Wisdom From Various Classic Books

[idaxtrader]

In every one of them I lost money. It served me right, because I was trying to force the market into giving me what it didn't have to give to wit, opportunities for making money.

More than once in the past I had run up a shoe string into hundreds of thousands. Sooner or later the market would offer me an opportunity.

I convinced myself that whatever was wrong was wrong with me and not with the market. Now what could be the trouble with me? I asked myself that question in the same spirit in which I always study the various phases of my trading problems.

I thought about it calmly and came to, the conclusion that my main trouble came from worrying over the money I owed. I was never free from the mental discomfort of it.

As I studied the problem I saw that it wasn't a case that called for reading the tape but for reading my own self. I quite cold-bloodedly reached the conclusion that I would never be able to accomplish anything useful so long as I was worried.

To take the cold-blooded, dispassionate attitude toward the game that comes from the ability to afford a few minor losses such as I often incurred in testing the market before putting down the big bet.

Must also know himself and provide against his own weaknesses. There is no need to feel anger over being human. I have come to feel that it is as necessary to know how to read myself as to know how to read the tape. I have studied and reckoned on my own reactions to given impulses or to the inevitable temptations of an active market, quite in the same mood and spirit as I have considered crop conditions or analysed reports of earnings.

But I sat tight and instead of listening to my loud-mouthed hopes or to my clamorous beliefs I heeded only the level voice of my experience and the counsel of common sense.

As a matter of fact I wasn't the same man, for where I had been harassed and wrong I was now at ease and right.

[idaxtrader]

I suppose, was the need to satisfy the public's insatiable demand for reasons for each and every price movement.

Was invented as an easy way of supplying reasons to those speculators who, being nothing but blind gamblers, will believe anything that is told them rather than do a little thinking.

She knew how I felt about stock speculation as practised by outsiders.

There are some who can't resist the craving and always look forward to those jags which they consider indispensable to their happiness.

Men do not take tips because they are bally asses but because they like those hope cocktails I spoke of.

Somebody asked him if making money in the Bourse was not a very difficult matter, and he replied that, on the contrary, he thought it was very easy. "That is because you are so rich," objected the interviewer. "Not at all. I have found an easy way and I stick to it. I simply cannot help making money. I will tell you my secret if you wish. It is this: I never buy at the bottom and I always sell too soon."

Investors are a different breed of cats. Most of them go in strong for inventories and statistics of earnings and all sorts of mathematical data, as though that meant facts and certainties.

He believed in asking his own questions and in doing his seeing with his own eyes. He had no use for another man's spectacles.

That is, it did not behave as it should have behaved to make me feel I was wise in buying it.

The training of a stock trader is like a medical education. The physician has to spend long years learning anatomy, physiology, materia medica and collateral subjects by the dozen. He learns the theory and then proceeds to devote his life to the practice. He observes and classifies all sorts of pathological phenomena. He learns to diagnose. If his diagnosis is correct, and that depends upon the accuracy of his observation -- he
ought to do pretty well in his prognosis, always keeping in mind, of course, that human fallibility and the utterly unforeseen will keep him from scoring 100 per cent of bull's eyes.

And then, as he gains in experience, he. learns not only to do the right thing but to do it instantly, so that many people will think he does it instinctively. It really isn't automatism. It is that he has diagnosed the case according to his observations of such cases during a period of many years; and, naturally, after he has diagnosed it, he can only treat it in the way that experience has taught him is the proper treatment. You can transmit knowledge -- that is, your particular collection of card indexed facts, but not your experience. A man may know what to do and lose money -- if he doesn't do it quickly enough.

Experience has taught me that the way a market behaves is an excellent guide for an operator to follow.

Observation gives you the best tips of all.

When the men who ought to want a stock don't want it, why should I want it?

I am a trader and therefore looked for one sign: Inside buying. There wasn't any.

It was the difference in behaviour.

My years of experience in trading told me that the line of least resistance had changed from up to down.

It was not difficult to be both fearless and patient. A speculator must have faith in himself and in his judgment.

It is the character of the advance or of the decline that determines for me the correctness or the fallacy of my market position.

Knowledge is power and power need not fear lies -- not even when the tape prints them. The retraction follows pretty quickly.

"The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past."

I can generally tell the moment the character of the buying in the stock makes it imprudent for me to be short of it.

In the stock market, as in warfare, it is well to keep in mind the difference between strategy and tactics.

He had in superlative degree the qualities of mind that are associated with successful speculators anywhere. That he did not argue with the tape is plain. He was utterly fearless but never reckless. He could and did turn in a twinkling, if he found he was wrong. (??? Nearly 100 years before Mark Douglas)

Manipulation is the art of advertising through the medium of the tape. The tape should tell the story the manipulator wishes its readers to see. The truer the story the more convincing it is bound to be, and the more convincing it is the better the advertising is. A manipulator today, for instance, has not only to make a stock look strong but also to make it be strong.

I neither have nor adhere to an inflexible system. I modify my terms and conditions according to circumstances.

Well, when the price line of least resistance is established I follow it, not because I am manipulating that particular stock at that particular moment but because I am a stock operator at all times.

I wasn't looking for the good or the bad points, but for the facts, such, as they were.

Realise the wisdom of playing the game dispassionately. Well, you would be surprised at the frequency with which some of our most successful promoters behave like peevish women because the market does not act the way they wish it to act. They seem to take it as a personaln slight, and they proceed to lose money by first losing their temper.

And is not governed in his actions by conditions but by fears,

[idaxtrader]

General wisdom is less valuable than specific savvy.

Without any effort on their part they would have been in the strong strategic position that I always try to find myself in when I am manipulating a stock.

The absence of inside support is generally accepted as a pretty good bear tip.

All I considered was what should, could or might help or hinder me in that task.

Nothing but a gambler, but he had real ability and a strongly developed aptitude for the speculative game. At the same time his reputed indifference to highbrow pursuits made him the hero of numberless anecdotes.

I suppose that helped, for nothing succeeds like success.

But on general principles it is just as well to provide for any and all contingencies. It's plain sense.

If the most successful manipulation consists of that in which the desired end is gained at the least possible cost to the manipulator.

Getting angry doesn't get a man anywhere. More than once it has been borne in on me that a speculator who loses his temper is a goner. In this case there was no aftermath to the grouches.

Carefully laid plans will miscarry because the unexpected and even the unexpectable will happen. Disaster may come from a convulsion of nature or from the weather, from your own greed or from some man's vanity; from fear or from uncontrolled hope.

The old-fashioned bucket shops are gone, though bucketeering "brokerage" houses still prosper at the expense of men and women who persist in playing the game of getting rich quick.

The speculator's deadly enemies are: Ignorance, greed, fear and hope.

In addition to trying to determine how to make money one must also try to keep from losing money. It is almost as important to know what not to do as to know what should be done.

The public always wants to be told.

The experience of years as a stock operator has convinced me that no man can consistently and continuously beat the stock market though he may make money in individual stocks on certain occasions. No matter how experienced a trader is the possibility of his making losing plays is always present because speculation cannot be made 100 percent safe.

There is no asphalt boulevard to success in Wall Street or anywhere else. Why additionally block traffic?

[idaxtrader]

I thought I would post my notes from one of my favorite books. Enhancing Trader Performance by Brett Steenbarger. This is a great book I highly recommend that people read it in its entirety. Its very concrete unlike some other good books such as Trading in the Zone.



Perhaps my greatest shock has been the recognition that a significant proportion of emotional problems affecting traders result from departures from the principles of sound training. XIII

When they do not employ systematic training to translate talents into skills, and when they violate prudent risk management in eager hopes of rapid profits, they create needless frustrations and even traumas. XIII


He was cut from his team in his sophomore year of high school. Any hopes of obtaining a college scholarship were quickly receding. Most aspiring athletes would take their lumps, join a local league or intramural squad, and move on with their lives. Michael Jordan, however, was not like most young athletes. 1

He responded to the cut by practicing day after day. When he felt too tired to continue, he forced himself to recall his cut from the team and drove himself harder. 1

One of those factors is finding a performance niche: a specific activity that is most likely to capitalize on your talents and interests. 2

Al kept himself emotionally balanced, taking liberal time away from the screen after setbacks. He honored his stops religiously and didn’t become irate at losses. He consistently expressed optimism over his development and a love of trading. 3

Mick was anything but balanced, taking losses almost as personal affronts. He periodically violated his risk management guidelines and could not break from the markets until he had rehashed all his mistakes and fumed over each. 3

Most of the trading psychology books you’d read would give the trading edge to Al, the more disciplined, less emotional performer. But Al, the novice, never did succeed at trading. Mick was—and remains—a multimillion-
dollar performer. The experience of working with many Micks and Als—and seeing common wisdom about trading success shot down time and again—convinced me to write this book. 3

No doubt, there’s a bit of the young Michael Jordan in Mick. He doesn’t accept defeat lightly, and he uses losses to drive himself forward. That is characteristic of elite performers, we shall learn, but there’s something even more basic that distinguished Mick from Al. In fact, it’s so basic that K. Anders Ericsson, perhaps the most prolific researcher in the field of performance, considers it the cornerstone of expertise. Think of the difference between Al and Mick as something that occurs every day, for approximately 250 trading days a year. Both Al and Mick trade frequently enough that they have winning and losing trades each day. Al puts his losses behind him and clears his head, to focus on the upcoming trade. Mick fusses and fumes, but uses the losses to review his trading, figure out the market (and his mistakes), and get his money back. Over the course of a year, Mick’s reviews ensure that he has easily experienced twice as much market action as Al. Moreover, Mick has systematically reviewed his performance and made constant adjustments. Al, though more relaxed, has little basis for detecting and correcting his errors. Mick, for all his emotionality, has become a learning machine, using losses to improve his trading. Ericsson refers to this as deliberative practice, and it is a hallmark of expert performers. Through guided practice, experts open themselves to feedback and, as a result, become better decision makers. We often hear the phrase “practice makes perfect,” but performance experts in sports emphasize that it is perfect practice that makes perfect. 4

Competence precedes confidence: Winning mind-sets result from mastery, not the reverse. 4

Practice is the cornerstone of expertise because it multiplies experience. It provides us with far more experience than we could ever gain during formal performance or competition. 5

The essence of deliberative practice is what I call the learning loop. A learning loop is an attempted performance, followed by specific feedback about the success/failure of the performance, followed by renewed efforts that incorporate the feedback. 6

Take conscious steps to stand outside themselves and watch their performances, correct mistakes, and jump-start a learning process. 7

An inner urge to reach ever higher levels of performance. 8

Next to the leave-everything-on-the-mat work ethic of a Dan Gable, the effort of maintaining a trading journal hardly requires a laboring instinct. Yet the majority of traders won’t sustain even this level of performance commitment. Why is that? 8

There it was. This was not a trader who was drawn to markets the way Gable fiercely embraced wrestling or Jordan pursued basketball. He wanted to trade because he didn’t like the alternatives. The alternatives meant eight hours a day of effort and the loss of the freedom to do what he wanted to do. But elite performers are doing what they want to do when they labor far more than eight hours a day on their craft. 8

A middle phase. At this point of development, the performer concentrates on one or more specific fields of performance for serious pursuit. 10

A late phase. For a limited number of individuals, mastery of the performance activity becomes a primary life focus. The goal is no longer competence, but the development of one’s talents and skills to the fullest. There is a commitment to self-development. 10

The aim of such practice is the internalization of complex skills, so that high levels of performance become routine. 10

Without a middle period of competence development, there is no readiness for the rigors of mastery. Absent the joys of an initial, exploratory phase, there will be no sustained commitment to skill development. 11

How much time does it take to develop expertise? Research tells us that a minimum of 10 years is required. Indeed, this “10-year rule” is one of the more durable findings in expertise research spanning sports, the arts and sciences, chess, and medicine. There is so much knowledge and skill required by most fields that elite performance necessitates years of development. 12

The greats do not become great by working hard; they work hard because they find a great niche: a field that captures their talents, interests, and imagination. 13

He watches what large traders are doing by monitoring volume on a trade-by-trade basis and tries to decide when they have strong or weak hands. He religiously avoids thinking about the market lest he become locked into opinions
the next day. 15

Finding the right niche makes all the difference in the world when it comes to performance. 17

Each group finds its own path through the developmental process, cultivating what comes naturally and most enjoyably to them. 18

It’s not whether you can be a good trader; it’s whether you can find the trading that’s good for you. 19

We started by distinguishing experts from novices and found that experts are engaged in learning loops fueled by deliberative practice. 19

Key to Collins’s findings is the notion of the Hedgehog Concept: the idea that great companies simplify by focusing on their strengths. The three elements of the Hedgehog Concept are:
1. What you can be best at
2. Where you can be most profitable
3.What you are most passionate about 23

Good companies that never reached greatness, Collins found, strayed outside the circles defined by each of these elements. The great companies focused all their efforts at the intersection of those three circles. 23

What are your talents? Where is there opportunity in the markets? What turns you on? There you will find your learning efforts turbocharged by multiplier effects, yielding not just competence, but expertise. 24

An initial step in finding your distinctive place in the trading universe is self-assessment. 25


When you have found your niche, you don’t need discipline to do the right things; you won’t want to do anything else. 29

People develop their potential by building on their strengths, not by trying to overcome their weaknesses. Successful performers, they argue, work around their shortcomings, but achieve great things by making maximum use of their strengths. 40

Your ideal trading niche will be one that allows you to exercise your greatest talents while working around your weaknesses. 40

You will know that you are close to your market niche when you develop a feel for market patterns quickly, find yourself fascinated by the patterns you see, and act readily upon your perceptions 42

Other traders who are less emotional, more disciplined, and more systematic may fail because they lack strengths that readily translate into trading edges. 43

Only such a bond creates the immersion that leads one to internalize a field, not just learn about it. 53

Stated differently, ordinary learning generates ordinary performance. Immersive learning—sparked by the crystallizing experience—is the motive force behind Collins’s flywheel, generating multiplier effects that build expertise. 55

Creativity—the novel seeing and doing born of unique, immersive experience—be the ultimate source of edge in the markets? Is it creativity that distinguishes great traders from those who are merely good? 55

Equally important, he shifted his perception. What had been a threat was now a source of opportunity. Chad now began to scan the market for places where sharp moves left overexposed traders vulnerable. 57

Indeed, he became so adept at recognizing when others were trapped (as he had been) that other traders would immediately seek him out following sharp market moves to get his read on the market. 58

This new perception—his crystallizing experience—reorganized his views of the market. What was danger became opportunity; what was frustrating now was exciting; what was incomprehensible made sense. The competence
he developed was not just that of self-control. He developed new ways of seeing and doing. His was an exercise in creativity, not therapy. 58

“Only those who have the patience to do simple things perfectly,” the saying goes, “will acquire the skill to do difficult things easily.” 60

His rage to master the game was so strong that it obliterated the normal distinction between work and play. 62

At some point in the development process, performers begin to integrate their activities into their identities. 62

The kiss of death for expertise is comfort. 64

The performer becomes so absorbed in the performance that it seems to flow effortlessly. 65

Our ability to sustain the immersion that generates multiplier effects depends upon the experience of competence. Without the perception of mastery, there can be no learning that generates expertise. 70

To a large degree, our moods are moderated by our perceptions—and especially our perceptions regarding our own competence. 70

We cannot be divided and also immersed in the flow experience that generates expertise. 71

[idaxtrader]

At this optimal state of arousal, the performer is divided by neither the understimulation of boredom nor the overstimulation of anxiety. Nor is there a divide between real and ideal that cannot be bridged. Flow occurs when there is a perception of likelihood of success at an important task, but not certainty. 71

Boredom, anxiety, and depression interfere with learning because they are distractions: They divide attention. Positive thoughts born of overconfidence are equal distractions. Interestingly, we need to feel competent to develop competence: The perception of competence generates the flow that enhances concentration and learning.

He was like the ordinary student, trying to build competence through normal efforts and practice. He could not immerse himself in markets to achieve the competence that leads to expertise. 72

Divided attention is the source of most performance shortcomings. 72


First-order competence is optimism about doing; second-order competence is optimism about competence building itself. A first-order performer feels competent to navigate through New York City but not London. A second-order performer feels competent to quickly learn the layout of any city. 72

Once they realized they could bridge the gap between real and ideal, they could face their shortcomings without fear or distraction. 73

Those who bounce from strategy to strategy are apt to pursue each one until it produces failure, leaving behind a string of disappointments. The resilient performer has cultivated enough second-order competence to stay in the zone even when the inevitable strings of setbacks occur. 75

Armstrong reveals an important secret about his ability to overcome this late-stage and often-fatal cancer. He explains that cancer gave him “a new sense of purpose” (page 151), replacing biking as his reason for being. He would start a cancer foundation and help others fight the disease. His role was no longer cyclist; he now defined himself as a survivor who would help other survivors. 75

His new goal—and his redefinition of who he was—no doubt contributed to that recovery. 75

This pervading sense that one is competent to master changing conditions allows performers to develop resilience to setbacks that would overwhelm their peers. Very often, as with Armstrong, this resilience is fueled by the performer’s creation of a new identity—one that redefines the challenge ahead. 76

The rage to master is fueled by the sense of self-mastery, and that is generated by experiencing and overcoming changing conditions. 76


If cancer and concentration camps cannot keep the human spirit from mastery, no challenges in markets, careers, or relationships are too
great to overcome—as long as you have the why. 79

There is no performance without purpose. 79

What does it mean to structure learning for success? Csikszentmihalyi outlines several preconditions of the flow experience in his book Creativity: Clear goals at each step of the learning process. Immediate feedback regarding one’s actions. A balance between challenges and skills. 80

He could not have experienced himself as competent. The coordination exercises, visualizations, and practice sessions for his swing, however, allowed him to master basic skills and develop a sense of confidence and ability. Cordoba’s feedback was essential to this process. He helped his student feel like a winner, and his student responded.

Cordoba’s genius in working with Sharon was his breaking down of complex tasks into component skills that could be rehearsed with clear goals and feedback. This is close to a universal principle in performance development: Wherever we encounter expertise, we see the intensive rehearsal of component skills. Not only does this drilling build performance to the point where it becomes automatic, it also cultivates the sense of mastery by creating positive mirrors. 83

Dan Gable explains how he consistently elicited excellencefrom his teams. He broke each skill into several segments and then demonstrated each with a clear explanation. 83

For now, the important thing to realize is that you can break trading down into bite-size pieces, rehearse those, develop mastery, and keep yourself in the flow state. Drilling is fun once we get it, and we are most likely to stick with something that feels good. The perfect practice that makes perfect develops performance-specific skills but also cultivates the conditions for sustained concentration, enhanced learning, and increased confidence. 84

Set goals for each practice session to generate immediate feedback. Each practice session’s objectives would be based upon progress from previous sessions. Goals would be specific, to track gains in learning. 87

Drill skills to promote implicit learning. We would make skills automatic through rapid repetition, solidifying learning, and providing resistance to emotional interference. 87

Competence requires curriculum: a systematic approach to learning. 87

As skills are brought to increasingly realistic performance settings, coaches generally advocate working thoroughly on one cluster of skills before starting others. Chris Carmichael and Lance Armstrong, detailing performance programs for cyclists, use the analogy of painting a house. Painting a wall of one room, then going to the ceiling of another, and then to a hallway would be inefficient. It makes more sense to complete one room at a time. 88

Carmichael and Armstrong describe four-week blocks of practice for each skill module before working on subsequent modules. Thus, for example, a cyclist may spend four weeks working on sprinting, the next four on climbing. 88


Divide overall performance into a set of skill modules that include the processes of monitoring markets for favorable trading conditions, researching/identifying trade ideas, working orders/entering positions, managing trades, and working orders/exiting positions. Assign time periods to each module to create a curriculum, with the most basic skills preceding more specialized ones. Within each period, break each module into component skills and mix the drilling of these skills to create realistic enactments. Establish explicit, challenging, but attainable training goals for each practice session and period and collect feedback about performance to track progress toward goals. Utilize feedback to set goals for the next practice sessions. Utilize feedback to make changes in the pacing of the curriculum, extending periods if progress is slower and moving ahead if progress is rapid. 89

Amateurs learn by performing, creating repeated experience without structure or feedback. Professionals learn by drilling, progressing through structured sequences of skills with the assistance of feedback and mentoring. 90

Despite this seemingly obvious truth, we see few traders attempt to learnthrough training. Instead, they approach trading in the amateur mode, only to lose money and court frustration. 90

[idaxtrader]

McNab describes a variety of training strategies that thoroughly and competently train ordinary soldiers and bring them to the elite levels of Special Forces troops. The key to such strategies, he emphasizes, is realism. For example, soldiers must be exposed to the sights and sounds of the battlefield or they will become disoriented under actual wartime conditions.Without prior exposure to the intense fighting conditions that they encountered, they froze under pressure. This is highly relevant to trading, where the real-time conditions of risk and reward create their own battlefields. 92

Traders progress from simulating skill modules—entries, risk management, and so on—to placing and managing trades, then trading full days in simulation mode, and eventually putting money on the line with one-lots. Facing—and mastering—challenges time after time creates the battle inoculation that allows traders to keep their cool under the most
pressured circumstances. 92

It is the role of the mentor to ensure that the increasing demands of training build the confidence of performers, rather than defeat them. 92

Your greatest challenge will be to create learning conditions that test you but do not break your spirit. 92

As your own mentor, you provide that competent and confident leadership by creating a steady stream of challenging goals that build upon one another. After struggling with one goal after another and succeeding, you will face the markets with a reservoir of confidence unknown by most market participants. Like the soldiers, you will be battleproofed—the hallmark of true competence. 93

Let’s step back and summarize. When we look at the training of athletes, professional musicians, therapists, physicians, soldiers, and chess players, we see the same three-step progression:
1. Breaking performance into component skills
2. Assembling modules of skills into simple simulations of performance
3. Requiring skill enactment in simulations of gradually increasing complexity


This is why every single elite training program I have been able to find—in sports, chess, health care, and the military—emphasizes progressive skill building through a structured program of practice. 100

Your exercise is to find your frame and just one way of trading it. Keep it simple. Become good at one kind of trade. That will provide you with a foundation for further development. 107


Guided activity in the form of training and mentorship challenges the performer and builds the sense of competence,
sustaining a flow state of high motivation, concentration, and learning. In this state, growth proceeds rapidly. 111

Expertise is skill internalized to the point of habit.116


Ericsson’s research suggests that the concentration of the performer is an essential element in deliberative practice—another factor that distinguishes it from playful experience with a performance field. This means that the duration of effective practice sessions must be limited to allow for rest and recuperation of attention and focus. Naps and rest periods are common among elite performers, reflecting the intensity of activity during practice. In addition to recuperative breaks, the presence of concrete goals and immediate feedback help to keep performers focused on learning during practice sessions. 118

Eventually you could do those things in your sleep. In fact, given the frequent occurrence of hallucinations among sleep-deprived recruits, there’s a sense in which they are doing it in their sleep—which is the whole point. Through repetition, even extreme challenges become automatic. 119

The elite in any field move from competence to expertise by creating performance challenges more demanding than anything they’re likely to experience day to day. We evolve by creating and adapting to challenges that lie outside our comfort zone. 120

These traders have seen so many markets and market scenarios that they develop an anticipatory sense—a
conviction that something is likely to happen because it has happened so many times before. 120

His formula for hitting success was simple: “Get a good pitch to hit.” 122

In a very important sense, when traders develop expertise, the markets they see are different from the markets
everyone else sees. 125

Expert traders similarly chunk information into meaningful groups, aiding their recall and speeding their responses to market events. 126

Rather, experts have accumulated so much implicit learning that they process events more efficiently and effectively than their counterparts. Their training has provided them with new ways of seeing the world based upon the grouping of their perceptions. 126

Novice traders reason in the backward fashion: They look for information to support their opinions rather than assemble their trade ideas from their readings of the market. Expert traders often talk about “letting the market come to me”—another way of saying that the right trades, like the right diagnoses, will emerge from gathering the right data. This is only possible, however, when traders, like physicians, have internalized a kind of decision tree that guides the circular process of collecting information and formulating tentative ideas. 128

Decisive action begins with efficient perception and organized information. 128

Cleeremans and colleagues found that implicit learning is actually an acquisition of knowledge about the statistical structure of events. Williams and Starkes, writing in a completely different field, find that experts possess knowledge about situational probabilities that guide their actions. 130

This accounts for an interesting finding from the research: Not only do expert players make more accurate assessments of ball location, they are also more confident in their assessments than nonexperts. 130

He has learned that, when he sees X, he should do Y. The X-Y linkage, repeated many times across varying conditions, becomes part of his instincts. My explicit processing cannot hope to keep up with such automatic, implicit thinking. 131

This is not merely the will to win, as Bob Knight emphasizes, but the will to prepare to win. 133

Contrary to the advertisements common in the popular media, trading expertise is not a function of possessing a superior indicator, mind-set, or chart pattern. Expert traders process market information differently from nonexperts, cultivating sophisticated mental maps that enable them to eliminate irrelevant information and implicitly process the patterns amidthe market noise. Armed with such maps, expert traders respond more rapidly, confidently, and accurately to market events than do nonexperts. 134

Like Tiger and Nolan, Ted Williams dominated his sport by the consistent application of proper mechanics. 137

Great results come from small improvements that are implemented with consistency. 138

[idaxtrader]

Specific Skills that Comprise Trading Mechanics
Trading Mechanics
• Idea development. Translating observations about the market into specific trade
ideas; gathering information the right way to produce useful conclusions.
• Assessment of market conditions. Evaluating whether the market is trending,
rangebound, volatile, or slow; ensuring that the trade idea is appropriate for the
present market.
• Order placement. Using the kinds of orders appropriate for market conditions to
maximize the likelihood of getting filled at desired prices.
• Order location. Selecting prices for orders that correspond to turning points in
supply and demand, thereby minimizing drawdowns and maximizing
opportunity.
• Order division. Scaling into positions to reduce initial risk exposure and obtain
superior average entry prices; scaling out of positions to secure profits and
benefit from favorable movement.
• Position sizing. Risking enough on a trade to make a meaningful contribution to
profitability while avoiding risk of ruin under adverse circumstances.
• Position diversification. Spreading risks among uncorrelated trades so as to
benefit from market participation but limit risk exposure; selecting trading
instruments most likely to benefit from the trade ideas.
• Exit determination. Defining clear criteria for when your trade ideas are wrong;
implementing proper stops to manage the risk exposure of each trade.
• Exit flexibility. Moving stop-loss points to protect profits while retaining
profit potential.
• Speed of execution. Making and implementing decisions rapidly.
• Accuracy of execution. Minimizing errors in order placement.
• Efficiency of information processing. Monitoring relevant variables in real time
to properly manage trades. 140


they traded well, they do not necessarily mean that they made a lot of money. They mean that they were fundamentally sound. Mechanics are rarely glamorous, but they account for a surprising degree of profitability. 141


Carl was a study in poor mechanics. Let’s play observer and review his
shortcomings:
• He had no real trade idea. “We’re not going lower” is not a firm foundation for a rational wagering of one’s trading stake. The reality was that we weren’t going anywhere, as long as the market was trading a few dozen contracts per minute on average. Without a valid trade idea, he had no edge in the marketplace.
• He gave up the edge needlessly. In a slow market, there was no urgency to getting in. If he had a valid reason to enter the market, he could have worked a bid and gained a tick simply by being patient. Instead, he took the offer after the market had already ticked higher, exposing him to those who had worked bids and now could take their scalping profits.
• He wagered impulsively. A good trending market will give multiple opportunities for entry, making it easy to scale into a trade even if you do have to go at the market as the trade picks up on a breakout. Entering with his maximum position exposed Carl to maximum risk before he had an opportunity to see if the position would move his way.
• He exited emotionally. Instead of exiting when the trade didn’t go his way, he exited when it went against him. If his trade was truly predicated on a breakout move or surge of buying, it should have gone his way promptly. Instead, he waited until it reached his pain threshold before exiting.
• He did not process information effectively. At no time during Carl’s trade was there evidence of bidders entering the order book or lifting offers in size. He failed to see bidders cancel their orders prior to the market moving against him, so he could not exit quickly. 142

My goal in working with traders such as Carl is to enable them to become keen observers of their own mechanics. This means emphasizing trade execution as much as overall profitability, and it means placing emphasis on the management of trades, from position sizing through exits. The majority of traders want to think about trades as things: events that are
either profitable or not profitable. The mechanics approach to performance, however, views trades as processes. 142

Much of profitability, I’ve found, is simply staying away from markets and market periods that do not offer a distinct edge. 151

To the extent, however, that you can break your information gathering down into the kinds of checkpoints described by Nolan Ryan, you turn much of the process of selecting tactics into one of mechanics. The bottom line is that, for any style of trading, there are mechanically sound and unsound ways to gather information and make decisions from the data. 151

One mark of a truly expert trader is the ability to rapidly adapt trading tactics to shifting market conditions. When you think about it, this is also a hallmark of expert emergency room physicians, battlefield commanders, and coaches. 151

Nothing so interferes with a performance as thinking about the performance while engaging in it. Most of us are familiar with the performance anxiety that affects speakers and test takers: The worries about how one is doing take one out of the flow of doing. For this reason, your observation and evaluation of your mechanics, tactics, and strategies need to occur outside of trading. While you’re trading, you’re the trader. All other times, you’re the mentor to that trader. 157

The structural edge, to which I have alluded earlier, is based upon knowledge of the participants in the equity
index marketplace. Many of these are day time frame participants, and many are highly leveraged. This creates situations in which traders behave as a herd, jumping aboard whatever movement they can detect in the market.
It also creates situations in which these same traders have to exitpositions quickly as part of risk management. Because of this, much of the day’s trade in the ES consists of waves of buying and selling attributable to herd behavior and the mass exiting of positions that are going underwater. Identifying spots where the herd is loaded up in one direction and will need to unload their holdings if their anticipations prove incorrect provides a structural edge. 160

Profits take care of themselves when you have a legitimate edge and execute properly. 161

Pele blended speed, vision, and accuracy as no one had previously. His formula for success? “Practice is everything.” 164

performance is not about speed, but rather about process. “Being fast comes with having lean processes. If you just focus on speed, you wind up with mistakes.” This is why instructors at PIT advise aspiring crew members, “Go slow to go fast.” The goal is smooth, lean operation— not hurried behavior. 165

Surprise is the great enemy. All training is for naught if we are taken by surprise and cannot make sense of our experience. 166

Markets will move—or fail to move—just beyond the level of expectations of participants. That is the only way the ambusher can take money from the ambushed. Preparing for expectable market events is important, just as preparing for routine car maintenance is the bread and butter of any pit crew. It’s the preparation for the unexpected, however, that, over time, wins the Winston Cup. 167

his challenge that he could win any dogfight—ride the tail of any challenger—within 40 seconds. His ability was to operate from inside the mind-set of his adversary: what he called the OODA (observation, orientation, decision, action) loop. 167

When you become predictable in a dogfight, you are inside the OODA loop of the other pilot. The pilot who wins is the one who stays outside the opponent’s loop. This is why the surprise, speed, and violence of action mentioned by Machowicz are so effective. A predictable attack, such as when British troops would line up in formation in their red coats, complete with flags flying and music playing, was within the OODA loop of savvy colonists. It is the swift, unexpected, violent attack of the guerilla force that can unnerve a much larger opponent. 167

What is well known and well publicized—from chart patterns to news stories—represents the OODA loop of the average market participant. If what you lean on for your edge is information that can be readily accessed by any trader possessing a decent real-time charting or market depth application, you are within the OODA loop of the pros, not outside it. 167

My particular focus would be on the triggers for this frustration: the market and trading events that precede her loss of control and deviations from sound mechanics. We would then work on specific brief therapy techniques for deprogramming these triggers and gaining cognitive and physical control over frustration 174

The bottom line is that we cannot improve what we do not observe. Most traders haven’t the slightest idea where they stand on these various metrics, nor are they aware of how their metrics are impacted by shifts in market conditions. We spend far more time studying markets than studying ourselves, and that is at our peril. The metrics will identify trading problems before they become financial problems. They will alert you to potential blowups before you incur devastating losses. Metrics complete learning loops, linking self-observation to self-improvement. 178

The key is selfobservation: constantly knowing—and wanting to know—what works and what doesn’t. Do you really know your strengths as a trader? If not, how can you build upon them and extend them? Are you aware of the weaknesses of your strategy, tactics, or mechanics? If not, can you truly improve them? We as traders are every bit as patterned as the markets we trade. Exploiting our patterns is an essential part of profiting from those in the market. 181

Journals contain a variety of information, but usually consist of the following:
• A trading plan. How one intends to trade.
• Goals. Things to work on in trading.
• Observations. About oneself and the market. 182

The evolving performer asks: What will I work on today? How will I work on it? How will I know if I’m successful? What have I learned from today that can be utilized tomorrow? The role of a diary is to structure responses to these questions and keep them in conscious awareness. This allows us to focus on achieving process goals rather than profits.
183

The value of the real-time diary is that it pushes us to stand outside ourselves and remove the prisms. To simply ask the questions “What is my state right now?” and “How is my state affecting my perceptions and behaviors?” requires that we stand apart from our frames of mind. The diary cultivates the self-observer in all of us, building our capacity to shift our own states intentionally. 184

“The difference I havefound between the good and the great traders is that great traders are always acutely aware of areas where they need to improve and they work very hard to eliminate those weak links. . . . There is no greater tool in my opinion than a good trading diary of things you’ve learned. When I read my trading diary from several years ago, I’m always amazed how many things I’ve actually forgotten.” 184

When you examine the field of performance coaching, whether in trading, athletics, or other fields, two interventions stand out: goal setting and visualization. 185

Performance goals such as these reflect mechanics: concrete actions that, performed well, contribute to results. They keep traders in a state of flow rather than compete for trader attention and concentration. 186

the acronym SMART to capture the common features of effective performance goals. Such goals are Specific, Measurable, Action- Oriented, Realistic, and Timely. 187

Common deficiencies of goals include:
• Not specific. The goals are framed in general terms, such as “I will trade with more discipline” or “I will let my winners ride,” so that they cannot guide specific actions and facilitate the development of positive habit patterns.
• Not measurable. The goal is framed as a state of mind—“I will trade with greater confidence”—or as an outcome that cannot be tracked with metrics, as in “I will trade well,” preventing any assessment of progress.
• Not action-oriented. Goals are stated as end points rather than as activities to perform, such as “I will make money today.”
• Not realistic. Goals are pie-in-the-sky, as in “I want to be green every day this month,” or are so numerous that they cannot be addressed effectively at one time.
• Not timely. Goals are so far into the future that they cannot guide current performance, as in “I want this to be my best year trading.” 187

[idaxtrader]

A goal that is not tied to immediate plans and feedback leaves a trader with no clearly perceived path toward goal attainment. Burton and colleagues make the excellent point that performers with lower levels of confidence and efficacy will especially benefit from goals that create experiences of success and control. 189

Because imagery is functionally equivalent to actual experience, performers can benefit from skill building via imagery as a supplement to deliberative practice. 190

1. Mental practice improves performance.
2. Mental practice added to physical practice improves performance
3. Mental practice improves cognitive skills more than motor ones.
4. Mental practice benefits expert performers more than novices.
5. The benefits of mental practice decrease quickly with time.


An additional, interesting finding is that imagery-based practice is most effective when it is vivid and when it is positive. People differ in their abilities to produce vivid imagery, and it appears that highly vivid images best serve as rehearsals for live performance. 190

Employed properly, imagery enhances goal setting by making goals real. 190

It is not enough to read books and articles, attend workshops, and review charts. Performance development is planful, systematic work on oneself. 191

An objective observer of the human race would conclude that people lack self-control. 193

Why would a trader who has written one rule after another in a journal lurch into a large position—and then hold it
as it goes against him? It almost seems like self-sabotage, but in fact it is much worse than that.It is the result of an absence of a unified self. 193

Quite simply, the “me” in us—our sense of who we are—is stronger than our “I”—our ability to intentionally guide our actions. 194

you cannot achieve unity of self unless you work on it while you are fragmented. This is the essence of realtime self-therapy. 194

What I’m doing is—metaphorically—shak ing traders by the shoulders, holding up a mirror, and saying, “Look at yourself! You’re worked up! Do you really want to be putting on trades now?” The goal is to help people stand outside themselves as observers, even as they are experiencing moment-to-moment state shifts. That observing capacity is the
glue holding the self together, allowing us to act with intention. “You’re frustrated; don’t go there” is the message from the therapist in us to our trader self. 195

The first step of progress in cognitive work is seeing that we have more control over our reactions than we thought we had: It’s our way of looking at things—and not things themselves—that maintain our problem patterns. 201

Cognitive therapy is most powerful when it provides us with direct experiences that undermine our most negative beliefs. 202

My own experience is that cognitive work is especially effective in situations like James’s, in which loss of confidence,
worry, and negative thinking are major elements. By framing these as part of our self-talk—our conversations with ourselves—traders can make rapid progress in distancing themselves from old patterns and beginning new ones. The value of this is that, without the negative self-talk, traders no longer experience the high levels of distress that trigger old coping patterns and generate further problems. 203

Research tells us that involvement in the therapy—practicing techniques on a daily basis, engaging in them emotionally, and applying them to actual life situations—accelerates change and improves the likelihood of success. 204

The goal of cognitive therapy is to help you become expert at thinking about your thinking: to become aware of your automatic thought patterns so that you can critically evaluate and change them. In a sense, cognitive therapy is an unlearning process. 204

The idea of the cognitive journal is to interrupt ourselves when we’re experiencing one of our characteristic problems—negative thinking or impulsive behavior—and identify the thoughts and beliefs that are associated with these problems. The journal forces us to become observers of ourselves rather than getting wrapped up in the problems of the moment. 204

Albert Ellis suggested a useful format for journals that he described as
an A-B-C sequence:
• Activating event. The situation that is occurring at the time we are experiencing our problem pattern.
• Beliefs. The thoughts and perceptions that are triggered by the event.
• Consequences. What we are feeling and how we are behaving as a result of the triggered beliefs.

Time and again I have seen people make remarkable changes, including ending long-term addictions, when they start viewing their problem patterns as personal enemies. The cognitive journal keeps the trader focused on the message “I am not a loser; it’s my negative way of thinking that’s making me feel like a loser.” By reinforcing this message
again and again, the journal helps traders sustain the momentum of their change efforts. 205

First, the journaling should be conducted every day until traders can clearly identify the one or two core beliefs or distortions that are most interfering with their performance. It is important for traders to recognize their own patterns and appreciate the degree to which their thinking is patterned. Second, the journal is just a learning tool. The ultimate goal is to recognize our cognitive patterns as they are occurring.Once traders can catch themselves in the act of distorting events and falling into old, automatic thoughts, it is time to move to the next phase of cognitive work. In general, I have found that at least two weeks of daily work with the journal are necessary before patterns become clear and people are able to catch those patterns in real time. 205

When people catch themselves falling into an automatic thought pattern, they purposely interrupt the negative thinking process by saying (out loud or to themselves): Stop! The purpose of this technique is to become more mindful: to not only recognize negative thoughts as they occur, but to actively interrupt them and decide to not run with them. 206

The idea of the fourth column is to question the negative assumptions and beliefs, rather than automatically identify with them. By playing devil’s advocate with your automatic thoughts, you reinforce the mindful part of you that does not want to fall into the old traps. The interesting part is that, as you repeat this devil’s advocacy day after day through the journal, the disputation process itself starts to become automatic: You are much more likely to catch negative thought patterns as they occur and reject them. 206

By translating self-talk into a conversation and vividly imaging the talk coming from another person, we become an observer of the distorted thoughts—much more able to view them critically and reject them. 208

Speaking our thoughts aloud gives them objectivity, allowing us to adopt the role of listener as well as speaker. It is not at all unusual for traders to reject their negative thoughts before they’ve even finished verbalizing them—that’s how silly they sound when they are given voice. 208

The common element in all of these approaches is that you are telling yourself, “The situation is not what’s making me feel this way; it’s how I’m processing the situation.” Once you realize this, it gives you room to stand apart from your processing and try to look at things from different perspectives. 210

The most important step to winning is learning that losses are part of the game. Every successful person has failed many times before succeeding.” Cognitive techniques reframe our perceptions of winning and losing, focusing us on learning and improving. 210

Should you find that you are not benefiting from the cognitive work, one of several factors may be the problem:


• Lack of focus. Sometimes people try to change too much all at once and bog down. It is usually not effective to work on multiple patterns at once. More promising is prioritizing patterns and tackling one at a time.

• Lack of repetition. Many times, you will be trying to unlearn patterns that have been present—and reinforced—over a period of years. This does not occur overnight. A daily focus over a sustained period provides an opportunity to internalize learning.

• Lack of emotional intensity. This is perhaps the most common mistake people make in cognitive therapy. Keeping a journal can become a routine, unemotional affair that never challenges old thinking patterns with passion and immediacy. Active methods such as talking about patterns aloud and utilizing imagery can yield greater emotional involvement.

• Incorrect diagnosis. Perhaps the problem is not what you think. Ifyour negative thinking is grounded in a biologically based depression, cognitive work might help, but it should be guided by a professional. It may also need to be supplemented with pharmacotherapy. Alternatively, emotional patterns of frustration may result from trading problems,
such as changing markets that have greatly reduced the edge of a particular strategy.


Behavior therapy works by reversing this process. It consists of a variety of techniques that allow us to process undigested events consciously, in essence reprogramming memory. It unconditions certain responses and helps us condition others. 217

What we typically call behavior therapy is really a collection of techniques for unlearning harmful conditioned responses and instilling new, positive ones. In becoming your own behavior therapist, it will be necessary for you to learn and implement the more basic techniques before progressing to more advanced ones. 222

Let’s start with the very most basic behavioral intervention: relaxation training. This is a method that is quite effective in dampening anxiety and frustration. The first step in relaxation training is learning how to breathe diaphragmatically. Deep, slow, controlled breathing is one of the simplest but also most effective ways of checking your physical and cognitive arousal. To breathe diaphragmatically, you begin by seating yourself in a comfortable position and closing your eyes to remove distractions. You then take deep, slow breaths from your abdomen. In the beginning, it is helpful to place your hand on your stomach as you breathe, making sure that your belly expands as you inhale and contracts as you exhale. Breaths should be deep, smooth, and slow; you want to avoid hyperventilating. As you breathe in, count your number of breaths aloud. As