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DbPhoenix

Pearls

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Figuratively speaking, the small trader should imagine himself as a hitch-hiker in the market. For the ordinary hitch-hiker, someone else supplies the car, chauffeur, oil and gas. When he thinks the car is about to go in his direction, he jumps aboard and rides as far as he thinks the car will go. When he notices the machine has been stopped by a red light, or is about to turn a corner and go in some other direction, or that the car is running out of gas, or the brakes failing to work properly, he steps off and figures he has secured about as long a ride as he may expect. All he has supplied in this transaction is a modest commission and whatever brains were necessary to observe and recognize the opportunity when to get on and off.

 

RDW

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The experience of the past few years has emphasized the value of disregarding all considerations except those which relate to price movement, volume and time. If one is endeavoring to realize profits from the principal swings in prices of stocks, it is my opinion that he should disregard fundamental as well as corporate statistics relating to the stocks in which he is trading, stick closely to a study of the action of the market and become deaf and blind to everything else.

 

RDW

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You must always be on the lookout for a change in the immediate trend. It is likely to change its direction from one to three times in a single session. This is how you detect the change: In an up trend, when the selling waves begin to increase in time and distances or the buying waves shorten. Either or both will be an indication of a change in the immediate trend. Apply the same reasoning to a down trend. Watch closely for these changes for they tell you when to buy and sell; when to get long or short; when to close your present trade and reverse your position.

 

RDW

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No one but a floor trader should always be in the market. Those who trade from the tape in an office should assume a neutral position frequently. They should not delude themselves that they can anticipate everything that happens in their favorite stocks. They should take vacations from the tape varying from a walk around the block to a trip into the country for a week or two.

 

A neutral position clarifies the mind.

 

Trading should never become a habit (like smoking cigarettes) so that you've simply got to satisfy that craving to jump in and out. Such a practice warps the judgment; eagerness to trade supplants deliberation.

 

RDW

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The action of the whole market tells you when the selling is better than the buying and vice versa. You do not care why insiders are buying or selling, but you should care a lot about the action of their stock on the tape, for that is what tells you the truth.

 

RDW

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How are we to know in advance why and to what extent someone else is prompted to buy or sell? We cannot know; it is impossible for us to foretell what actuates all of those whose orders are poured into the vast intake of the Stock Exchange machinery during the day's session.

 

But if we study the action of prices; the responses; the speed of the ticker, indicating urgency or the contrary; the intensity of the buying or selling, as indicated by the volumes; and the intervals when the volume is heavy or light -- all these in relation to each other -- then we gain insight or the design and the purposes of those who are dominant in the market situation for the time being.

 

All the varying phases of stock market technique may thus be studied and interpreted from the buying and selling waves as they appear on the tape. From these we form a conclusion as to the balance of the probabilities. On this we base our commitments.

 

RDW

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The market always tells you what to do. It tells you: Get in. Get out. Move your stop. Close out. Stay neutral. Wait for a better chance. All these things the market is continually impressing upon you, and you must get into the frame of mind where you are in reality taking your orders from the action of the market itself — from the tape.

 

Your judgment will become poorer from the very time when you decide that you know more about the market than the market is telling you. From that moment your results will be unsatisfactory, for in this trading business the tape is the boss. You must learn to obey its orders, doing exactly what it tells you. When you can accomplish this, you are on the high road to success in your stock trading.

 

RDW

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In a certain sense, reading charts is like reading music, in which you endeavor to interpret correctly the composer's ideas and the expression of his art. Just so a chart of the averages, or of a single stock, reflects the ideas, hopes, ambitions and purposes of the mass mind operating in the market, or of a manipulator handling a single stock.

 

The study of charts is not as some people claim, the mere identification of certain labeled patterns made by the actions of stocks. That sort of thing borders on the mechanical and does little to aid in the development of one's judgment. But when a student undertakes to read from his charts the purposes and objective of those who are responsible for a stock's action in the market, he is beginning to see, in a true light, the meaning of scientific stock speculation.

 

RDW

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Admitting Our Incompetence

 

In order to become a top-notch trader, you must have accurate insight into your own limitations. But most novice traders do not. For example, behavioral economist Dr. Terrance Odean has shown that online investors tend to trade beyond their skills. They don't have an accurate picture of what they can and cannot do. These biased exaggerations of abilities are not restricted to traders. It's a widespread phenomenon. Research studies suggest that when it comes to estimating how well you are doing as a novice trader, it is best not to trust your intuition.

 

Dr. David Dunning and colleagues (2003), in a recent article in "Current Directions in Psychological Science," argue that most people are "blissfully unaware of their incompetence." This tendency to overestimate one's abilities has been documented in several studies. When people are asked to take a test measuring abilities, such as thinking logically, writing grammatically, and spotting funny jokes, they tend to overestimate their performance: they think they are performing well above average (60% and above), yet they are actually performing in the bottom 25%. This research finding isn't restricted to taking tests. People in a variety of settings and skill areas overestimate how well they are doing. Debate teams in college tournaments wrongly think they are superb debaters. Hunters think they know more about firearms than they really do, and medical residents think they know how to diagnose patients more accurately than they really can. Studies have even shown that when people are offered money to estimate their performance accurately, they still can't do it.

 

Dr. Dunning and colleagues suggest that poor performers are "double-cursed." Not only do they perform poorly, but they also lack the psychological ability to perceive that they are doing poorly. So what do poor performers do compared to top performers? Poor performers start with the belief that they are "good performers" and don't take the time to develop a method to assess their actual performance. Top performers, in contrast, try to gauge their performance accurately, and tend to avoid worrying about whether they are "good performers" or not. Indeed, studies show that they actually underestimate their performance. When they see how others have performed on a similar skill, they are surprised how well they do compared to others.

 

Fortunately, poor performers are not doomed to remain at the bottom of the heap. In their experiments, Dr. Dunning and colleagues have shown that when poor performers are shown how poorly they do, and are given instruction on how to improve their skills, they perform better and are more accurate with regard to their performance estimates.

 

These studies offer ways that novice traders can improve their trading performance. First, one should be aware that novice traders' intuitive performance estimates are grossly exaggerated and take active steps to ignore them. Second, create an objective log of your trading results, such as a trader diary, so that you know exactly how well you are performing. Third, get some trading instruction to improve your skills (trading coach, mentor, workshops, etc.). As your skills improve, you will perform better and your estimates of your performance will be more accurate. So keep these guidelines in mind. An objective and accurate estimate of your abilities is vital for trading success. Make sure you have one.

 

--Innerworth

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The Bottom Line

 

Should I buy? Should I sell? Many traders often focus their efforts on identifying buy and sell signals. The research and analysis they do are geared towards reaching the goal of getting that “bottom line” directive to guide their actions. Any successful, experienced trader will tell you that although properly identifying buy/sell signals is important, it’s not the key to being successful. Instead, the way you manage each trade is what will determine your success.

 

Traders who take the bottom line approach tend to believe that the success of their trading activity is dependent on following the right buy/sell signals at the right time. Clearly, it’s important that a trader be able to understand the process of generating signals and to use the methods involved. Realistically though, almost any trader can find a way to generate signals (whether using technical methods already out there, coming up with their own system, or using their platform’s automated signal generation tools).

 

Any successful, experienced trader will tell you that your trade doesn’t begin and end with a buy or sell. There’s a trade management process involved. For each trade you make, you’re making a group of decisions. The way you manage and time those decisions is what will determine the success of your trade.

 

Suppose two traders get the same signal at the same time and act on it. One’s trade may result in profits while the other’s results in losses. This could occur because each trader made a combination of additional decisions throughout the process of the trade. These decisions might include scaling in and/or out of the trade, using trailing stop losses, setting profit objectives, waiting, etc. The trader who made the more effective overall combination of decisions will have the better trade results in the end.

 

It’s very important to regard trading as a process, and to understand that a trader’s efforts need to be focused on the activity of trading itself, as opposed to getting a quick bottom line answer. Because there are many aspects involved in making your trades successful, it’s essential that you educate and train yourself in all the different areas. Learn how to develop better trading plans and analysis methods, and then learn how to apply what you’ve developed to the process of a making a trade – from the original impetus to enter or stay out of a trade to the psychology of managing that trade.

 

--Innerworth

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Possibility Mapping

 

Traders often hear about the potential benefits of preparing actionable trade plans prior to the next trading day. The goal of such preparation is to make yourself immune to mental edge breakdown. One of the greatest threats to your mental edge is coming across something that's unexpected during the trading day. Seeing an unexpected price move (especially one you perceive to be a big move) is likely to stress and panic you and therefore cause your psychology to shift into an emotional, reactive state. An effective way to prevent this is to prepare with possibility mapping.

 

Possibility mapping is a process which will mentally prepare you to expect the potentially unexpected, and therefore will allow you to numb, in advance, any potential emotional responses.

 

There are two major types of possibility mapping: Exact possibility mapping, which you would use if you tend to make your trade decisions the day before; and Price Pattern possibility mapping, which you would use if you tend to make your trade decisions while you watch price patterns forming.

 

With exact possibility mapping, you first identify a trade you might make. You would then write out all possible scenarios of price activity following your entry. Yes, there are more scenarios than you could possibly define. However, you'll be able to identify major groups of scenarios where each of the scenarios in a given group would ultimately result in the same signal. These groups are limited and can easily be defined. Then, in your objective state of mind, you decide how you would react in each case.

 

On the other hand, with pattern possibility mapping, you would define the several possible groups of general, overview patterns you might see and decide what actions you would take in each case. Over time, you'll find yourself mapping possibilities faster and more accurately. You can also prepare further by defining what you might think the chances are of each scenario actually occurring.

 

With such preparation, you've already "experienced" tomorrow's markets. Therefore, you virtually eliminate the chance of mental edge breakdown due to unexpected scenarios. Possibility mapping can also drastically improve the quality of your trade decisions and your recognition of certain patterns. In addition, reviewing and comparing your possibility mapping records with your trade diary will help you find key patterns in your trading, identify areas in which you might have a lack of preparation and ones in which you have strengths.

 

--Innerworth

Edited by DbPhoenix

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Forward Opportunities

 

What was the last thing you traded? Look at its 1 year, 6 month, 1 month, and 3-5 day charts. Can you see all the opportunities where you could have made a profit? Should have gone long there, shorted here . . .. You're assessing "opportunity" based on price activity subsequent to the point at which you believe the opportunity existed, which means that you're working backward to identify that point of opportunity.

 

While trading, these are the very opportunities a trader is aiming to spot. This and the desire to make trades will often drive the inexperienced trader to "see" opportunity where there is none, simply because the trader can easily envision the price pattern moving in any given direction. If his predisposition or any of his analysis makes him inclined to forecast a certain direction, he can quickly envision the movement of price in the direction that will yield profits. By envisioning such price pattern formations, it's often the case that the trader will mentally emulate what he has previously viewed on historical charts, and perhaps even had a desire to experience. And this psychology is made even more complex when the trader begins to find "evidence" in current price activity that supports his forecast/vision and ignores any information that contradicts it, thereby providing a false justification to make the trade.

 

This type of thinking will cause a trader to make trades when no real opportunity exists. The fundamental problem is that the reason for action is based on a forecast/vision, and not on what has happened and what is happening right now. Given the fact that forecasts and visions are not realities and that historical and current activities are, decisions that are based on the proper interpretation of what has happened and is happening will be correct far more often. It's critical to avoid mentally creating opportunities and to know when to stay out of a trade.

 

Looking at the charts again, try to identify forward-looking opportunities, where you consider only each price point and the price patterns before it. You'll find that it's now far more difficult to spot the winners, but those are the opportunities that you need to identify and then appropriately act on in order to be a successful trader.

 

Any experienced and successful trader will agree that it's very important not to trade until there's a true opportunity.

 

--Innerworth

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Cracking Under Pressure

 

Whether it is trading or playing sports, when the pressure is on, many of us crack under the strain. Consider the Olympic performances of Sarah Hughes and Michelle Kwan in the 2002 Winter Olympics.

 

Michelle tried to meet high expectations of winning the Gold Medal and made several mistakes in her performance. Sarah, on the other hand, went into her performance with fewer expectations and a carefree attitude. She said, "I really thought there was no way in the world I would win. Realistically, there was this little window, but I didn't think I would win. I went out and just skated." By taking this carefree attitude, she skated freely and without worry. This stance allowed her to react to the moment, express her creativity, and win the Gold Medal. It's like saying, "I didn't worry about how much money I would make, I just traded." It's also similar to something Andy Bushak, a trader with Advanced GET, said in his Innerworth Master Interview about successful traders on the floor of the Chicago Mercantile Exchange. "They don't have too many rules for themselves. They keep it simple, do a little bit of homework, and simply react to market conditions." In other words, they just trade.

 

Successful traders make trades in a carefree manner. They don't put pressure on themselves to succeed. They don't believe they need to be right, and they don't need to predict the future behavior of the market. Instead, they objectively observe market conditions, react to them, and let the market take them where it wants them to go. Successful traders are "in the zone" as Mark Douglas claims. In his book, Trading in the Zone, Douglas notes that seasoned traders do not doubt or second-guess themselves. They freely enter and exit trades without worrying about the consequences. This carefree approach to trading allows them to see trading opportunities more easily and allows them to take advantage of these opportunities when they arise. How does one enter the zone? It takes intense concentration and focus, and it's difficult to maintain this stance when the pressure is on you to perform. Mark Douglas suggests removing some of the pressure by thinking in terms of probabilities and carefully managing risk. You may not win on any single trade, but after a series of trades, you will have enough winners to make a profit in the long run. Remembering this and having confidence that your trading strategies, or edges, will ensure you make money in the long run will help you stay in the zone. It's also important to manage your risk. Specifically, determine your risk on a given trade before making it, and risk only a small amount of trading capital on a single trade. Doing so will take some of the pressure off, allowing you to be more open to see the opportunities that the market offers. Be open-minded. Remember that the market is always right. It's your job as a trader to see what the market is doing, rather than imposing your will or expectations onto it.

 

Flow with the market. Move with the market. React to the market. Let the market tell you where it wants you to go. By taking the pressure off of yourself, you will feel more free and open. You will be able to identify trading opportunities, quickly react, and take home the profits.

 

--Innerworth

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Misplaced Confidence

 

Confidence can be an important psychological tool for the trader - important enough to make the difference between a winning trade and a losing trade. When you develop your trading plan, it is obviously important that you have confidence in its accuracy and usefulness and in your belief that you can follow your plan closely and execute it successfully.

 

Often, traders fall into a mental "I know it all" trap, where they use their confidence to nurture their ego instead of using it to be appropriately decisive in their trading and investing decisions. Such misplaced confidence can be crippling to trading success, because any potential influence from the environment (media, others' opinions, etc.) that could sway the trader from sticking to his trading plan will have far more power. When a trader is caught in this type of trap, his ability to question his opinions and ideas diminishes. If his initial reaction to a suggestion is to accept it, he loses the capacity to question his acceptance; and if his initial reaction is to disagree, then he loses the capacity to question his disagreement, which can cause even the slightest suggestions from news, colleagues, and other influential sources to be magnified in the trader's psyche.

 

If you're caught in this trap, you'll tend to make these magnified suggestions your own. When you do this, you give yourself logical reason and justification to act on them, even if it means you have to sway from your trading plan. Falling into this trap is characterized by being confident about things you really don't know, instead of being confident about the things you know well, such as your trading plan.

 

Alternatively, when you have the right kind of confidence, you empower yourself to stick to your trading plan and deflect fear and doubt. Before making a trading or investing decision, be certain that you're confident about what you're confident about. The key is not to be confident about what you don't know (especially when it comes to others' opinions) but to be confident about your knowledge of objective facts and the trading plan that you have so laboriously developed.

 

To prevent misplacing your confidence, review decisions that you've made confidently but that turned out to be incorrect, evaluating exactly where your confidence was placed. Most of the time, you'll discover that your decision was based on a suggestion not your own, but that you had made your own.

 

--Innerworth

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Your Trading Plan & Your Trading Personality

 

As a trader, you often hear about how the success of your career depends on the quality of your trading plan. What you don't hear is that the process of developing your trading plan can be as important as, if not more important, than the end result.

 

Most traders are consistently swayed into modeling their trading plans on what other seemingly more successful or experienced traders are doing. Whether they make their plans identical to another's, or they just adjust theirs to accommodate someone else's opinions and ideas, the bottom line is that most traders develop trading plans that aren't their own. As a result, they also tend to compare their trading results with those of more successful traders and wonder why they're not doing as well.

 

Working with a trading plan that's not entirely your own can cause you to develop typically unforeseen psychological issues that will be detrimental to your trading success. One of the most obvious of these "side-effects" is the effect on your confidence. Knowing that your trading plan is not your own will never allow you to be completely confident about your plan's reliability, which can seriously affect your ability to stick to it. You'll also continuously struggle with the idea that any success you achieve will not be entirely your own. Feelings of being a "cheater," and not deserving your winnings may creep into your mind and negatively affect your trading decisions. Additionally, your trading plan will be the first to serve as an excuse for your losses, preventing you from taking responsibility for your actions - after all, it wasn't your idea.

 

It's critical that you develop your trading plan based on your own interpretations, analyses, and thoughts, so that it's compatible with your trading personality. Working with a trading plan that you've laboriously developed based on your own knowledge and research will give you the confidence that's key to your trading abilities. It will also encourage you to take responsibility for your decisions, and help you to actively improve your trading plan based on your experiences. Even the process of the development itself will better shape your trading psychology.

 

Additionally, when your trading plan is tailored to your trading personality, you'll find that you can use your intuition to trade more effectively and you'll feel more comfortable in making your decisions.

 

--Innerworth

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Resistance & Momentum

 

The classic boom and bust theory of the market is that a given price pattern cycle is initiated by mass mentality or perception of what future price movement will be. As investors establish their opinions (these cycles usually begin with bullish opinion) and the media reports support them, they begin to act on it, inevitably and seemingly causing their predicted pattern to develop (the boom).

 

This confirmation of their opinions bolsters their confidence and is a source of encouragement for them to maintain their positions and to even add to them. As the predicted directional movement forms and the activity slows down, experienced traders come in and set their positions against the mass opinion. The price trend begins to change (the bust).

 

Logically, it would seem that this would be a good point for most people to begin liquidating their positions and taking either some profit or if they were a bit late to enter, to cut their losses short. But this is not what happens. As the price declines, investors tend to hold on, with the hopes that the price will begin rising again or that they'll have an opportunity to at least sell at the price they bought.

 

In general, once people are taught a certain way, and especially when they've received positive reinforcement in what they've learned, they have great difficulty altering their behavior. Even if they see clear evidence to the contrary of what they believe, they will persist in their opinions. Successful traders who utilize momentum in their decision-making are basing their choices, at least partly, on this type of market psychology. The boom created by the mass opinion originally has a form of "inertia" as people receive affirmation about their opinions. At some point, as this momentum slows, the experienced trader realizes an opportunity of optimized probability to take advantage of the market pattern.

 

The resistance to alter one's behavior is what causes the trader to give back unrealized gains and more often than not, to even take realized losses. When you're speculating or have an opinion about where the market's headed, no matter how solid you think your analysis is, it's always only good for a limited time. Recognizing this and realizing how others think and invest will give you the added edge to take advantage of opportunities to make trades with optimized probabilities.

 

--Innerworth

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If P, Then Q

 

If asked to evaluate the truth of this statement, "If you traded MSFT during the month of May, you made a profit," most people would start the process of evaluation by trying to think of people they know who traded MSFT during May and made a profit. Then, on coming up with one or more examples, they would evaluate the statement as being true. In other words, they would first look for confirming evidence. If there were even one person who traded MSFT during May and did not make a profit (even if the evaluator didn't know of this person), the results of the evaluation would be false.

 

The logically correct way to evaluate the statement above would be to look for cases where MSFT was traded in May and profits were not made. If you can think of even one example, you've disconfirmed it and know it's false.

 

The process of assessing statement validity by looking for confirming evidence often leads people to false conclusions. This can be an especially serious impediment to trading success, because you're constantly evaluating your trading plans, technical signals and indicators, news, etc. The views you form as a result of your evaluations are ultimately what you base your decisions on. If your views are made up of fallacies, your decisions will inevitably be wrong, resulting in losses.

 

Suppose you've developed a technical analysis method that you believe will give you excellent indicators. If you evaluate the effectiveness of this method by only looking for cases where it works, it's possible that you'll identify 10 instances where it works just as you expected. But there might be 40 instances where your method doesn't work, and you'll be ignoring these. Through your biased evaluation, you'll come to the conclusion that your method is very effective, and in fact, will set yourself up to be overconfident about it.

 

Traders tend to be particularly vulnerable to this difficulty in evaluation because they're usually evaluating trading plans or methods they think might yield them great profits. They naturally want to see perfect results, thus pushing them even further to look for confirming evidence.

 

When evaluating a theory or statement, it helps to play devil's advocate - try to come up with a proof for why the theory or statement is false. Remember to always be objective, and evaluate from the various sides before coming to any conclusion.

 

--Innerworth

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Mixing Perspectives

 

At the end of May, the QQQ was at $30, which was around the low September-October levels. You reasoned that this was a fantastic opportunity to go long, because the price was bound to move up after hitting such lows. And so you bought, risking the maximum capital you were willing to lose on any one trade. It's mid-June now. The price is $27.53. You were planning on investing for the long-term to meet your profit objectives, right?

 

Many traders face the problem of what's known as mixing perspectives. Suppose you're planning on building a long-term portfolio and are preparing to make some investment entry decisions. Would you limit your analysis by only looking at this week's price patterns? Of course you wouldn't. You'd want to look at the long-term patterns and perhaps use this week's price patterns as supporting information to enter the trade with maximum precision, if you use them at all. The issues that can be caused by mixing perspectives are fairly clear in this case, but they aren't always.

 

Novice traders often make the mistake of entering a trade with a strategic methodology that conflicts with the original perspective used to analyze the trade. For instance, they'll analyze a potential decision in terms of a long-term strategy but act as if they're executing a short-term strategy. The trader who mixes perspectives will inevitably set inappropriate stop losses and profit objectives, and therefore will be likely to stop out and take losses, only to see that his original analysis turned out to be correct (in our example, over a longer term). And that's when the trader will start thinking, "I should have waited. I got out too soon."

 

Mixing perspectives can cause a series of problems for the trader. As the trader takes losses, he develops an aversion to sticking to stop losses and minding profit objectives. He'll try to unjustifiably stay in a trade for more or less time than he's planned, because he feels he needs to make some sort of an adjustment. Additionally, immediate losses due to stop outs can indirectly cause a breakdown in the trader's confidence in his analysis, and therefore in his trading ability.

 

The key is to make sure that the perspective you take when you're analyzing a trade is the same perspective you use when you set stop losses and profit objectives to act on that analysis.

 

--Innerworth

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I wasted about four years trying to decipher the intent behind every move and disappeared down a number of fruitless though mildly interesting bunny tunnels. It's a natural thing to do, as the basic mechanics of trading ultimately become tedious and unfulfilling, at the very least in an intellectual sense, so of course one tries to go deeper and deeper to squeeze more meaning from the motion, indeed the profession as a whole. Or hole.

 

Now I'm down to one free web-based chart and have let it all go, it's such a relief. Four monitors, 85 charts with various pointless divisions of time, range and volume, bid/ask order book overlaid with pit noise, TICK, VIX, put/call open interest, A/D and TRIN. WTF? Muddies the waters innit. Anything to avoid seeing the simplicity that was always there. I suppose it's kinda hard to accept that an innocent child with the proverbial crayon would probably do the job better, especially for the inquisitive male ego "But... but ... you mean that's all I have to do? Can't be right. So let's misovercomplexify it" as Bush might say.

 

Notwithstanding I think basics still need to be grasped: the formations and background levels of commitment and emotion that manifest as, for instance, an even-handed fierce fight; a non-commital can't be bothered to fight; whoa that hurt and I grimly held on but now it really hurts capitulation; directional grind, whippy uncertainty etc. ... vague levels of view (or lack of it) and positioning. but beyond that I no longer care why anything is happening outside of the nebulous bigger picture. Perhaps it gets more exciting when you can see the less obvious coming, but you don't need to. Pursue another (parallel) career if you want creative rewards, enlightening explanations or a sense of having produced something whether physically or in the mysterious carapace at the top of our bodies.

 

Accept that for the market to work it needs to occasionally misdirect -- savagely -- often during a dull moment (biggest moves often come out of these) but that it is, yes, generally quite obvious. Draw a few simple lines, exercise patience and hit those small areas of high probability again and again. That's all we can do. Thus it must follow that battles will indeed be fought in these obvious areas, as that's where the seasoned money will always be. It cannot be any other way. Our money, playing the waiting selective game. Not their money, cause they're impulsive, impatient, clueless, adrenaline diet disciples, or so rumour has it.

 

--frugi

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They say you never grow poor taking profits. No, you don't. But neither do you grow rich taking a four-point profit in a bull market. . . .

After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine -- that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.

 

Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see -- or if you prefer, until you think you see -- the turn of the market; the beginning of a reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. One of the most helpful things that anybody can learn is to give up trying to catch the last eighth -- or the first. These two are the most expensive eighths in the world.

 

JL

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A lot of smart stuff has been posted on message boards, and much of it has been lost, not because it has literally been deleted (though that is sometimes the case), but because it has been forgotten. People move on, they quit, they die, and it's important to pass the good stuff on so that those who read it when it was posted aren't the only ones who benefit.

 

Years ago, a guy named William posted the rules from Larry Phillips' book, Zen and the Art of Poker, one by one in order to encourage reflection and discussion, and this is my purpose as well. I'm not going to post all the rules because, as I said to William at the time, not all of them are as clearly applicable to trading as others. But you will see how very applicable to trading many of these rules are.

 

Db

 

Patience

(edited)

 

RULE #1: Learn to use inaction as a weapon.

 

RULE #2: Don't get irritated or angered by long session of folding.

 

RULE #3: If you've been folding a lot, for a long time in the game, and you're starting to think that maybe it's time you got in and played a few hands again – that's not a good enough reason. Keep folding.

 

RULE #4: Don't feel like a martyr when folding.

 

RULE#5: Sometimes others get to play and you don't. Make peace with this idea. Cross your arms and sit back.

 

RULE#6: To win at poker you must embrace the idea of breaking even. A distaste for breaking even can lead us into the valley of pressing and overplaying and other wrongful activity.

 

RULE #7: Regard patience as a central pillar of your game and strategy. Don't assign it a secondary or lesser role.

 

RULE #8 Keep plugging away. Expect nothing. There will be times when you play tight, keep playing tight, and keep on playing tight, and it still does no good; the bad cards just keep coming. You may have to just keep doing it until the end, with no reward at all.

 

RULE #9: Don't fall into the "Now Trap." Players want to win now, today. Results must happen now, in this hand, the one right in front of us. We assign a little more importance to where we are. We make it bigger, more important. But we do this timewise, too; we assign things more importance because they are happening in the present moment. Yet giving greater importance to the present in the game of poker allows us to imagine marginal hands into good hands and good hands into great hands.

 

RULE #10: The long run is longer than you think. Playing only the best hands can be frustrating. Anger and irritability can arise. The emotions can be severely tested. This is where Zen comes in.

 

RULE #11: Don't defend patience too strongly. You can't make yourself go to sleep through sheer strength of will. It is not about the strength of commitment; it is more of a gentler thing, a letting go.

 

RULE#12: Don't be impatient about patience. Your brain is telling you to play patiently while your emotions are saying, "What's taking so long?" These two must be in alignment.

 

RULE #13 Occupy yourself while you are not playing. The fact is, if you are playing correctly, you are going to be doing a lot of folding, so you need to think of ways to fill this time. If you hate this period of time when you're not playing, and some do, it will have the effect of throwing your game out of kilter.

 

RULE #14: Begin by playing tight, but don't forget to stay tight. The important thing is not who possesses the control and discipline at the start of the game, but who possesses it at the middle, the end, and all points throughout.

 

RULE #15: Discipline your game. It is more like patience, pacing yourself (especially emotionally) for the length of the game. It is different than mere patience, however. It comes from a larger and longer-term view of things, one that steps back and sees things as a whole.

Edited by DbPhoenix

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Emotionlessness

(edited)

 

The true journey of mastery is in each moment. Writer George Leonard, in his book Mastery, refers to this as the "goalless journey". In other words: there is no finish line; the journey itself is the destination. According to Leonard, mastery lives within itself and the practice of itself – doing a thing for its own sake; not just reaching the goal, but each hour, each moment, every day, is the goal.

 

You cannot apply the principles of Zen until you know the game perfectly inside and out. Having the proper attitude of Zen calm and confidence does no good if you do not know the game. Zen will not make up for, or offset, incorrect play. As a result, there is a certain amount of ordinary, old-fashioned work involved in mastering the game, a certain amount of sweating the white beads before the days of tranquility come along.

 

Good [trading] is not a "mood", it is a series of individual decisions. It does not occur by "Buddhistically" meditating ourselves into some dreamlike mental state, but rather by knowing the game well and being in synch with it -- by inserting ourselves correctly into the flow of what is going on in front of us.

 

No Zen attitude will make up for this lack. You may be quite Zen-like and have all the attributes of Zen calm, but if you play incorrectly, the result is that you will get destroyed. Practice, and long hours at the table, are indispensable.

 

Arrive with a system. It is not enough to rely on luck or hope to carry us past the weak parts of our game. These parts must be attended to. The system must be whole and complete. The weak parts must be corrected, or disaster will appear.

 

Learn from your mistakes. When we factor past lessons in for future play, losses are not losses, but rather stepping-stones toward future correct play. Failure, by its nature, moves us in another direction, away from failure. We need to treat these lessons neutrally. Simply learn from them. Don't take them too much to heart or put too much emotion into them.

 

Don't expect a certain card to appear. Bad players do this all the time – expect the best possible outcome to occur – and then are crushed when it doesn't.

 

When things start going right for other players and wrong for you, back off. Looking back at the end of the night at how a losing streak was put together, certain things stand out, and this is one of them: we should have caught on a little sooner. It is important that we notice these situations earlier and react accordingly.

 

Develop a true indifference to the game. George Leonard writes in Mastery that mastery's true face is often "relaxed and serene, sometimes faintly smiling". You sometimes see this with good poker players, a kind of smiling, ironic indifference to the vicissitudes of fate and the outcome of hands.

 

Don't take the game personally. The poker gods are not out to destroy you personally (although it may sometimes seem that way). The game itself is as neutral and mechanical as a roulette wheel, a church raffle, or a lottery ball drawing.

 

Nonattachment. The idea of attachment, in Buddhistic terms, means the linking of our emotions with something that we want, some desired object or outcome. The stronger this connection, the more discontent when we fail to achieve our ends (as well as desperate steps taken trying to achieve them). Emotions have no place in poker. To play in an ego-less state means simply to not let the ego and emotions get involved.

 

When you take your emotions out of the game, other players' emotions become visible. When we are focused exclusively on our own emotions (as we often are), the emotion of others tend to be obscured. When we make ourselves neutral, however, we find that the canvas suddenly becomes blank and the emotions of others begin to appear.

Edited by DbPhoenix

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