MT Trading Psychology Field Guide, Part I: Transformation

MT TRADING PSYCHOLOGY FIELD GUIDE, PART I: TRANSFORMATION

I think to be in the upper echelon of successful traders requires an innate skill, a gift. It's just like being a great violinist. But to be a competent trader and make money is a skill you can learn. Michael Marcus (trader who turned 30K into 80 million) A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That's the kind of thing winning traders do. Ed Seykota (trader who turned 5K into 15 million) The purpose of the MT Drivers Manual is to TRANSFORM YOU INTO A WINNING TRADER. To teach you everything you need to know and we mean everything to trade with profitable expectation, year in and year out. If you are already a winning trader, then our goal is to help you win bigger and better more profit, more size, more consistency. All materials in the MT Drivers manual exist to serve this goal. Everything is secondary in relation to this goal. But here is the challenge: To transform into a winning trader, you must first transform yourself. What does that mean? In this, Part I of the Trading Psychology Field Guide, we will explore that question and start by laying out the proper mindset required to achieve the transformation (or bring it about to more full completion). If you are already profitable, the challenge will not be as great. By achieving consistent profitability adjusted for risk of course you have already been forged in the fires of adversity. But even then, there are still new levels to attain. No matter how high you have climbed, you can still climb higher speaking here as relentless climbers ourselves. (It is an irony that those most devoted to training are already the best in the world at what they do. Their passionate devotion to optimal performance is what made them the best. It is only the nonserious who fail to take training seriously.)

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MT Trading Psychology Field Guide, Part I: Transformation We begin the MT Drivers Manual with the Trading Psychology Field Guide because, quite simply, trading psychology is foundational. All results rest on it. Your long-term performance and the ultimate potential of that performance will depend on many things. But first and foremost it will depend on the quality and consistency of your mental state. The right attitudes, beliefs, and cognitive processes will prove invaluable in your quest. This does not mean psychology is the only thing, or that Jedi mind tricks are some kind of Holy Grail. It means that sound trading psychology is a necessary, but not sufficient, prerequisite for true trading success. TRADING IS DANGEROUS AND YOU ARE THE DANGER Trading psychology is critically important because of the inherent risk involved in trading. To be successful as a trader, you must understand the following: Volatility and risk make trading dangerous. But this is not a bad thing. Volatility and risk also create opportunity, which enables profitable trading in the first place. Traders who understand how to manage volatility and risk and exploit opportunities created by the presence of both can perform in markets profitably. Those traders who do not understand how to manage volatility and risk who expose themselves to excess danger, or fail to exploit opportunity, or waste their capital on suboptimal opportunities are a source of profit for the winning group. To put it another way: Trading is dangerous because you can lose a lot of money. Trading is profitable because you can make a lot of money. The first condition enables the second. The masses who lose fuel the profits of those who win. THE WINNING TRADER IS A DANGER TO OTHERS THE LOSING TRADER IS A DANGER TO HIMSELF. This has to be understood with 100% crystal clarity, so let us repeat it: THE WINNING TRADER IS A DANGER TO OTHERS THE LOSING TRADER IS A DANGER TO HIMSELF. Think about the extreme binary nature of this situation. It is natural to be a losing trader in the early stages of your journey that is called earning your dues or paying tuition. Just as highly trained medical and legal professionals have to pay for their educations, a trader has tuition fees too.

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MT Trading Psychology Field Guide, Part I: Transformation But to remain a losing trader is absolute disaster. That would be like going to school to be a doctor, and then paying ongoing tuition bills indefinitely while never getting your medical license, or never building a profitable practice. What would be the point? If you are in the markets, you ARE a danger to somebody. Either you are taking money from others (and are thus a danger to them) or you are a source of profits for others, and thus a danger to yourself. This is a hard truth. But it is a GOOD thing that 90% of traders and the majority of investors too for that matter fail to make money in markets. Why? BECAUSE THEIR FAILURE MEANS PROFIT FOR THOSE WHO WIN. (Apologies for the repetitive table pounding this is not a very warm and fuzzy view of things, we know. But it is reality. Some trading gurus prefer non-confrontational market metaphors, and push the idea that trading can be a peaceful and non-combative endeavor. Pardon the French, but we call bullshit on that. Markets are combat, plain and simple, and when you as a trading practitioner make mistakes, or allow your discipline to slip, you give money to ruthless competitors who would move heaven and earth to take it from you.) So the first part of our transformation is fully accepting that markets are dangerous and that YOU, as a winning trader, are part and parcel of that danger. As a winner, you take the profits that others count as losses A stock with mediocre fundamentals and a reliable price pattern breaks down, creating an attractive short entry. Over a period of weeks, stubborn investors who are long refuse to let go. Finally they blow out near the extreme point of the move, transferring their losses to you, the winning trader, who shorted at the right time and stuck with the position. A deeply oversold market shows every indication of an exhaustion bottom, after a blowout bout of panic selling and flat-out hysteria in the media. The vast majority of traders and investors are terrified, having lost large amounts of capital due to poor (or nonexistent) risk control. You, meanwhile, have a quiet confidence and a full measure of dry powder, because you never let the bears get into your pocket and actually made money on the way down. You are thus in position to buy in huge size and make the killing of the year, even as all around you get killed. A stubborn government refuses to face reality instead of acknowledging economic slowdown and the reality of the business cycle, the central bank loosens credit conditions in aggressive fashion, creating a mini-boom in liquidity-driven areas of the market. You recognize the age-old nature of the pattern, make money on the long side (even as permabears get short too early), and invest a portion of your profits in put options when the euphoria extreme has definitively peaked. Again you win where others lose. Over and over again, the market presents opportunity to make bad decisions and to lose money as a result of those bad decisions.

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MT Trading Psychology Field Guide, Part I: Transformation Losing traders lose money by making consistently poor decisions over time. As a winning trader, you make the money that they lose. (By the way, does this mean winning traders never have losing trades? Of course not. The key differentiator is that winning traders only lose the necessary minimum in pursuit of positive expected value, in the context of correct decisions and a winning program.) Here are some examples of bad decisions that transfer profits from the pockets of the 90% to the pockets of the 10%. Think about the following in the context of the winner on the other side: Not cutting losses quickly. As a position goes against the losing trader, a winning trader sees open profits on their winning trend position rack up. Taking profits prematurely. As losing traders grab profits prematurely because they cannot resist doing so, they create a modest pullback in an excellent position that allows winning traders to pyramid and make an even larger killing. Wasting capital on suboptimal trades. After hacking up their trading account on mediocre trades, the losing trader becomes scared money when a truly excellent opportunity comes up giving the winning trader a bigger edge as he acts in size, having not lost large amounts in the period of chop n slop. Not showing day-by-day consistency. By failing to apply his process consistently day in and day out, the losing trader misses out on a handful of key opportunities ones that showed up on the days the losing trader was out or distracted or not paying attention that in aggregate could have turned a mediocre year into a great year. Trading too big or too small. The losing trader puts on positions that are too large, and then takes an emotional and financial body blow when they dont work out. Then he puts on positions that are too small, and feels frustrated and angry when his profits feel miniscule. He then goes back to trading too big again, and the cycle repeats eventually the cycle spirals into emotional meltdown and another winning trader, cool as a cucumber, takes all his money. Not maintaining emotional control. This is the meta-error that feeds all the others. For whatever reason, the losing trader just cant let go of a market view, a position gone bad, an underperforming methodology, or what have you the result being mistakes that accrue to the winning traders benefit. DISSECTING THE 90% FAILURE RATE It seems intimidating to tackle an endeavor where 90% of participants fail. The little voice whispers: Wow, nine out of ten people fail at this? What makes me so special then? And yet, consider: Nine out of ten small businesses fail.

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MT Trading Psychology Field Guide, Part I: Transformation Nine out of ten Americans cant stay on a diet. The vast majority of Americans dont have the discipline to work from a home office. That same majority lacks the basic business skills to run a corner grocery store So before you get too intimidated by that number, ask yourself: Am I disciplined enough to work from a home office? Am I responsible enough to be my own boss? Am I capable of running a profitable small business? (The last one running a profitable small business is the trickiest. If you start, say, a landscaping business, only a portion of your success will come from how good you are at landscaping. The rest of it will come from general considerations such as sales and marketing, cash flow management, maintaining the books, and so on. The inherent complexities of running a small business are comparable to the inherent complexities of trading for a living although trading in some ways is much simpler.) If you answer yes to these questions, re, being your own boss, working from a home office, and running a small business, you have already put yourself in a ten percent minority relative to the general population. Then too, consider the following in weeding out the ninety percent: Those who trade for entertainment. Those who trade because they like to gamble. Those who trade because they hate their jobs. Those who indulge in trading fantasies. Those who trade without willingness to learn. Those who refuse to admit their mistakes. Those who are just plain stupid (dumb as a box of hammers). (Re that last one, you dont have to be a genius to make it as a trader but you cant be an absolute moron. You would be surprised how many morons miss this point.) We can think of psychological suitability on a continuum scale of 1 through 9, with 5 being the minimum acceptable level to have even a hope of trading success. Given these parameters, a surprising number of would-be traders not only have a psychological suitability score below 5, some of them have a score of ZERO that is to say, off-the-scale bad. We can further stipulate that, all things being equal, the higher you get your psychological suitability number the closer get to 9 the higher your overall odds for long-run trading success. WHY THE 90% IS GOOD NEWS Lets do a quick recap: To become a winning trader, you must transform yourself.

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MT Trading Psychology Field Guide, Part I: Transformation A key step in this transformation is recognizing that winning traders take from losing traders. The habits of losers provide profit to the winners. The 90% failure rate is not as daunting as it first appears. If you can work from a home office, act as your own boss, and run a profitable small business, you are already in the minority in a manner that is meaningfully significant to your odds of success as an independent trader. Once we move past the initial fear of the 90% barrier the notion that 9 out of 10 is daunting we can see that a 90% failure rate is very good news. Why? Because of simple supply and demand: If bad traders did not reliably lose money Then good traders could not reliably win it. If the supply of bad traders dried up Then winning traders would be in trouble. But the supply of bad traders is endless And of course, we arent just talking about bad traders here, but bad investors too. Ask yourself: How many times have you read on article on Marketwatch or Yahoo Finance or wherever saying You are too undisciplined and lazy and stupid to invest your own money? (These articles are not speaking to you specifically, of course, but to investors in aggregate.) How many studies have you seen saying the average Wall Street money manager is no better off than a dart-throwing monkey? How many mountains of evidence have accumulated that the average investor is, for all intents and purposes, a pants-wearing monkey as Barry Ritholtz has put it? How many more tall mountains of evidence have accumulated showing that, on the whole, large institutions (that run tens of billions) are just as bad when it comes to stubborn foolishness and gross lack of risk control? Or how about this from Jesse Livermore (via Reminiscences): At first, when I listened to the accounts of old-time deals and devices I used to think that people were more gullible in the 1860's and 70's than in the 1900's. But I was sure to read in the newspapers that very day or the next something about the latest Ponzi or the bust-up of some bucketing broker and about the millions of sucker money gone to join the silent majority of vanished savings Good traders make money from bad traders (and bad investors) and the supply of bad traders is endless. Human nature makes it so. For the past 100 years, the game has not fundamentally changed. It will not change for the next 100 either

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MT Trading Psychology Field Guide, Part I: Transformation

It would be depressing if it werent so comical. Endless firehoses of finger-wagging nanny advice spew forth from the financial media, directed at the great unwashed saving masses: Dont pick your own investments. Dont make decisions for yourself. And dont think for even one second you can succeed at something as dangerous as trading. Sorry but you dont have the discipline. And you are probably not smart enough. Accept mediocrity, because you are mediocre. Take the timid road and hope for the best because you dont have the brains or balls to be successful. Just buy an index fund. Listen to those who know better than you. Accept lousy returns (and the potential of negative returns) because its the best that you, a mediocre slackjawed sheep basically, can possibly hope for. THAT is the message that Forbes and Kiplingers and Smart Money and all those responsible outlets provide to the average investor on the collective whole. And you know what? For the most part for the vast majority that message is actually correct. The average individual should not be in markets. (But then remember the average American has the self-discipline of a cocker spaniel and lacks the acumen to run a corner grocery store...) But you are not average are you? or else you wouldnt even have read this far As a winning trader, your profits do NOT depend on: a booming economy a hot new technology inside information super powerful computing software a secret holy grail trading recipe a magical genius level talent or anything of the above nature Instead, your profits depend on the continuing presence of bad traders (the 90%) making mistakes that allow you, the 10% minority, to profit over time and that supply will NEVER END. THERE ARE LOSERS AND THERE ARE WINNNERS. YOU MUST VOW TO BECOME THE WINNER. YOU MUST EMBRACE THE WINNERS STATE OF MIND, AND THEN EXECUTE AS A WINNER EVERY SINGLE DAY. AND YOU CANNOT DO THIS WITHOUT A TRANSFORMATION A TRANSFORMATION THAT CROSSES OVER INTO EVERY ASPECT OF YOUR LIFE. Again, apologies for the shouting. But we are getting into some real nitty gritty here. We are digging into some hard truths. WINNING THE MOST IMPORTANT GAME

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MT Trading Psychology Field Guide, Part I: Transformation Now its time for a personal question the answer to which has relevance to our mission here (transforming you into a winning trader). The question is this: Are you a winner at the game of life? Think about it for a moment. What is your instinctive answer? Here are some ways to think about it: Am I a winner at the game of life? Do I feel successful in the areas of life that matter to me? In my relationships my financial goals my personal health? Do I take a general winners attitude to things? Do I have a winners demeanor? Am I treated as such by the people around me? Do I believe in myself as a confident winner would? This question is important because of the many psychological ramifications. If you see yourself as a winner at the game of life then you already know that winning is addictive (in a positive way). When you are a winner, you want to win MORE. You want to climb higher have more intense experiences love and feel even more deeply within the context of a healthy psychology, this love of winning is a good thing. If you do NOT see yourself as a winner at the game of life then this has to change. You must RESOLVE to become a winner. You must resolve it deep down, at the innermost core of your being, as this simple decision to become a winner, no matter what, will have ripple effects out to all actions you undertake and everything you do. Let us refer to that ancient authority, Aristotle: Excellence is an art won by training and habituation. We do not act rightly because we have virtue or excellence, but we rather have those because we have acted rightly. Excellence, then, is not an act, but a habit. Excellence is NOT AN ACT, BUT A HABIT. Profitable trading is NOT AN ACT, BUT A HABIT. Winning at the game of life is NOT AN ACT, BUT A HABIT. To become a successful trader you will have to show a consistent commitment to excellence in your discipline, in your commitment, in your passion and drive and focus. You will have to maintain this discipline day in and day out, including the days when you dont want to in fact especially on the days you dont want to. To maintain this discipline you will have to draw on your personal resources as a competitor playing a competitive game. You will have to tap your stores of energy and will power and emotional control, day after day. You will also have to replenish those resources on a regular basis which means going to bed drained, waking up recharged, and doing it all again.

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MT Trading Psychology Field Guide, Part I: Transformation You cannot do this without the motivation that comes from SEEING YOURSELF AS A WINNER from seeing the EXCELLENCE OF THE PRIZE and knowing the pain is all worthwhile. You need not START as a winner perhaps you are even starting from a dark pit of despair and seeing a light at the end of the tunnel for the first time in years but wherever you begin, you must RESOLVE TO WIN and then TAP INTO THE FIRE that arises from that What a bunch of crazy talk! Stupid motivational B.S who needs this touchy feely junk, right? If thats the way you feel, then good luck to you we feel it is imperative to say EXACTLY what we feel here, and lay out the truth EXACTLY as we see it from our perspective as traders who have walked the path of blood and sweat and tears to create your best shot at succeeding in this most noble and challenging of goals. Because it is possible that becoming a successful trader and moving through the various levels of profitability and success, one by one turns out to be the most CHALLENGING and FULFILLING thing you have ever done. (No guarantee of course but many would say this, as would we) It is the level of challenge that fuels our sense of urgency here. The challenge is proportional to the prize. If someone told you it was possible to do the following: Make hundreds of thousands or millions or tens of millions And make it working for yourself, from your own home Or while traveling around the world With no boss, no HR, no payroll And to do it by playing an intensely competitive game In which your profits were taken from the pockets of others Would you really expect a prize like that developing the competitive skill to achieve it to be easy? Successful traders make the winning appear easy on the surface, just as successful golfers and high stakes poker players make their craft look easy at casual glance. When you see a guy making millions per year on the PGA tour, sinking putts in the sunshine, it really does seem like nothing to it. And sometimes, when you are flowing and in the zone, there really is nothing to it because all your prior investment, your blood, sweat, and tears, has compounded to create that easy moment. But ask that world-class player how he got to that spot what went into the transformation that took him to that level As Morpheus told Neo in the Matrix, I can only show you the door. Youre the one that has to walk through it. Walking through the door of consistent profitability leaving behind the 90% to become one of the 10% -- requires more than just methodology and process knowledge.

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MT Trading Psychology Field Guide, Part I: Transformation It requires a commitment to consistent levels of excellence that are beyond the scope of the general population which in turn requires routine energy expenditure that can only be fueled by deep core motivation the type of well-spring motivation that only winners have access to. DYING AND CHANGE Over the course of the next few months if you continue on the Drivers Manual path with us we will share all kinds of trading-specific and methodology-specific knowledge. Well get into swing trading filters price action setups entry and exit parameters position sizing and monitoring pyramiding, macro analysis, structured options positions and far more But here is the thing: It will all be WORTHLESS if you arent willing to make the initial transformation to change and evolve as we move forward on the trading path If you realize that all things change, there is nothing you will try to hold on to. If you are not afraid of dying, there is nothing you cannot achieve. ~ Lao Tzu When the way comes to an end, then change. Having changed, you pass through. ~ The I-Ching
Neuroplasticity: The brain's ability to reorganize itself by forming new neural connections throughout life.

~ medterms.com To say that all things change means that we as human beings you and I as traders can INITIATE AND CULTIVATE TRANSFORMATIONAL CHANGE. With nothing to hold on to we let go of ego and pride excuses and procrastination doubt and disbelief As our old ways come to an end, we change and then pass through to new heights of learning, understanding, and performance. Through the property of neuroplasticity our ability to, in a very literal sense, rewire our brains to a superior configuration vs factory settings we can adopt the mindsets, belief systems, and cognitive processes necessary to become lean, mean, consistently profitable trading machines. This concludes Part I of the Trading Psychology Field Guide. In Part II we will cover Radical Cognitive Therapy specific mental processes and memory tools to cultivate and maintain your optimal psychological state. Then, after that, we will delve into detailed specifics of your trading journey so get ready

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