Brokerage at 1-800-531-2817 or by e-mail at webinar@inﬁnitybrokerage.com.
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Index
Page numbers followed by f indicate a ﬁgure.
Abell, Howard, 131Actual behavior, trading and, 61Actual opportunities, 53Actual performance, 111, 112, 115Actual prices, 107Actual risk, 107Actual time frame, 25Actual time price pattern, 71“Add to your winners” rule, 65–69“All markets are bearish” rule,
143–148
“Always place a protective stop”
rule, 37–41Attachment trade:emotional, 49overtrading and, 54price and, 44–45
Back-tested market, 65–66Baseline of behavior, overtrading
and, 54
Basic market structure, 144“Be a contrarian” rule, 137–141Bearish trader, time frame and, 26Bear market:
in FOREX, 101prices and, 43–44
“Be a student of yourself” rule,
167–171
Behavior, crowd, 137–139“Black box” traders, 157Bona ﬁde hedger, 146Breakout approach, 98Break taking, 117–121Bull market:
coming to conclusion in, 144 equities in, 100–101exploitation by professional
selling, 147in FOREX, 101prices and, 17–19, 18f, 43–44selling and buying hedgers in,
148
Buy orders, 4–5, 6, 19, 19f“Buy/sell 50% retracements” rule,
66, 149–154, 152f
Buy side, executing from, 73“Buy the rumor, sell the fact” rule,
123, 125
Cash trading balance, 34–35, 49CCI. See Commodity channel index
(CCI)
CFTC. See Commodity FuturesTrading Commission (CFTC)
Change to the structure of the
market, 158–159
185
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186
INDEX
Character, trading time frame and,
24
Chart Your Way to Stock MarketProﬁts (Markestein), 91Chicago Board of Trade, 92, 131,
155
Clason, George S., 133Clemens, Samuel (Mark Twain),
155, 159
“Clock time,” 71, 74Close strategy, 67“Commitment of Traders” report
(CFTC), 147
Daily price chart, 73Daily time frame, 27Data gathering, 61Declining market, 