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participation is already reflected in the current price? At any given moment, how many of them are about to change their minds and exit their positions? If they do, how long will they stay out of the market? And if and when they do come back into the market, in what direction will they cast their votes? These are the constant, never-ending, unknown, hidden variables that are always operating in every market—always] The best traders don't try to hide from these unknown variables by pretending they don't exist, nor do they try to intellectualize or rationalize them away through market analysis. Quite the contrary, the best traders take these variables into account, factoring them into every component of their trading regimes. For the typical trader, just the opposite is true. He trades from the perspective that what he can't see, hear, or feel must not exist. What other explanation could account for his behavior? If he really believed in the existence of all the hidden variables that have the potential to act on prices in any given moment, then he would also have to believe that every trade has an uncertain outcome. And if every trade truly has an uncertain outcome, then how could he ever justify or talk himself into not predefining his risk, cutting his losses, or having some systematic way to take profits? Given the circumstances, not adhering to these three fundamental principles is the equivalent of committing financial and emotional suicide. Since most traders don't adhere to these principles, are we to assume that their true underlying motivation for trading is to destroy themselves? It's certainly possible, but I think the percentage of traders who either consciously or subconsciously want to rid themselves of their money or hurt themselves in some way is extremely small. So, if financial suicide is not the predominant reason, then what could keep someone from doing something that would otherwise make absolute, perfect sense? The answer is quite simple: The typical trader doesn't predefine his risk, cut his losses, or systematically take profits because the typical trader doesn't believe it's necessary. The only reason why he would believe it isn't necessary is that he believes he already knows what's going to happen next, based on what he perceives is happening in any given "now moment." If he already knows, then there's really no reason to adhere to these principles. Believing, assuming, or thinking that "he knows" will be the cause of virtually eveiy trading error he has the potential to make (with the exception of those errors that are the result of not believing that he deserves the money). Our beliefs about what is true and real are very powerful inner forces. They control every aspect of how we interact with the markets, from our perceptions, interpretations, decisions, actions, and expectations, to our feelings about the results. It's extremely difficult to act in a way that contradicts what we believe to be true. In some cases, depending on the strength of the belief, it can be next to impossible to do anything that violates the integrity of a belief. What the typical trader doesn't realize is that he needs an inner mechanism, in the form of some powerful beliefs, that virtually compels him to perceive the market from a perspective that is always expanding with greater and greater degrees of clarity, and also compels him always act appropriately, given the psychological conditions and the nature of price movement. The most effective and functional trading belief that he can acquire is "anything can happen." Aside from the fact that it is the truth, it will act as a solid

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foundation for building every other belief and attitude that he needs to be a successful trader. Without that belief, his mind will automatically, and usually without his conscious awareness, cause him to avoid, block, or rationalize away any information that indicates the market may do something he hasn't accepted as possible. If he believes that anything is possible, then there's nothing for his mind to avoid. Because anything includes everything, this belief will act as an expansive force on his perception of the market that will allow him to perceive information that might otherwise have been invisible to him. In essence, he will be making himself available (opening his mind) to perceive more of the possibilities that exist from the markets perspective. Most important, by establishing a belief that anything can happen, he will be training his mind to think in probabilities. This is by far the most essential as well as the most difficult principle for people to grasp and to effectively integrate into their mental systems. CHAPTER 7

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THE TRADER'S EDGE: THINKING IN PROBABILITIES

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Exactly what does it mean to think in probabilities, and why is it so essential to one's consistent success as a trader? If you take a moment and analyze the last sentence, you will notice that I made consistency a function of probabilities. It sounds like a contradiction: How can someone produce consistent results from an event that has an uncertain probabilistic outcome? To answer this question, all we have to do is look to the gambling industry. Corporations spend vast amounts of money, in the hundreds of millions, if not billions, of dollars, on elaborate hotels to attract people to their casinos. If you've been to Las Vegas you know exactly what I am talking about. Gaming corporations are just like other corporations, in that they have to justify how they allocate their assets to a board of directors and ultimately to their stockholders. How do you suppose they justify spending vast sums of money on elaborate hotels and casinos, whose primary function is to generate revenue from an event that has a purely random outcome?

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Here's an interesting paradox. Casinos make consistent profits day after day and year after year, facilitating an event that has a purely random outcome. At the same time, most traders believe that the outcome of the market's behavior is not random, yet can't seem to produce consistent profits. Shouldn't a consistent, nonrandom outcome produce consistent results, and a random outcome produce random, inconsistent results? What casino owners, experienced gamblers, and the best traders understand that the typical trader finds difficult to grasp is: even that have probable outcomes can produce consistent

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CHAPTER 7

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PROBABILITIES PARADOX: RANDOM OUTCOME, CONSISTENT RESULTS

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results, if you can get the odds in your favor and there is a large enough sample size. The best traders treat trading like a numbers game, similar to the way in which casinos and professional gamblers approach gambling. To illustrate, let's look at the game of blackjack. In blackjack, the casinos have approximately a 4.5-percent edge over the player, based on the rules they require players to adhere to. This means that, over a large enough sample size (number of hands played), the casino will generate net profits of four and a half cents on every dollar wagered on the game. This average of four and a half cents takes into account all the players who walked away big winners (including all winning streaks), all the players who walked away big losers, and everybody in between. At the end of the day, week, month, or year, the casino always ends up with approximately 4.5 percent of the total amount wagered. That 4.5 percent might not sound like a lot, but let's put it in perspective. Suppose a total of $100 million dollars is wagered collectively at all of a casino's blackjack tables over the course of a year. The casino will net $4.5 million. What casino owners and professional gamblers understand about the nature of probabilities is that each individual hand played is statistically independent of every other hand. This means that each individual hand is a unique event, where the outcome is random relative to the last hand played or the next hand played. If you focus on each hand individually, there will be a random, unpredictable distribution between winning and losing hands. But on a collective basis, just the opposite is true. If a large enough number of hands is played, patterns will emerge that produce a consistent, predictable, and statistically reliable outcome. Here's what makes thinking in probabilities so difficult. It requires two layers of beliefs that on the surface seem to contradict each other. We'll call the first layer the micro level. At this level, you have to believe in the uncertainty and unpredictability of each individual hand. You know the truth of this uncertainty, because there are always a number of unknown variables affecting the consistency of the deck that each new hand is drawn from. For example, you can't know in advance how any of the other participants will decide to play their hands, since they can either take or decline additional cards. Any variables acting on the consistency of the deck that can't be controlled or known in advance will make the outcome of any particular hand both uncertain and random (statistically independent) in relationship to any other hand. The second layer is the macro level. At this level, you have to believe that the outcome over a series of hands played is relatively certain and predictable. The degree of certainty is based on the fixed or constant variables that are known in advance and specifically designed to give an advantage (edge) to one side or the other. The constant variables I am referring to are the rules of the game. So, even though you don't or couldn't know in advance (unless you are psychic) the sequence of wins to losses, you can be relatively certain that if enough hands are played, whoever has the edge will end up with more wins than losses. The degree of certainty is a function of how good the edge is. It's the ability to believe in the unpredictability of the game at the micro level and simultaneously believe in the predictability of the game at the macro level that makes the casino and the professional gambler effective and successful at what they do. Their belief in the uniqueness of each hand prevents them from engaging in the pointless

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endeavor of trying to predict the outcome of each individual hand. They have learned and completely accepted the fact that they don't know what's going to happen next. More important, they don't need to know in order to make money consistently. Because they don't have to know what's going to happen next, they don't place any special significance, emotional or otherwise, on each individual hand, spin of the wheel, or roll of the dice. In other words, they're not encumbered by unrealistic expectations about what is going to happen, nor are their egos involved in a way that makes them have to be right. As a result, it's easier to stay focused on keeping the odds in their favor and executing flawlessly, which in turn makes them less susceptible to making costly mistakes. They stay relaxed because they are committed and willing to let the probabilities (their edges) play themselves out, all the while knowing that if their edges are good enough and the sample sizes are big enough, they will come out net winners. The best traders use the same thinking strategy as the casino and professional gambler. Not only does it work to their benefit, but the underlying dynamics supporting the need for such a strategy are exactly the same in trading as they are in gambling. A simple comparison between the two will demonstrate this quite clearly. First, the trader, the gambler, and the casino are all dealing with both known and unknown variables that affect the outcome of each trade or gambling event. In gambling, the known variables are the rules of the game. In trading, the known variables (from each individual trader's perspective) are the results of their market analysis. Market analysis finds behavior patterns in the collective actions of everyone participating in a market. We know that individuals will act the same way under similar situations and circumstances, over and over again, producing observable patterns of behavior. By the same token, groups of individuals interacting with one another, day after day, week after week, also produce behavior patterns that repeat themselves. These collective behavior patterns can be discovered and sub- «pnii<=-nflv identified bv nsinf analvtical tools such as trend lines, moving averages, oscillators, or retracements, just to name a few of the thousands that are available to any trader. Each analytical tool uses a set of criteria to define the boundaries of each behavior pattern identified. The set of criteria and the boundaries identified are the trader's known market variables. They are to the individual trader what the rules of the game are to the casino and gambler. By this I mean, the trader's analytical tools are the known variables that put the odds of success (the edge) for any given trade in the trader's favor, in the same way that the rules of the game put the odds of success in favor of the casino. Second, we know that in gambling a number of unknown variables act on the outcome of each game. In blackjack, the unknowns are the shuffling of the deck and how the players choose to play their hands. In craps, it's how the dice are thrown. And in roulette, it's the amount of force applied to spin the wheel. All these unknown variables act as forces on the outcome of each individual event, in a way that causes each event to be statistically independent of any other individual event, thereby creating a random distribution between wins and losses. Trading also involves a number of unknown variables that act on the outcome of any particular behavior pattern a trader may identify

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and use as his edge. In trading, the unknown variables are all other traders who have the potential to come into the market to put on or take off a trade. Each trade contributes to the market's position at any given moment, which means that each trader, acting on a belief about what is high and what is low, contributes to the collective behavior pattern that is displayed at that moment. If there is a recognizable pattern, and if the variables used to define that pattern conform to a particular trader's definition of an edge, then we can say that the market is offering the trader an opportunity to buy low or sell high, based on the trader's definition. Suppose the trader seizes the opportunity to take advantage of his edge and puts on a trade. What factors will determine whether the market unfolds in the direction of his edge or against it? The answer is: the behavior of other traders! At the moment he puts a trade on, and for as long as he chooses to stay in that trade, other traders will be participating in that market. They will be acting on their beliefs about what is high and what is low. At any given moment, some percentage of other traders will contribute to an outcome favorable to our traders edge, and the participation of some percentage of traders will negate his edge. There's no way to know in advance how everyone else is going to behave and how their behavior will affect his trade, so the outcome of the trade is uncertain. The fact is, the outcome of every (legal) trade that anyone decides to make is affected in some way by the subsequent behavior of other traders participating in that market, making the outcome of all trades uncertain. Since all trades have an uncertain outcome, then like gambling, each trade has to be statistically independent of the next trade, the last trade, or any trades in the future, even though the trader may use the same set of known variables to identify his edge for each trade. Furthermore, if the outcome of each individual trade is statistically independent of every other trade, there must also be a random distribution between wins and losses in any given string or set of trades, even though the odds of success for each individual trade may be in the traders favor. Third, casino owners don't try to predict or know in advance the outcome of each individual event. Aside from the fact that it would be extremely difficult, given all the unknown variables operating in each game, it isn't necessary to create consistent results. Casino operators have learned that all they have to do is keep the odds in their favor and have a large enough sample size of events so that their edges have ample opportunity to work.

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TRADING IN THE MOMENT

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Traders who have learned to think in probabilities approach the markets from virtually the same perspective. At the micro level, they believe that each trade or edge is unique. What they understand about the nature of trading is that at any given moment, the market may look exactly the same on a chart as it did at some previous moment; and the geometric measurements and mathematical calculations used to determine each edge can be exactly the same from one edge to the next; but the

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actual consistency of the market itself from one moment to the next is never the same. For any particular pattern to be exactly the same now as it was in some previous moment would require that every trader who participated in that previous moment be present. What's more, each of them would also have to interact with one another in exactly the same way over some period of time to produce the exact same outcome to whatever pattern was being observed. The odds of that happening are nonexistent. It is extremely important that you understand this phenomenon because the psychological implications for your trading couldn't be more important. We can use all the various tools to analyze the market's behavior and find the patterns that represent the best edges, and from an analytical perspective, these patterns can appear to be precisely the same in eveiy respect, both mathematically and visually. But, if the consistency of the group of traders who are creating the pattern "now" is different by even one person from the group that created the pattern in the past, then the outcome of the current pattern has the potential to be different from the past pattern. (The example of the analyst and chairman illustrates this point quite well.) It takes only one trader, somewhere in the world, with a different belief about the future to change the outcome of any particular market pattern and negate the edge that pattern represents. The most fundamental characteristic of the market's behavior is that each "now moment" market situation, each "now moment" behavior pattern, and each "now moment" edge is always a unique occurrence with its own outcome, independent of all others. Uniqueness implies that anything can happen, either what we know (expect or anticipate), or what we don't know (or can't know, unless we had extraordinary perceptual abilities). A constant flow of both known and unknown variables creates a probabilistic environment where we don't know for certain what will happen next. This last statement may seem quite logical, even self-evident, but there's a huge problem here that is anything but logical or selfevident. Being aware of uncertainty and understanding the nature of probabilities does not equate with an ability to actually function effectively from a probabilistic perspective. Thinking in probabilities can be difficult to master, because our minds don't naturally process information in this manner. Quite the contrary, our minds cause us to perceive what we know, and what we know is part of our past, whereas, in the market, every moment is new and unique, even though there may be similarities to something that occurred in the past. This means that unless we train our minds to perceive the uniqueness of each moment, tiiat uniqueness will automatically be filtered out of our perception. We will perceive only what we know, minus any information that is blocked by our fears; everything else will remain invisible. The bottom line is that there is some degree of sophistication to thinking in probabilities, which can take some people a considerable amount of effort to integrate into their mental systems as a functional thinking strategy. Most traders don't fully understand this; as a result, they mistakenly assume they are thinking in probabilities, because they have some degree of understanding of the concepts. I've worked with hundreds of traders who mistakenly assumed they thought in probabilities, but didn't. Here is an example of a trader I worked with whom I'll call Bob. Bob is a certified trading advisor (CTA) who

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manages approximately $50 million in investments. He's been in the business for almost 30 years. He came to one of my workshops because he was never able to produce more than a 12- to 18-percent annual return on the accounts he managed. This was an adequate return, but Bob was extremely dissatisfied because his analytical abilities suggested that he should be achieving an annual return of 150 to 200 percent. I would describe Bob as being well-versed in the nature of probabilities. In other words, he understood the concepts, but he didn't function from a probabilistic perspective. Shortly after attending the workshop, he called to ask me for some advice. Here is the entry from my journal written immediately after that phone conversation. 9-28-95: Bob called with a problem. He put on a belly trade and put his stop in the market. The market traded about a third of the way to his stop and then went back to his entry point, where he decided to bail out of the trade. Almost immediately after he got out, the bellies went 500 points in the direction of this trade, but of course he was out of the market. He didn't understand what was going on. First, I asked him what was at risk. He didn't understand the question. He assumed that he had accepted the risk because he put in a stop. I responded that just because he put in a stop it didn't mean that he had truly accepted the risk of the trade. There are many things that can be at risk: losing money, being wrong, not being perfect, etc., depending on one's underlying motivation for trading. I pointed out that a person's beliefs are always revealed by their actions. We can assume that he was operating out of a belief that to be a disciplined trader one has to define the risk and put a stop in. And so he did. But a person can put in a stop and at the same time not believe that he is going to be stopped out or that the trade will ever work against him, for that matter. By the way he described the situation, it sounded to me as if this is exactly what happened to him. When he put on the trade, he didn't believe he would be stopped out. Nor did he believe the market would trade against him. In fact, he was so adamant about this, that when the market came back to his entry point, he got out of the trade to punish the market with an "I'll show you" attitude for even going against him by one tic. After I pointed this out to him, he said this was exactly the attitude he had when he took off the trade. He said that he had been waiting for this particular trade for weeks and when the market finally got to this point, he thought it would immediately reverse. I responded by reminding him to look at the experience as simply pointing the way to something that he needs to learn. A prerequisite for thinking in probabilities is that you accept the risk, because if you don't, you will not want to face the possibilities that you haven't accepted, if and when they do present themselves. When you've trained your mind to think in probabilities, it means you have fully accepted all the possibilities (with no internal resistance or conflict) and you always do something to take the unknown forces into account. Thinkine this way is virtually impossible unless you've done the mental work necessary to "let go" of the need to know what is going to happen next or the need to be right on each trade. In fact, the degree by which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader. Traders

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who have learned to think in probabilities are confident of their overall success, because they commit themselves to taking every trade that conforms to their definition of an edge. They don't attempt to pick and choose the edges they think, assume, or believe are going to work and act on those; nor do they avoid the edges that for whatever reason they think, assume, or believe aren't going to work. If they did either of those things, they would be contradicting their belief that the "now" moment situation is always unique, creating a random distribution between wins and losses on any given string of edges. They have learned, usually quite painfully, that they don't know in advance which edges are going to work and which ones aren't. They have stopped trying to predict outcomes. They have found that by taking every edge, they correspondingly increase their sample size of trades, which in turn gives whatever edge they use ample opportunity to play itself out in their favor, just like the casinos. On the other hand, why do you think unsuccessful traders are obsessed with market analysis. They crave the sense of certainty that analysis appears to give them. Although few would admit it, the truth is that the typical trader wants to be right on every single trade. He is desperately trying to create certainty where it just doesn't exist. The irony is that if he completely accepted the fact that certainty doesn't exist, he would create the certainty he craves: He would be absolutely certain that certainty doesn't exist. When you achieve complete acceptance of the uncertainty of each edge and the uniqueness of each moment, your frustration with trading will end. Furthermore, you will no longer be susceptible to making all the typical trading errors that detract from your potential to be consistent and destroy your sense of self-confidence. For examnle not rlefminff the risk before crRftincr into a trarle is hv far rhp most common of all trading errors, and starts the whole process of trading from an inappropriate perspective. In light of the fact that anything can happen, wouldn't it make perfect sense to decide before executing a trade what the market has to look, sound, or feel like to tell you your edge isn't working? So why doesn't the typical trader decide to do it or do it every single time? I have already given you the answer in the last chapter, but there's more to it and there's also some tricky logic involved, but the answer is simple. The typical trader won't predefine the risk of getting into a trade because he doesn't believe it's necessary. The only way he could believe "it isn't necessary" is if he believes he knows what's going to happen next. The reason he believes he knows what's going to happen next is because he won't get into a trade until he is convinced that he's right. At the point where he's convinced the trade will be a winner, it's no longer necessary to define the risk (because if he's right, there is no risk). Typical traders go through the exercise of convincing themselves that they're right before they get into a trade, because the alternative (being wrong) is simply unacceptable. Remember that our minds are wired to associate. As a result, being wrong on any given trade has the potential to be associated with any (or every) other experience in a trader's life where he's been wrong. The implication is that any trade can easily tap him into the accumulated pain of every time he has been wrong in his life. Given the huge backlog of unresolved, negative energy surrounding what it means to be wrong that exists in most people, it's easy

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to see why each and every trade can literally take on the significance of a life or death situation. So, for the typical trader, determining what the market would have to look, sound, or feel like to tell him that a trade isn't working would create an irreconcilable dilemma. On one hand, he desperately wants to win and the only way he can do that is to participate, but the only way he will participate is if he's sure the trade will win. On the other hand, if he defines his risk, he is willfully gathering evidence that would negate something he has already convinced himself of. He will be contradicting the decision-making process he went through to convince himself that the trade will work. If he exposed himself to conflicting information, it would surely create some degree of doubt about the viability of the trade. If he allows himself to experience doubt, it's very unlikely he will participate. If he doesn't put the trade on and it turns out to be a winner, he will be in extreme agony. For some people, nothing hurts more than an opportunity recognized but missed because of self-doubt. For the typical trader, the only way out of this psychological dilemma is to ignore the risk and remain convinced that the trade is right. If any of this sounds familiar, consider this: When you're convincing yourself that you're right, what you're saying to yourself is, "I know who's in this market and who's about to come into this market. I know what they believe about what is high or what is low. Furthermore, I know each individual's capacity to act on those beliefs (the degree of clarity or relative lack of inner conflict), and with this knowledge, I am able to determine how the actions of each of these individuals will affect price movement in its collective form a second, a minute, an hour, a day, or a week from now." Looking at the process of convincing yourself that you're right from this perspective, it seems a bit absurd, doesn't it? For the traders who have learned to think in probabilities, there is no dilemma. Predefining the risk doesn't pose a problem for these traders because they don't trade from a right or wrong perspective. They have learned that trading doesn't have anything to do with being right or wrong on any individual trade. As a result, they don't perceive the risks of trading in the same way the typical trader does. Any of the best traders (the probability thinkers) could have just as much negative energy surrounding what it means to be wrong as the typical trader. But as long as they legitimately define trading as a probability game, their emotional responses to the outcome of any particular trade are equivalent to how the typical trader would feel about flipping a coin, calling heads, and seeing the coin come up tails. A wrong call, but for most people being wrong about predicting the flip of a coin would not tap them into the accumulated pain of every other time in their lives they had been wrong. Why? Most people know that the outcome of a coin toss is random. If you believe the outcome is random, then you naturally expect a random outcome. Randomness implies at least some degree of uncertainty. So when we believe in a random outcome, there is an implied acceptance that we don't know what that outcome will be. When we accept in advance of an event that we don't know how it will turn out, that acceptance has the effect of keeping our expectations neutral and open-ended. Now we're getting down to the very core of what ails the typical trader. Any expectation about the markets behavior that is specific, well-defined, or rigid—instead of being neutral

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and open-ended—is unrealistic and potentially damaging. I define an unrealistic expectation as one that does not correspond with the possibilities available from the market's perspective. If each moment in the market is unique, and anything is possible, then any expectation that does not reflect these boundary-less characteristics is unrealistic.

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MANAGING EXPECTATIONS

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The potential damage caused by holding unrealistic expectations comes from how it affects the way we perceive information. Expectations are mental representations of what some future moment will look, sound, taste, smell, or feel like. Expectations come from what we know. This makes sense, because we can't expect something that we have no knowledge or awareness of. What we know is synonymous with what we have learned to believe about the ways in which the external environment can express itself. What we believe is our own personal version of the truth. When we expect something, we are projecting out into the future what we believe to be true. We are expecting the outside environment a minute, an hour, a day, a week, or a month from now to be the way we have represented it in our minds. We have to be careful about what we project out into the future, because nothing else has the potential to create more unhappiness and emotional misery than an unfulfilled expectation. When things happen exactly as you expect them to, how do you feel? The response is generally wonderful (including feelings like happiness, joy, satisfaction, and a greater sense of well-being), unless, of course, you were expecting something dreadful and it manifested itself. Conversely, how do you feel when your expectations are not fulfilled? The universal response is emotional pain. Everyone experiences some degree of anger, resentment, despair, regret, disappointment, dissatisfaction, or betrayal when the environment doesn't turn out to be exactly as we expected it to be (unless, of course, we are completely surprised by something much better than we imagined). Here's where we run into problems. Because our expectations come from what we know, when we decide or believe that we know something, we naturally expect to be right. At that point, we're no longer in a neutral or open state of mind, and it's not difficult to understand why. If we're going to feel great if the market does what we expect it to do, or feel horrible if it doesn't, then we're not exactly neutral or open- minded. Quite the contrary, the force of the belief behind the expectation will cause us to perceive market information in a way that confirms what we expect (we naturally like feeling good); and our pain-avoidance mechanisms will shield us from information that doesn't confirm what we expect (to keep us from feeling bad). As I've already indicated, our minds are designed to help us avoid pain, both physical and emotional. These pain-avoidance mechanisms exist at both conscious and subconscious levels. For example, if an object is coming toward your head, you react instinctively to get out of the way. Ducking does not require a conscious decision-making process. On the other hand, if you clearly see the object and have

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time to consider the alternatives, you may decide to catch the object, bat it away with your hand, or duck. These are examples of how we protect ourselves from physical pain. Protecting ourselves from emotional or mental pain works in the same way, except that we are now protecting ourselves from information. For example, the market expresses information about itself and its potential to move in a particular direction. If there's a difference between what we want or expect and what the market is offering or making available, then our pain-avoidance mechanisms kick in to compensate for the differences. As with physical pain, these mechanisms operate at both the conscious and subconscious levels. To protect ourselves from painful information at the conscious level, we rationalize, justify, make excuses, willfully gather information that will neutralize the significance of the conflicting information, get angry (to ward off the conflicting information), or just plain lie to ourselves. At the subconscious level, the pain-avoidance process is much more subtle and mysterious. At this level, our minds may block our ability to see other alternatives, even though in other circumstances we would be able to perceive them. Now, because they are in conflict with what we want or expect, our pain-avoidance mechanisms can make them disappear (as if they didn't exist). To illustrate this phenomenon, the best example is one I have already given you: We are in a trade where the market is moving against us. In fact, the market has established a trend in the opposite direction to what we want or expect. Ordinarily, we would have no problem identifying or perceiving this pattern if it weren't for the fact that the market was moving against our position. But the pattern loses its significance (becomes invisible) because we find it too painful to acknowledge. To avoid the pain, we narrow our focus of attention and concentrate on information that keeps us out of pain, regardless of how insignificant or minute. In the meantime, the information that clearly indicates the presence of a trend and the opportunity to trade in the direction of that trend becomes invisible. The trend doesn't disappear from physical reality, but our ability to perceive it does. Our pain-avoidance mechanisms block our ability to define and interpret what the market is doing as a trend. The trend will then stay invisible until the market either reverses in our favor or we are forced out of the trade because the pressure of losing too much money becomes unbearable. It's not until we are either out of the trade or out of danger that the trend becomes apparent, as well as all the opportunities to make money by trading in the All the distinctions that would otherwise be perceivable become perfectly clear, after the fact, when there is no longer anything for our minds to protect us from. We all have the potential to engage in self- protective painavoidance mechanisms, because they're natural functions of the way our minds operate. There may be times when we are protecting ourselves from information that has the potential to bring up deepseated emotional wounds or trauma that we're just not ready to face, or don't have the appropriate skills or resources to deal with. In these cases, our natural mechanisms are serving us well. But more often, our pain-avoidance mechanisms are just protecting us from information that would indicate that our expectations do not correspond with what is available from the environments

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perspective. This is where our pain-avoidance mechanisms do us a disservice, especially as traders. To understand this concept, ask yourself what exactly about market information is threatening. Is it threatening because the market actually expresses negatively charged information as an inherent characteristic of the way it exists? It may seem that way, but at the most fundamental level, what the market gives us to perceive are uptics and down-tics or up-bars and down-bars. These up and down tics form patterns that represent edges. Now, are any of these tics or the patterns they form negatively charged? Again, it may certainly seem that way, but from the market's perspective the information is neutral. Each up-tic, down-tic, or pattern is just information, telling us the market's position. If any of this information had a negative charge as an inherent characteristic of the way it exists, then wouldn't everyone exposed to it experience emotional pain? For example, if both you and I get hit on the head with a solid object, there probably wouldn't be much difference in how we would feel. We'd both be in pain. Any part of our bodies coming into contact with a solid object with some degree of force will cause anyone with a normal nervous system to experience pain. We share the experience because our bodies are constructed in basically the same way. The pain is an automatic physiological response to the impact with a tangible object. Information in the form of words or gestures expressed by the environment, or up and down tics expressed by the market, can be just as painful as being hit with a solid object; but there's an important difference between information and objects. Information is not tangible. Information doesn't consist of atoms and molecules. To experience the potential effects of information, whether negative or positive, requires an interpretation. The interpretations we make are functions of our unique mental frameworks. Everyone's mental framework is unique for two fundamental reasons. First, all of us were born with different genetically encoded behavior and personality characteristics that cause us to have different needs from one another. How positively or negatively and to what degree the environment responds to these needs creates experiences unique to each individual. Second, everyone is exposed to a variety of environmental forces. Some of these forces are similar from one individual to the next, but none are exactly the same. If you consider the number of possible combinations of genetically encoded personality characteristics we can be born with, in relation to the almost infinite variety of environmental forces we can encounter throughout our lives, all of which contribute to the construction of our mental framework, then it's not difficult to see why there is no universal mental framework common to everyone. Unlike our bodies, which have a common molecular structure that experiences physical pain, there is no universal mind-set to assure us that we will share the potential negative or positive effects of information in the same way. For example, someone could be projecting insults at you, intending to cause you to feel emotional pain. From the environment's perspective, this is negatively charged information. Will you experience the intended negative effects? Not necessarily! You have to be able to interpret the information as negative to experience it as negative. What if this person is insulting you in

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a language you don't understand, or is using words you don't know the meaning of? Would you feel the intended pain? Not until you built a framework to define and understand the words in a derogatory way. Even then, we can't assume that what you'd feel would correspond to the intent behind the insult. You could have a framework to perceive the negative intent, but instead of feeling pain, you might experience a perverse type of pleasure. I've encountered many people who, simply for their own amusement, like to get people riled up with negative emotions. If they happen to be insulted in the process, it creates a sense of joy because then they know how successful they've been. A person expressing genuine love is projecting positively charged information into the environment. Let's say the intent behind the expression of these positive feelings is to convey affection, endearment, and friendship. Are there any assurances that the person or persons this positively charged information is being projected toward will interpret and experience it as such? No, there aren't. A person with a very low sense of self-esteem, or someone who experienced a great deal of hurt and disappointment in relationships, will often misinterpret an expression of genuine love as something else. In the case of a person with low self-esteem, if he doesn't believe he deserves to be loved in such a way, he will find it difficult, if not impossible, to interpret what he is being offered as genuine or real. In the second case, where one has a significant backlog of hurt and disappointment in relationships, a person could easily come to believe that a genuine expression of love is extremely rare, if not non-existent, and would probably interpret the situation either as someone wanting something or trying to take advantage of him in some way. I'm sure that I don't have to go on and on, sighting examples of all the possible ways there are to misinterpret what someone is trying to communicate to us or how what we express to someone can be misconstrued and experienced in ways completely unintended by us. The point that I am making is that each individual will define, interpret, and consequently experience whatever information he is exposed to in his own unique way. There's no standardized way to experience what the environment may be offering—whether it's positive, neutral, or negative information—simply because there is no standardized mental framework in which to perceive information. Consider that, as traders, the market offers us something to perceive at each moment. In a sense, you could say that the market is communicating with us. If we start out with the premise that the market does not generate negatively charged information as an inherent characteristic of the way it exists, we can then ask, and answer, the question, "What causes information to take on a negative quality?" In other words, where exactly does the threat of pain come from? If it's not coming from the market, then it has to be coming from the way we define and interpret the available information. Defining and interpreting information is a function of what we assume we know or what we believe to be true. If what we know or believe is in fact true—and we wouldn't believe it if it weren't—then when we project our beliefs out into some future moment as an expectation, we naturally expect to be right. When we expect to be right, any information that doesn't confirm our version of the truth automatically becomes threatening. Any information that has the

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potential to be threatening also has the potential to be blocked, distorted, or diminished in significance by our pain-avoidance mechanisms. It's this particular characteristic of the way our minds function that can really do us a disservice. As traders, we can't afford to let our pain-avoidance mechanisms cut us off from what the market is communicating to us about what is available in the way of the next opportunity to get in, get out, add to, or subtract from a position, just because it's doing something that we don't want or expect. For example, when you're watching a market (one you rarely, if ever, trade in) with no intention of doing anything, do any of the up or down tics cause you to feel angry, disappointed, frustrated, disillusioned, or betrayed in any way? No! The reason is that there's nothing at stake. You're simply observing information that tells you where the market is at that moment. If the up and down tics that you're watching form into some sort of behavior pattern you've learned to identify, don't you readily recognize and acknowledge the pattern? Yes, for the same reason: There's nothing at stake. There is nothing at stake because there's no expectation. You haven't projected what you believe, assume, or think you know about that market into some future moment. As a result, there's nothing to be either right about or wrong about, so the information has no potential to take on a threatening or negatively charged quality. With no particular expectation, you haven't placed any boundaries on how the market can express itself. Without any mental boundaries, you will be making yourself available to perceive everything you've learned about the nature of the ways in which the market moves. There's nothing for your pain-avoidance mechanisms to exclude, distort, or diminish from your awareness in order to protect you. In my workshops, I always ask participants to resolve the following primary trading paradox: In what way does a trader have to learn how to be rigid and flexible at the same time? The answer is: We have to be rigid in our rules and flexible in our expectations. We need to be rigid in our rules so that we gain a sense of self-trust that can, and will always, protect us in an environment that has few, if any, boundaries. We need to be flexible in our expectations so we can perceive, with the greatest degree of clarity and objectivity, what the market is communicating to us from its perspective. At this point, it probably goes without saying that the typical trader does just the opposite: He is flexible in his rules and rigid in his expectations. Interestingly enough, the more rigid the expectation, the more he has to either bend, violate, or break his rules in order to accommodate his unwillingness to give up what he wants in favor of what the market is offering.

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ELIMINATING THE EMOTIONAL RISK

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To eliminate the emotional risk of trading, you have to neutralize your expectations about what the market will or will not do at any given moment or in any given situation. You can do this by being willing to think from the markets perspective. Remember, the market is always communicating in probabilities. At the collective level, your edge may look perfect in every respect; but at the individual level, every trader who has the potential to act as a force on price movement can negate the positive

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outcome of that edge. To think in probabilities, you have to create a mental framework or mind-set that is consistent with the underlying principles of a probabilistic environment. A probabilistic mind-set pertaining to trading consists of five fundamental truths.

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1. Anything can happen. 2. You don't need to know what is going to happen next in order to make money. 3. There is a random distribution between wins and losses for any given set of variables that define an edge. 4. An edge is nothing more than an indication of a higher probability of one thing happening over another. 5. Eveiy moment in the market is unique.

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Keep in mind that your potential to experience emotional pain comes from the way you define and interpret the information you're exposed to. When you adopt these five truths, your expectations will always be in line with the psychological realities of the market environment. With the appropriate expectations, you will eliminate your potential to define and interpret market information as either painful or threatening, and you thereby effectively neutralize the emotional risk of trading. The idea is to create a carefree state of mind that completely accepts the fact that there are always unknown forces operating in the market. When you make these truths a fully functional part of your belief system, the rational part of your mind will defend these truths in the same way it defends any other belief you hold about the nature of trading. This means that, at least at the rational level, your mind will automatically defend against the idea or assumption that you can know for sure what will happen next. It's a contradiction to believe that each trade is a unique event with an uncertain outcome and random in relationship to any other trade made in the past; and at the same time to believe you know for sure what will happen next and to expect to be right. If you really believe in an uncertain outcome, then you also have to expect that virtually anything can happen. Otherwise, the moment you let your mind hold onto the notion that you know, you stop taking all of the unknown variables into consideration. Your mind won't let you have it both ways. If you believe you know something, the moment is no longer unique. If the moment isn't unique, then everything is known or knowable; that is, there's nothing not to know. However, the moment you stop factoring in what you don't or can't know about the situation instead of being available to perceive what the market is offering, you make yourself susceptible to all of the typical trading errors. For example, if you really believed in an uncertain outcome, would you ever consider putting on a trade without defining your risk in advance? Would you ever hesitate to cut a loss, if you really believed you didn't know? What about trading errors like jumping the gun? How could you anticipate a signal that hasn't yet manifested itself in the market, if you weren't convinced that you were going to miss out? Why would you ever let a winning trade turn into a loser, or not have

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a systematic way of taking profits, if you weren't convinced the market was going your way indefinitely? Why would you hesitate to take a trade or not put it on at all, unless you were convinced that it was a loser when the market was at your original entiy point? Why would you break your money management rules by trading too large a position relative to your equity or emotional tolerance to sustain a loss, if you weren't positive that you had a sure thing? Finally, if you really believed in a random distribution between wins and losses, could you ever feel betrayed by the market? If you flipped a coin and guessed right, you wouldn't necessarily expect to be right on the next flip simply because you were right on the last. Nor would you expect to be wrong on the next flip if you were wrong on the last. Because you believe in a random distribution between the sequence of heads and tails, your expectations would be perfectly aligned with the reality of the situation. You would certainly like to be right, and if you were that would be great, but if you were wrong then you would not feel betrayed by the flip, because you know and accept that there are unknown variables at work that affect the outcome. Unknown means "not something your rational thinking process can take into consideration in advance of the Hi-r" ?jXCi>v'L ^ fu!Iv accept that you don't know As a result, there is little, if any, potential to experience the kind of emotional pain that wells up when you feel betrayed. As a trader, when you're expecting a random outcome, you will always be at least a little surprised at whatever the market does— even if it conforms exactly to your definition of an edge and you end up with a winning trade. However expecting a random outcome doesn't mean that you can't use your full reasoning and analytical abilities to project an outcome, or that you can't guess what's going to happen next, or have a hunch or feeling about it, because you can. Furthermore, you can be right in each instance. You just can't expect to be right. And if you are right, you can't expect that whatever you did that worked the last time will work again the next time, even though the situation may look, sound, or feel exactly the same. Anything that you are perceiving "now" in the market will never be exactly the same as some previous experience that exists in your mental environment. But that doesn't mean that your mind (as a natural characteristic of the way it functions) won't try to make the two identical. There will be similarities between the "now moment" and something that you know from the past, but those similarities only give you something to work with by putting the odds of success in your favor. If you approach trading from the perspective that you don't know what will happen next, you will circumvent your mind's natural inclination to make the "now moment" identical to some earlier experience. As unnatural as it seems to do so, you can't let some previous experience (either negative or extremely positive) dictate your state of mind. If you do, it will be very difficult, if not impossible, to perceive what the market is communicating from its perspective. When I put on a trade, all I expect is that something will happen. Regardless of how good I think my edge is, I expect nothing more than for the market to move or to express itself in some way. However, there are some things that I do know for sure. I know that based on the markets past behavior, the odds of it moving in the direction of my trade are good or acceptable, at least in relationship to how much I am willing to spend to find out if it does. I

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also know before getting into a trade how much I am willing to let the market move against my position. There is always a point at which the odds of success are greatly diminished in relation to the profit potential. At that point, it's not worth spending any more money to find out if the trade is going to work. If the market reaches that point, I know without any doubt, hesitation, or internal conflict that I will exit the trade. The loss doesn't create any emotional damage, because I don't interpret the experience negatively. To me, losses are simply the cost of doing business or the amount of money I need to spend to make myself available for the winning trades. If, on the other hand, the trade turns out to be a winner, in most cases I know for sure at what point I am going to take my profits. (If I don't know for sure, I certainly have a veiy good idea.) The best traders are in the "now moment" because there's no stress. There's no stress because there's nothing at risk other than the amount of money they are willing to spend on a trade. They are not trying to be right or trying to avoid being wrong; neither are they trying to prove anything. If and when the market tells them that their edges aren't working or that it's time to take profits, their minds do nothing to block this information. They completely accept what the market is offering them, and they wait for the next edge. CHAP TER 8

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CHAPTER 8

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WORKING WITH YOUR BELIEFS

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Now the task before you is to properly integrate the five fundamental truths presented in Chapter 7 in your mental environment at a functional level. To help you do that, we will take an in-depth look at beliefs—their nature, properties, and characteristics. However, before we do that I will review and organize the major concepts presented thus far into a much clearer and more practical framework. What you learn from this and the next two chapters will form the foundation for understanding everything you need to do to achieve your goals as a trader.

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DEFINING THE PROBLEM

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At the most fundamental level, the market is simply a series of up and down tics that form patterns. Technical analysis defines these patterns as edges. Any particular pattern defined as an edge is simply an indication that there is a higher probability that the market will move in one direction over the other. However, there is a major mental paradox here because a pattern implies consistency, or, at least, a consistent outcome. But the reality is each pattern is a unique occurrence. They may look (or measure) exactly the same from one occurrence to the next, but the similarities are only on the surface. The underlying force behind each pattern is traders, and the traders who contribute to the formation of one

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pattern are always different from the traders who contribute to the next; so the outcome of each pattern is random relative to one another. Our minds have an inherent design characteristic (the association mechanism) that can make this paradox difficult to deal with. Now these edges, or the patterns they represent, flow by in every time frame, making the market a never-ending stream of opportunities to get in, get out (scratch a trade), take profits, cut losses, or add to or detract from a position. In other words, from the market's perspective, each moment presents each one of us traders with the opportunity to do something on our own behalf.

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DEFINING THE TERMS

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What prevents us from perceiving each "now moment" as an opportunity to do something for ourselves or to act appropriately even when we do? Our fears! What is the source of our fears? We know its not the market, because from the market's perspective, the up and down tics and the patterns they create are neither positively or negatively charged. As a result, the up and down tics themselves have no capacity to cause us to enter into any particular state of mind (negative or positive), lose our objectivity, make errors, or take us out of the opportunity flow. If it's not the market that causes us to experience a negatively charged state of mind, then what does cause it? The way we define and interpret the information we perceive. If that's the case, then what determines what we perceive and how we define and interpret that information? What we believe or what we assume to be true. Our beliefs working in conjunction with the association and pain- avoidance mechanisms act as a force on our five senses, causing us to perceive, define, and interpret market information in a way that is consistent with what we expect. What we expect is synonymous with.what we believe or assume to be true. Expectations are beliefs projected into some future moment. Each moment from the market's perspective is unique; but if the information being generated by the market is similar in quality, properties, or characteristic to something that is already in our minds, the two sets of information (outside and inside) automatically become linked. When this connection is made, it triggers a state of mind (confidence, euphoria, fear, terror, disappointment, regret, betrayal, etc.) that corresponds to whatever belief, assumption, or memory the outside information was linked. This makes it seem as if what is outside is exactly the same as whatever is already inside of us. It's our state of mind that makes the truth of whatever we're perceiving outside of us (in the market) seem indisputable and beyond question. Our state of mind is always the absolute truth. If I feel confident, then I am confident. If I feel afraid, then I am afraid. We can't dispute the quality of energy flowing through our mind and body at any given moment. And because I know as an indisputable fact how I feel, you could say that I also know the truth of what I'm perceiving outside of me in the same moment. The problem is that how we feel is always the absolute truth, but the beliefs that triggered our state of mind or feeling may or may not be

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true relative to the possibilities that exist in the market at any given moment. Recall the example of the boy and the dog. The boy "knew" for an absolute fact that each dog he encountered after the first was threatening, because of the way he felt when one came into his field of awareness. These other dogs did not cause his fear; his negatively charged memory working in conjunction with the association and his pain- avoidance mechanism caused his fear. He experienced his own version of the truth, although that did not correspond with the possibilities that existed from the environment's perspective. His belief about the nature of dogs was limited relative to the possible characteristics and traits expressed by dogs. Yet the state of mind he experienced eveiy time he encountered a dog caused him to believe thats he "knew" exactly what to expect from them. This same process causes us to believe that we "know" exactly what to expect from die market, when the reality is there are always unknown forces operating at every moment. The trouble is, the instant we think we "know" what to expect, we simultaneously stop taking all the unknown forces and die various possibilities created by those forces into consideration. The unknown forces are other traders waiting to enter or exit trades, based on their beliefs about the future. In other words, we really can't know exactly what to expect from the market, until we can read the minds of all the traders who have the potential to act as a force on price movement. Not a very likely possibility. As traders, we can't afford to indulge ourselves in any form of "I know what to expect from the market." We can "know" exactly what an edge looks, sounds, or feels like, and we can "know" exactly how much we need to risk to find out if that edge is going to work. We can "know" that we have a specific plan as to how we are going to take profits if a trade works. But that's it! If what we think we know starts expanding to what the market is going to do, we're in trouble. And all that's required to put us into a negatively charged, "I know what to expect from the market" state of mind is for any belief, memoiy, or attitude to cause us to interpret the up and down tics or any market information as anything but an opportunity to do something on our own behalf. What Are the Objectives? Ultimately, of course, making money is everyone's objective. But if trading were only a matter of making money, reading this book wouldn't be necessary. Putting on a winning trade or even a series of winning trades requires absolutely no skill. On the other hand, creating consistent results and being able to keep what we've created does require skill. Making money consistently is a by-product of acquiring and mastering certain mental skills. The degree to which you understand this is the same degree to which you will stop focusing on the money and focus instead on how you can use your trading as a tool to master these skills. What Are the Skills? Consistency is the result of a carefree, objective state of mind, where we are making ourselves available to perceive and act upon whatever the market is offering us (from its perspective) in any given "now moment." What Is a Carefree State of Mind? Carefree means confident, but not euphoric. When you are in a carefree state of mind, you won't feel any fear, hesitation, or compulsion to do anything, because

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you've effectively eliminated the potential to define and interpret market information as threatening. To remove the sense of threat, you have to accept the risk completely. When you have accepted the risk, you will be at peace with any outcome. To be at peace with any outcome, you must reconcile anything in your mental environment that conflicts with the five fundamental truths about the market. What's more, you also have to integrate these truths into your mental system as core beliefs. What Is Objectivity? Objectivity is a state of mind where you have conscious access to everything you have learned about the nature of market movement. In other words, nothing is being blocked or altered by your painavoidance mechanisms. What Does it Mean to Make Yourself Available? Making yourself available means trading from the perspective that you have nothing to prove. You aren't trying to win or to avoid losing. You aren't trying get your money back or to take revenge on the market. In other words, you come to the market with no agenda other than to let it unfold in any way that it chooses and to be in the best state of mind to recognize and take advantage of the opportunities it makes available to you. What Is the "Now Moment'? Trading in the "now moment" means that there is no potential to associate an opportunity to get into, get out of, add too, or detract from a trade with a past experience that already exists in your mental environment.

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HOW THE FUNDAMENTAL TRUTHS RELATE TO THE SKILLS

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1. Anything can happen. Why? Because there are always unknown forces operating in every market at every moment, it takes only one trader somewhere in the world to negate the positive outcome of your edge. That's all: only one. Regardless of how much time, effort, or money you've invested in your analysis, from the market's perspective there are no exceptions to this truth. Any exceptions that may exist in your mind will be a source of conflict and potentially cause you to perceive market information as threatening. 2. You don't need to know what is going to happen next in order to make money. Why? Because there is a random distribution between wins and losses for any given set of variables that define an edge. (See number 3.) In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 12 will be winners and 8 will be losers. What you don't know is the sequence of wins and losses or how much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game. When you really believe that trading is simply a probability game, concepts like right and wrong or win and lose no longer have the same significance. As a result, your expectations will be in harmony with the possibilities. Keep in mind that nothing has more potential to cause emotional discord than our unfulfilled expectations. Emotional pain is the universal response when the outside world expresses itself in a way that doesn't reflect what we expect or believe to be true. As a result, any market information that does not confirm our expectations is automatically defined and interpreted as

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threatening. That interpretation causes us to adopt a negatively charged, defensive state of mind, where we end up creating the very experience we are trying to avoid. Market information is only threatening if you are expecting the market to do something for you. Otherwise, if you don't expect the market to make you right, you have no reason to be afraid of being wrong. If you don't expect the market to make you a winner, you have no reason to be afraid of losing. If you don't expect the market to keep going in your direction indefinitely, there is no reason to leave money on the table. Finally, if you don't expect to be able to take advantage of every opportunity just because you perceived it and it presented itself, you have no reason to be afraid of missing out. On the other hand, if you believe that all you need to know is: 1. the odds are in your favor before you put on a trade; 2. how much it's going to cost to find out if the trade is going to work; 3. you don't need to know what's going to happen next to make money on that trade; and 4. anything can happen; Then how can the market make you wrong? What information could the market generate about itself that would cause your pain-avoidance mechanisms to kick in so that you exclude that information from your awareness? None that I can think of. If you believe that anything can happen and that you don't need to know what is going to happen next to make money, then you will always be right. Your expectations will always be in harmony with the conditions as they exist from the market's perspective, effectively neutralizing your potential to experience emotional pain. By the same token, how can a losing trade or even a series of losers have the typical negative effect, if you really believe that trading is a probability or numbers game? If your edge puts the odds in your favor, then every loss puts you that much closer to a win. When you really believe this, your response to a losing trade will no longer take on a negative emotional quality.

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3. There is a random distribution between wins and losses for any given set of variables that define an edge. If every loss puts you that much closer to a win, you will be looking forward to the next occurrence of your edge, ready and waiting to jump in without the slightest reservation or hesitation. On the other hand, if you still believe that trading is about analysis or about being right, then after a loss you will anticipate the occurrence of your next edge with trepidation, wondering if it's going to work. This, in turn, will cause you to start gathering evidence for or against the trade. You will gather evidence for the trade if your fear of missing out is greater than your fear of losing. And you will gather information against the trade if your fear of losing is greater than your fear of missing out. In either case, you will not be in the most conducive state of mind to produce consistent results.

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4. An edge is nothing more than an indication of a higher probability of one thing happening over another. Creating consistency requires that you completely accept that trading isn't about hoping, wondering, or gathering evidence one way or the other to determine if the next trade is going to work. The only

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evidence you need to gather is whether the variables you use to define an edge are present at any given moment. When you use "other" information, outside the parameters of your edge to decide whether you will take the trade, you are adding random variables to your trading regime. Adding random variables makes it extremely difficult, if not impossible, to determine what works and what doesn't. If you're never certain about the viability of your edge, you won't feel too confident about it. To whatever degree you lack confidence, you will experience fear. The irony is, you will be afraid of random, inconsistent results, without realizing that your random, inconsistent approach is creating exactly what you are afraid of. On the other hand, if you believe that an edge is simply a higher probability of one thing happening over another, and there's a random distribution between wins and losses for any given set of variables that define an edge, why would you gather "other" evidence for or against a trade? To a trader operating out of these two beliefs, gathering "other" evidence wouldn't make any sense. Or let me put it this way: Gathering "other" evidence makes about as much sense as trying to determine whether the next flip of a coin will be heads, after the last ten flips came up tails. Regardless of what evidence you find to support heads coming up, there is still a 50-percent chance that the next flip will come up tails. By the same token, regardless of how much evidence you gather to support acting or not acting on a trade, it still only takes one trader somewhere in the world to negate the validity of any, if not all, of your evidence. The point is why bother! If the market is offering you a legitimate edge, determine the risk and take the trade.

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5. Every moment in the market is unique. Take a moment and think about the concept of uniqueness. "Unique" means not like anything else that exists or has ever existed. As much as we may understand the concept of uniqueness, our minds don't deal with it very well on a practical level. As we have already discussed, our minds are hardwired to automatically associate (without conscious awareness) anything in the exterior environment that is similar to anything that is already inside of us in the form of a memory, belief, or attitude. This creates an inherent contradiction between the way we naturally think about the world and the way the world exists. No two moments in the external environment will ever exactly duplicate themselves. To do so, every atom or every molecule would have to be in the exact same position they were in some previous moment. Not a very likely possibility. Yet, based on the way our minds are designed to process information, we will experience the "now moment" in the environment as being exactly the same as some previous moment as it exists inside our minds. If each moment is like no other, then there's nothing at the level of your rational experience that can tell you for sure that you "know" what will happen next. So I will say again, why bother trying to know?! When you try to know, you are, in essence, trying to be right. I am not implying here that you can't predict what the market will do next and be right, because you most certainly can. It's in the trying that you run into all of the problems. If you believe that you correctly predicted the market once, you will naturally try to do it again.

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As a result, your mind will automatically start scanning the market for the same pattern, circumstance, or situation that existed the last time you correctly predicted its movement. When you find it, your state of mind will make it seem as if everything is exactly as it was the last time. The problem is that, from the market's perspective, it is not the same. As a result, you are setting yourself up for disappointment. What separates the best traders from all the rest is that they have trained their minds to believe in the uniqueness of each moment (although this training usually takes the form of losing several fortunes before they "really" believe in the concept of uniqueness). This belief acts as a counteracting force, neutralizing the automatic association mechanism. When you truly believe that each moment is unique, then by definition there isn't anything in your mind for the association mechanism to link that moment to. This belief acts as an internal force causing you to disassociate the "now" moment in the market from any previous moment filed away in your mental environment. The stronger your belief in the uniqueness of each moment, the lower your potential to associate. The lower your potential to associate, the more open your mind will be to perceive what the market is offering you from its perspective.

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MOVING TOWARD "THE ZONE"

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When you completely accept the psychological realities of the market, you will correspondingly accept the risks of trading. When you accept the risks of trading, you eliminate the potential to define market information in painful ways. When you stop defining and interpreting market information in painful ways, there is nothing for your mind to avoid, nothing to protect against. When there's nothing to protect against, you will have access to all that you know about the nature of market movement. Nothing will get blocked, which means you will perceive all the possibilities you have learned about (objectively), and since your mind is open to a true exchange of energy, you will quite naturally start discovering other possibilities (edges) that you formerly couldn't perceive. For your mind to be open to a true exchange of energy, you can't be in a state of knowing or believing that you already know what's going to happen next. When you are at peace with not knowing what's going to happen next, you can interact with the market from a perspective where you will be making yourself available to let the market tell you, from its perspective, what is likely to happen next. At that point, you will be in the best state of mind to spontaneously enter "the zone," where you are tapped into the "now moment opportunity flow." CHAPTER 9

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CHAPTER 9

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THE NATURE OF BELIEFS

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At this point, if you can sense the benefits of adopting the five fundamental truths about trading, then the task is to learn how to properly integrate these truths into your mental system as core beliefs that are not in conflict with any other beliefs you may hold. At first glance, this may seem like a daunting task and under other circumstances I would agree with you, but it won't be, because in Chapter 11 I'll give you a simple trading exercise specifically designed to properly install these truths as beliefs at a functional level. A functional level is, one where you find yourself just naturally operating out of a carefree state of mind, perceiving exactly what you need to do and doing it without hesitation or internal conflict. However, I do have a word of caution for those of you who have already looked at the exercise. On the surface, the trading exercise looks so simple that you may be tempted to do it now, before you thoroughly understand the implications of what you are doing. I strongly suggest that you reconsider. There are some subtle yet profound dynamics involved in the process of learning how to install new beliefs and change any existing beliefs that are in conflict with the new ones. Understanding the trading exercise itself is easy. Understanding how to use the exercise to change your beliefs is another matter entirely. If you do the exercise without understanding the concepts presented in this chapter and the next, you will not achieve the desired results. It is also important that you not take for granted the amount of mental effort you may have to expend to train your mind to fully accept these principles of success, regardless of how well you understand them. Remember Bob, the CTA who believed he thoroughly understood the concept of probabilities, but didn't have the ability to function from a probabilistic perspective. Many people make the mistake of assuming that once they understand something, the insight inherent in their new understanding automatically becomes a functional part of their identity. Most of the time, understanding a concept is only a first step in the process of integrating that concept at a functional level. This is especially true of concepts that deal with diinking in probabilities. Our minds are not naturally wired to be "objective" or to stay in the "now moment." This means we have to actively train our minds to think from these perspectives. In addition to the training involved, there may be any number of conflicting beliefs to work through. Conflicting beliefs will have the effect of sabotaging your best intentions to operate from an objective state of mind or to experience the "now moment opportunity flow." For example, let's say you've spent years learning how to read the markets, or spent large sums of money developing or buying technical systems, just so you could find out what was going to happen next.

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Now you have come to understand that you don't have to know what's going to happen next, and that even trying to know will detract from your ability to be objective or to stay in the moment. What we have is a direct conflict between your old belief that you need to know what will happen next to be successful and your new understanding that you don't need to know. Now, will your new understanding suddenly neutralize all the time, money, and energy expended on reinforcing the belief that you "need to know"? I wish it were that easy. And for some lucky few, it may be. If you will recall in Chapter 4 when I talked about psychological distance in relationship to software code, I said that some traders may already be so close to these new perspectives that all they need is to put together a few of the missing pieces to create a mindaltering, "ah, ha" experience. However, based on my experience of working with well over a thousand traders, I can say that most are not close to these perspectives at all. For those of you who are not, it may take a considerable amount of mental work (over a considerable amount of time) to properly integrate your new understandings about trading into your mental environment. The good news is that, ultimately, the exercise I present in Chapter 11 will install the five fundamental truths and resolve many of the potential conflicts, but only if you know exactly what you are doing and why you are doing it. That is the subject of this and the next chapter.

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THE ORIGINS OF A BELIEF

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What can we learn about the nature of beliefs, and how can we use that knowledge to create a mind-set that fosters our desire to be a consistently successful trader? These are the two questions I am going to focus on answering in this chapter. First, let's look at the origin of our beliefs. As you may recall, memories, distinctions, and beliefs exist in the form of energy— specifically, structured energy. Earlier, I lumped these three mental components together to illustrate:

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1. that memories, distinctions, and beliefs do not exist as physical matter; 2. that the cause-and-effect relationship that exists between ourselves and the external environment brings these components into existence; and 3. how the cause-and-effect relationship reverses so that we can perceive in the external environment what we have learned about.

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To get at the origins of our beliefs, we're going to have to unbundle these components to illustrate the difference between a memory and a belief. The best way to do this is to imagine ourselves in the mind of an infant. I would think that at the very beginning of a child's life, the memories of his experiences would exist in their purest form. By that I mean that the memories of what he has seen, heard, smelled, touched, or tasted exist in his mind as pure sensory information that is not organized or attached to any specific words or concepts. Therefore, I am going to define a pure memory as sensory information

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stored in its original form. A belief, on the other hand, is a concept about the nature of the way the external environment expresses itself. A concept combines pure sensory information with a symbol system we call language. For example, most infants have a pure memory of how it feels to be lovingly nurtured by a parent, but it isn't until the infant is taught to link or associate certain words with the pure sensory information stored in his memory that he will form a concept about how it feels to be lovingly nurtured. The phrase "Life is wonderful" is a concept. By themselves, the words make up a meaningless collection of abstract symbols. But if a child is either taught or decides to connect these words to his positively charged feelings of being nurtured, then the letters are no longer a collection of abstract symbols and the words are no longer an abstract phrase. "Life is wonderful" becomes a definitive distinction about the nature of existence or the way the world works. By the same token, if the child didn't get enough nurturing, relative to his needs, he could just as easily link his feelings of emotional pain to a concept like "Life isn't fair" or "The world is an awful place." In any case, when the positive or negative energy from our memories or experiences become linked to a set of words we call a concept, the concept becomes energized and, as a result, is transformed into a belief about the nature of reality. If you consider that concepts are structured by the framework of a language and energized by our experiences, it becomes clear why I refer to beliefs as "structured energy." When a belief comes into existence, what does it do? What is its function? In some ways it seems ludicrous to ask those questions. After all, we all have beliefs. We are constantly expressing our beliefs both verbally and through our actions. Furthermore, we are constantly interacting with other peoples beliefs as they express them. Yet, if I ask, "What exactly does a belief do?" chances are your mind will go blank. On the other hand, if I were to ask about the functions of your eyes, ears, nose, or teeth, you would have no problem answering. Since beliefs are such important component parts of our make-up (in terms of their impact on the quality of our lives), it certainly has to be one of life's great ironies that they are also the least thought about and understood. What I mean by "least thought about" is, if we have a problem with one of our body parts, we naturally focus our attention on that part and think about what we need to do to fix the problem. However, it doesn't necessarily occur to us that the problems we may be having with the quality of our lives (for example, lack of happiness, a sense of dissatisfaction, or lack of success in some area) are rooted in our beliefs. This lack of consideration is a universal phenomenon. One of the prominent characteristics of beliefs is that they make what we experience seem self evident and beyond question. In fact, if it weren't for your intense desire to experience consistent success as a trader, it's unlikely you would be delving into this topic at all. Usually, it takes years of extreme frustration before people begin examining their beliefs as the source of their difficulties. However, even though beliefs are an intricate part of our identity, you don't have to take this process of self analysis so personally. Consider the fact that none of us was born with any of our beliefs. They were all acquired in a combination of ways. Many of the beliefs that have the most profound impact on our lives were not even acquired by us as an

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act of free will. They were instilled by other people. And it probably won't come as a surprise to anyone that usually the beliefs that cause us the most difficulty are those that were acquired from others without our conscious consent. By that I mean beliefs that we acquired when we were too young and uninformed to realize the negative implications of what we were being taught. Regardless of the source of our beliefs, once they are born into existence they all basically function in the same way. Beliefs have certain characteristic ways in which they do their jobs, not unlike the various parts of our bodies. For example, if you compare my eyes and your eyes, or my hands and your hands, or my red blood cells and your red blood cells, we can see that they are not exactly the same, but they have characteristics in common that cause them to function in similar ways. By the same token, a belief that "Life is wonderful" will perform its function in the same way as a belief that "Life is awful." The beliefs themselves are different and the effect that each has on the quality of the holder's life will be vastly different, but both beliefs will function in exactly the same manner.

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In the broadest sense, our beliefs shape the way we experience our lives. As I have already said, we're not born with any of our beliefs. They're acquired, and as they accumulate, we live our lives in a way that reflects what we have learned to believe. Consider how different your life would be if you had been born into a culture, religion, or political system that has very little, if anything, in common with the one you were born into. It might be hard to imagine, but what you would have learned to believe about the nature of life and how the world works may not be remotely similar to what you currently believe. Yet you would hold these other beliefs with the same degree of certainty as your current beliefs.

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How Beliefs Shape Our Lives

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1. They manage our perception and interpretation of environmental information in a way that is consistent with what we believe. 2. They create our expectations. Keep in mind that an expectation is a belief projected into some future moment. Since we can't expect something we don't know about, we could also say that an expectation is what we know projected into some future moment. 3. Anything we decide to do or any outward expression of behavior will be consistent with what we believe. 4. Finally, our beliefs shape how we feel about the results of our actions.

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There isn't much about the way we function that beliefs don't play a major role in. So what I am going

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BELIEFS AND THEIR IMPACT ON OUR LIVES

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to do now is give you an example I used in my first book, The Disciplined Trader, to illustrate the various functions of a belief. In the spring of 1987, I was watching a locally produced television program called "Gotcha Chicago." It was about some local celebrities who played practical jokes on one another. In one segment of the program, the TV station hired a man to stand on the sidewalk along Michigan Avenue holding a sign that read "Free money. Today only." (For those of you who are not familiar with Chicago, Michigan Avenue is home to many fashionable, exclusive department stores and boutiques.) The TV station gave the man a considerable amount of cash, with instructions to give money to anyone who asked for it. Now, when you consider that Michigan Avenue is one of the busiest areas of the city, and if we assume that most of the people who passed the man on the street could read the sign, how many people would you think took him up on his offer and asked for some money? Of all the people who walked by and read the sign, only one person stopped, and said, "Great! May I have a quarter to buy a bus transfer?" Otherwise, no one would even go near the man. Eventually, the man grew frustrated because people weren't reacting the way he expected them to. He started crying out, "Do you want any money? Please take my money; I can't give it away fast enough." Everyone just kept walking around him as if he didn't exist. In fact, I noticed that several people went out of their way to avoid him. As a man wearing a suit and carrying a briefcase approached, he went right up to him and said, "Would you like some money?" The man responded, "Not today." Really frustrated now, he shot back, "How many days does this happen? Would you please take this?" as he tried to hand the man some cash. The man responded with a terse "No" and walked on. What was going on here? Why wouldn't anyone (except for the person who needed a bus transfer) ask for the money? If we assume that most or all of the passersby could read the sign, but still didn't make any effort to get the money, then one possible explanation for their behavior is that they just didn't care about money. This is extremely unlikely, though, considering how much of our lives is devoted to the pursuit of money. If we agree that people could read the sign and that money is very important to most of us, then what could have stopped these people from helping themselves? The environment was making available an experience that most people would love to have: someone giving them money with no strings attached. Yet everyone walked by, oblivious to what was awaiting them. They must not have been able to perceive what was available. That's hard to imagine, because the sign clearly stated "Free money. Today only." However, it's not hard to imagine if you consider that most people have a belief (an energized concept about how the world works) that "Free money doesn't exist." If free money really doesn't exist, then how does someone reconcile the obvious contradiction between that belief and the sign saying that it does? That's easy, just decide the man with the sign is crazy; what else could account for such bizarre behavior if, in fact, free money doesn't exist? The reasoning process that could compensate for the contradiction might go something like this: "Everyone knows getting money with no strings attached rarely happens. Certainly not from a stranger on one of the busiest streets in the city. In fact, if the man were really

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giving away money, he would already be mobbed. He might even be endangering his life. He must be crazy. I had better take a wide path around him; who knows what he might do?" Notice that every component of the thought process described is consistent with the belief that free money doesn't exist. 1. The words "free money" were neither perceived nor interpreted as they were intended from the environment s perspective. 2. Deciding the person with the sign must be crazy created an expectation of danger, or at least a perception that caution was warranted. 3. Purposefully altering one's path to avoid the person with the sign is an action that is consistent with the expectation of danger. 4. How did each person feel about the outcome? That's difficult to say without knowing each person individually, but a good generalization would be that they felt relieved that they successfully avoided an encounter with a crazy person. The feeling of relief that resulted from avoiding a confrontation is a state of mind. Remember that how we feel (the relative degree of positively or negatively charged energy flowing through our bodies and minds) is always the absolute truth. But the beliefs that prompt any particular state of mind may not be the truth with respect to the possibilities available from the environment's perspective. Relief from confrontation was not the only possible outcome in this situation. Imagine how different the experience would be if they believed that "free money exists." The process described above would be the same, except it would make the belief that "free money exists," seem self-evident and beyond question, just as it made the belief that "free money doesn't exist," seem self-evident and beyond question. A perfect example would be the one person who said "great, may I have a quarter for a bus transfer." When I saw this, I had the anybody for a quarter. A panhandler is someone who definitely believes in the existence of free money. Therefore, his perception and interpretation of the sign were exactly what was intended by the TV station. His expectation and behavior were consistent with his belief that free money exists. And how would he feel about the results? He got his quarter, so I would assume he felt a sense of satisfaction. Of course, what he didn't know is that he could have gotten a lot more. There's another possible outcome for our scenario. Let's look at a hypothetical example of someone who believes that "free money doesn't exist," but who takes a "what if approach to the situation. In other words, some people can be so intrigued and curious about the possibilities that they decide to temporarily suspend their belief that "free money doesn't exist." This temporary suspension allows them to act outside the boundaries created by a belief, in order to see what happens. So instead of ignoring the man with the sign, which would be our hypothetical person’s first inclination, he walks up to him and says, "Give me ten dollars." The man promptly pulls a ten-dollar bill out of his pocket and gives it to him. What happens now? How does he feel, having experienced something unexpected that completely contradicted his belief? For most people, the belief that free money doesn't exist is acquired through unpleasant circumstances, to put it mildly. The most common

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way is being told that we can't have something because it's too expensive. How many times does the typical child hear, "Who do you think you are anyway? Money doesn't grow on trees, you know." In other words, it is probably a negatively charged belief. So the experience of having money handed to him with no strings attached and without any negative comments would likely create a state of mind of pure elation. In fact, most people would be so happy that they'd feel compelled to share that happiness and this new discovery with everyone they knew. I can imagine him going back to his office or going home, and the moment he encounters someone he knows, the first words out of his mouth will be “You won’t believe what happened to me today," and even though he desperately wants those he meets to believe his story, they probably won't. Why? Because their belief that free money doesn't exist will cause them to interpret his story in a way that negates its validity. To take this example a little further, imagine what would happen to this person's state of mind if it occurred to him that he could have asked for more money. He is in a state of pure elation. However, the moment the thought either pops into his mind or someone he relates his story to offers the idea that he could have asked for a lot more money, his state of mind will immediately shift to a negatively charged state of regret or despair. Why? He tapped into a negatively charged belief about what it means to miss out on something or not get enough. As a result, instead of being happy over what he got, he will lament what he could have had but didn't get.

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BELIEFS VS. THE TRUTH

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In all three of these examples (including the hypothetical one), everybody experienced their own unique version of the situation. If asked, each person would describe what he or she experienced from their perspective, as if it were the only true and valid version of the reality of the situation. The contradiction between these three versions of the truth suggests to me a larger philosophical issue that needs to be resolved. If beliefs limit our awareness of the information being generated by the physical environment, so that what we perceive is consistent with whatever we believe, then how do we know what the truth is? To answer this question, we have to consider four ideas: 1. The environment can express itself in an infinite combination of ways. When you combine all the forces of nature interacting with everything created by humans, then add to that the forces generated by all the possible ways people can express themselves, the result is a number of possible versions of reality that would surelv overwhelm even the most onen-minded nerson. 2. Until we have acquired the ability to perceive eveiy possible way in which the environment can express itself, our beliefs will always represent a limited version of what is possible from the environment's perspective, making our beliefs a statement about reality, but not necessarily a definitive statement of reality. 3. If you find yourself taking exception to the second statement, then consider that if our beliefs were a true, 100-percent accurate reflection of physical reality, then our expectations would always be

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fulfilled. If our expectations were always fulfilled, we would be in a perpetual state of satisfaction. How could we feel other than happy, joyful, elated, and with a complete sense of well-being if physical reality was consistently showing up exactly as we expected it to? 4. If you can accept the third statement as being valid, then the corollary is also true. If we are not experiencing satisfaction, then we must be operating out of a belief or beliefs that don't vork very well relative to the environmental conditions. we Taking these four ideas into consideration, I can now answer the question, "What is the truth?" The answer is, whatever works. If beliefs impose limitations on what we perceive as possible, and the environment can express itself in an infinite combination of ways, then beliefs can only be true relative to what we are attempting to accomplish at any given moment. In other words, the relative degree of truth inherent in our beliefs can be measured by how useful they are. Each of us has internally generated forces (curiosity, needs, wants, desires, goals, and aspirations) that compel or motivate us to interact with the physical environment. The particular set of steps we take to fulfill the object of our curiosity, needs, wants, desires, goals, or aspirations is a function of what we believe to be true in any given circumstance or situation. That truth, whatever it is, will determine:

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1. the possibilities we perceive in relation to what is available from the environment's perspective, 2. how we interpret what we perceive, 3. the decisions we make, 4. our expectations of the outcome, 5. the action we take, and 6. how we feel about the results of our efforts.

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At any given moment, if we find ourselves in a state of satisfaction, happiness, or well-being in relation to whatever we are attempting to accomplish, we can say that our truth (meaning whatever beliefs we are operating from) are useful because the process, as stated above, worked. What we perceived was not only consistent with our objective, it was also consistent with what was available from the environment's perspective. Our interpretation of the information we perceived resulted in a decision, expectation, and action that were in harmony with the environmental situation and circumstance. There was no resistance or counteracting force offered by the environment (or in our own mind) that would diminish the outcome we were trying to achieve. As a result, we find ourselves in a state of satisfaction, happiness, and well-being. On the other hand, if we find ourselves in a state of dissatisfaction, disappointment, frustration, confusion, despair, regret, or hopelessness, we can say that relative to the environmental situation and circumstances, the beliefs we are operating from don't work well or at all, and therefore are not useful. Simply put, the truth is a function of whatever works in relation to what we are trying to accomplish at any given moment. CHAPTER

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CHAPTER 10

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THE IMPACT OF BELIEFS ON TRADING

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If the external environment can express itself in an infinite combination of ways, then there's really no limit to the number and types of beliefs available to be acquired about the nature of our existence. That is an elaborate way of saying that there's a lot out there to be learned about. Yet, to make a general observation about the nature of humanity, I would say that we certainly don't live our lives in a manner that is consistent with that statement. If it's true that it's possible to believe almost anything, then why are we always arguing and fighting with each other? Why isn't it all right for all of us to express our lives in a way that reflects what we have learned to believe? There has to be something behind our relentless attempt to convince others of the validity of our beliefs and to deny the validity of theirs. Consider that every conflict, from the smallest to the largest, from the least to the most significant, whether between individuals, cultures, societies, or nations, is always the result of conflicting beliefs. What characteristics of our beliefs make us intolerant of divergent beliefs? In some cases, we are so intolerant that we are willing to kill each other to get our point across. My personal theory is that beliefs are not only structured energy, but also energy that seems to be conscious, at least to the extent of having some degree of awareness. Otherwise, how can we account for our ability to recognize on the outside what is on the inside? How would we know our expectations are being fulfilled? How would we know when they are not? How would we know we are being confronted with information or circumstances that contradict what we believe? The only explanation I have is that each individual belief has to have some quality of either awareness or self-awareness that causes it to function as it does. The idea of energy that has some degree of awareness may be difficult for many of you to accept. But there are several observations we can make about our individual and collective natures that support die possibility. First, everyone wants to be believed. It doesn't matter what the belief is; the experience of being believed feels good. I think these positive feelings are universal, meaning that they apply to everyone. Conversely, no one likes to be disbelieved; it doesn't feel good. If I said, "I don't believe you," the negative feeling that would resonate throughout your body and mind is also universal. By the same token, none of us likes to have our beliefs challenged. The challenge feels like an attack. Everyone, regardless of the belief, seems to respond in the same way: The typical response is to argue, defend ourselves (our beliefs), and, depending on the situation, attack back. When expressing ourselves, we seem to like being listened to. If we sense our audience isn't paying attention, how does it feel? Not good! Again, I think this response is universal. Conversely, why is it so difficult to be a good listener? Because to be a good listener, we actually have to listen, without thinking about how we are going to express ourselves the moment we can either

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politely or rudely interrupt the person who's speaking. What's the compelling force behind our inability to listen without waiting to interrupt? Don't we like being with people with similar beliefs, because it feels comfortable and secure? Don't we avoid people with dissimilar or conflicting beliefs, because it feels uncomfortable or even threatening? The bottom line implication is, the moment we acquire a belief, it seems to take on a life of its own, causing us to recognize and be attracted to its likeness and repelled by anything that is opposite or contradictory. Considering the vast number of divergent beliefs that exist, if these feelings of attraction or comfort and being repelled or threatened are universal, then each belief must somehow be conscious of its existence, and this conscious, structured energy must behave in characteristic ways that are common to all of us.

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THE PRIMARY CHARACTERISTICS OF A BELIEF

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There are three basic characteristics you need to understand in order to effectively install the five fundamental truths about trading at a functional level in your mental environment:

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1. Beliefs seem to take on a life of their own and, therefore, resist any force that would alter their present form. 2. All active beliefs demand expression. 3. Beliefs keep on working regardless of whether or not we are consciously aware of their existence in our mental environment.

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1. Beliefs resist any force that would alter their present form. We may not understand the underlying dynamics of how beliefs maintain their structural integrity, but we can observe that they do so, even in the face of extreme pressure or force. Throughout human history, there are many examples of people whose belief in some issue or cause was so powerful that they chose to endure indignities, torture, and death rather than express themselves in a way that violated their beliefs. This is certainly a demonstration of just how powerful beliefs can be and the degree to which they can resist any attempt to be altered or violated in the slightest way. Beliefs seem to be composed of a type of energy or force that naturally resists any other force that would cause them to exist in any form other than their nresent form. Does this mean that thev can't be altered? Absolutely not! It just means that we have to understand how to work with them. Beliefs can be altered, but not in the way that most people may think. I believe that once a belief has been formed, it cannot be destroyed. In other words, there is nothing we can do that would cause one or more of our beliefs to cease to exist or to evaporate as if they never existed at all. This assertion is founded in a basic law of physics. According to Albert Einstein and others in the scientific community, energy can neither be created nor destroyed; it can only be transformed.

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If beliefs are energy—structured, conscious energy that is aware of its existence—then this same principle of physics can be applied to beliefs, meaning, if we tiy to eradicate them, it's not going to work. If you knew someone or something was trying to destroy you, how would you respond? You would defend yourself, fight back, and possibly become even stronger than you were before you knew of the threat. Each individual belief is a component of what we consider to be our identity. Isn't it reasonable to expect that, if threatened, each individual belief would respond in a way that was consistent with how all the parts respond collectively? The same principle holds true if we tiy to act as if a particularly troublesome belief doesn't exist. If you woke up one morning and everyone you knew ignored you and acted as if you didn't exist, how would you respond? It probably wouldn't be long before you grabbed someone and got right in their face to try to force them to acknowledge you. Again, if purposely ignored, each individual belief will act in the very same way. It will find a way to force its presence into our conscious thought process or behavior. The easiest and most effective way to work with our beliefs is to gently render them inactive or nonfunctional by drawing the energy out of them. I call this process de-activation. After de-activation, the original structure of the belief remains intact, so technically it hasn't changed. The difference is that the belief no longer has any energy. Without energy, it doesn't have the potential to act as a force on our perception of information or on our behavior. Here is a personal illustration: As a young child, I was taught to believe in both Santa Claus and the Tooth Fairy. In my mental system, both of these are perfect examples of what are now inactive, nonfunctional beliefs. However, even though they are inactive, they still exist inside my mental system, only now they exist as concepts with no energy. If you recall from the last chapter, I defined beliefs as a combination of sensory experience and words that form an energized concept. The energy can be drawn out of the concept, but the concept itself remains intact, in its original form. However, without energy, it no ! T.gCI h-15 th? nOt?ptial to act on my perception of inforlYiation or on my behavior. So, as I'm sitting here typing into my computer, if someone came up to me and said that Santa Claus was at the door, how do you think I would define and interpret this information? I would treat it as being irrelevant or a joke, of course. However, if I were five years old and my mother told me that Santa Claus was at the front door, her words would have instantly tapped me into a huge reservoir of positively charged energy that would have compelled me to jump up and run to the front door as fast as I could. Nothing would have been able to stop me. I would have overcome any obstacle in my path. At some point, my parents told me Santa Claus didn't exist. Of course, my first reaction was disbelief. I didn't believe them, nor did I want to believe them. Eventually, they convinced me. However, the process of convincing me did not destroy my belief in Santa Claus or cause it not to exist any longer; it just took all the energy out of the belief. The belief was transformed into a nonfunctional, inactive concept about how the world works. I'm not sure where all that energy went, but I know that some of it was transferred to a belief that Santa Claus doesn't exist.

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Now I have two contradictory distinctions about the nature of the world that exist in my mental system: one, Santa exists; two, Santa doesn't exist. The difference between them is in the amount of energy they contain. The first has virtually no energy; the second has energy. So from a functional perspective, there is no contradiction or conflict. I propose that, if it's possible to render one belief inactive, then it's possible to de-activate any belief, despite the fact that all beliefs seem to resist any force that would alter their present form. The secret to effectively changing our beliefs is in understanding and, consequently, believing that we really aren't changing our beliefs; we are simply transferring energy from one concept to another concept, one that we find more useful in helping us to fulfill our desires or achieve our goals.

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2. All active beliefs demand expression. Beliefs fall into two basic categories: active and inactive. The distinction between the two is simple. Active beliefs are energized; they have enough energy to act as a force on our perception of information and on our behavior. An inactive belief is just the opposite. It is a belief, that for any number of reasons, no longer has energy, or has so little energy that it's no longer able to act as a force on how we perceive information or how we express ourselves. When I say that all active beliefs demand expression, I don't mean to imply that every belief in our mental environment is demanding to express itself simultaneously. For example, if I ask you to think about what's wrong with the world today, the word "wrong" would bring to your mind ideas about the nature of the world that reflect what you believe to be troubling or disturbing. Unless, of course, there is nothing about the state of the world you find troubling. The point is, if there is something you do believe is wrong, you weren't necessarily thinking about those ideas before I asked the question; but the moment I did, your beliefs about these issues instantly moved to the forefront of your conscious thinking process. In effect, they demanded to be heard. I say that beliefs "demand" to be expressed because once something causes us to tap into our beliefs, it seems as if we can't stop the flood of energy that's released. This is especially true of emotionally sensitive issues or beliefs we feel particularly passionate about. You might ask, "Why would I want to hold back expressing my beliefs?" There could be several reasons. Consider a scenario in which you're this person is saying something that you completely disagree with, or even find utterly absurd. Will you express your truth or hold back? That will depend on the beliefs you have about what is proper in such a situation. If your beliefs dictate that speaking up would be inappropriate, and those beliefs have more energy than the ones that are being contradicted, then you'll probably hold back and not argue openly. You might be looking at this person (the boss) and nodding your head in agreement. But is your mind in agreement? More to the point, is your mind silent? Absolutely not! Your position on the issues being presented are effectively countering each point the boss is making. In other words, your beliefs are still demanding expression, but they aren't being expressed externally (in the environment) because other beliefs are acting as a counteracting; force. However O O ' they will soon find a way to get out, won't they? As soon as you are out of the situation, you will probably

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find a way to "unload," or even spew out your side of the argument. You will probably describe what you had to endure to anyone you think will lend a sympathetic ear. This is an example of how our beliefs demand to be expressed when they are in conflict with the external environment. But what happens when one or more of our beliefs are in conflict with our intents, goals, dreams, wants, or desires? The implications of such a conflict can have a profound effect on our trading. As we have already learned, beliefs create distinctions in how the external environment can express itself. Distinctions, by definition, are boundaries. Human consciousness, on the other hand, seems to be larger than the sum total of everything we have learned to believe. This "larger than" quality of human consciousness gives us the ability to think in any direction we choose, either inside or outside of the boundaries imposed by our beliefs. Thinking outside of the boundaries of our beliefs is commonly referred to as creative thinking. When we purposely choose to question a belief (question what we know), and sincerely desire an answer, we make our minds available to receive a "brilliant idea," "inspiration," or "solution" to the issue at hand. Creativity, bv definition, brings forth something- that didn't we will (by definition, automatically) receive ideas or thoughts that are outside of anything that already exists in our rational mind as a belief or memory. As far as I know, there is no consensus among artists, inventors, or the religious or scientific communities as to exactly where creatively generated information comes from. However, what I do know is that creativity seems to be limitless and without boundaries. If there are any limits on the ways we can think, we certainly haven't found them yet. Consider the staggering pace at which technology has developed in the last 50 years alone. Every invention or development in the evolution of humanity was born in the minds of people who were willing to think outside the boundaries dictated by what they had learned to believe. If all of us have the inherent ability to think creatively (and I believe that we do), then we also have the potential to encounter what I call a "creative experience." I define a creative experience as the experience of anything new or outside the boundaries imposed by our beliefs. It could be a new sight—something we've never seen before, but from the environment's perspective was always there. Or we could experience a new sound, smell, taste, or touch. Creative experiences, like creative thoughts, inspirations, hunches, and brilliant ideas, can occur as a surprise or can be the result of our conscious direction. In either case, when we experience them we can be confronted with a major psychological dilemma. A creative occurrence, whether in the form of a thought or an experience, can cause us to be attracted to or desire something that is in direct conflict with one or more of our beliefs. To illustrate the point, let's return to the example of the boy and dog. Recall that the boy has had several painful experiences with dogs. The first experience was real from the environment's perspective. The others, however, were the result of how his mind processed information (based on the operation of the association and painavoidance mechanisms). The end result is that he experiences fear every time he encounters a dog. Let's suppose that the boy was a toddler when he

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had his first negatively charged experience. As he grows up and begins associating specific words and concepts with his memories, he will form a belief about the nature of dogs. It would be reasonable to assume that he adopted a belief something like, "All dogs are dangerous." With the use of the word "all," the boy's belief is structured in a way that assures that he will avoid all dogs. He has no reason to question this belief, because every experience has confirmed and reinforced its validity. However, he (and everyone else on the planet) is susceptible to a creative experience. Under normal circumstances, the boy will do everything possible to make sure he does not encounter a dog. But what if something unexpected and unintended occurs? Suppose the boy is walking with his parents and, as a result, feels safe and protected. Now, suppose he and his parents come to a blind corner and cannot see what is on the other side. They encounter a scene in which several children of about the same age as the boy are playing with some dogs and, furthermore, they are obviously having a great deal of fun. This is a creative experience. The boy is confronted with indisputable information that what he believes about the nature of dogs isn't true. What happens now? First, the experience was not at the boy's conscious direction. He didn't make a decision to willingly expose himself to information that contradicted what he believed to be true. We might call this an inadvertent creative experience, because the external environment forced him to confront other possibilities that he didn't believe existed. Second, the experience of seeing other children playing with dogs and not getting hurt will throw his mind into a state of confusion. After the confusion wears off, meaning as he begins to accept the possibility that not all dogs are dangerous, several scenarios are possible. Seeing other children his own age (with whom he could strongly identify) having such a great time playing with dogs could cause the boy to decide that he wants to be like the other children and have fun with dogs, too. If that's the case, this inadvertent creative encounter has caused him to become attracted to express himself in a way that he formerly didn't believe was possible (interacting with dogs). In fact, the notion was so impossible that it wouldn't have even occurred to him to consider it. Now, he not only considers it, he desires it. Will he be able to express himself in a way that is consistent with his desire? The answer to this question is a matter of energy dynamics. There are two forces within the boy that are in direct conflict with each other, competing for expression: his belief that "all dogs are dangerous" and his desire to have fun and be like the other children. What he will do the next time he encounters a dog will be determined by which has more energy: his belief or his desire. Given the intensity of the energy in his belief that "All dogs are dangerous," we can reasonably assume that his belief will have far more energy than his desire. If that's the case, then he will find his next encounter with a dog very frustrating. Even though he may want to touch or pet the dog, he'll find that he can't interact with it in any way. The word "all" in his belief will act as a paralyzing force, preventing him from fulfilling his desire. He might be well aware of the fact that the dog he wants to pet is not dangerous and won't hurt him;

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but he won't be able to pet it until the balance of energy tips in favor of his desire. If the boy genuinely wants to interact with dogs, he will have to overcome his fear. This means that he will have to de-activate his belief that all dogs are dangerous so he can properly install a belief about dogs that is more consistent with his desire. We know that dogs can express themselves in a wide range of ways, from loving and gentle to mean and nasty. However, very few dogs on a percentage basis fall into the mean and nasty category. A good belief for the boy to adopt, then, would be something like, "Most dogs are friendly, but some can be mean and nasty." This belief would allow him to learn to recognize characteristics and behavior patterns that will tell him which dogs he can play with and which ones to avoid. However, the larger issue is, how can the boy de-activate the "all" in the belief that "All dogs are dangerous" so he can overcome his fear? Remember that all beliefs naturally resist any force that would alter their present form, but, as I indicated above, the appropriate approach is not to try to alter the belief, but rather to draw the energy out of it and channel that energy into another belief that is better suited to our purposes. To de-activate the concept the word "all" represents, the boy will have to create a positively charged experience with a dog; at some point, he will have to step through his fear and touch one. Doing this might require a great deal of effort on the boy's part over a considerable amount of time. Early in the process, his new realization about dogs might be strong enough only to allow him to be in the presence of a dog, at a distance, and not run away. However, each encounter with a dog, even at a distance, that doesn't result in a negative outcome will draw more and more of the negative energy out of his belief that "All dogs are dangerous." Eventually, each new positive experience will allow him to close the gap between himself and a dog, little by little, to the point that he can actually touch one. From an energy dynamics perspective, he will be able to touch a dog when his desire to do so is at least one degree greater in intensity than his belief that all dogs are dangerous. The moment he actually does touch a dog, it will have the effect of drawing most of the remaining negative energy out of the "all" concept and transfer it to a belief that reflects his new experience. Although it's probably not that common, there are people who, for various reasons, are motivated enough to purposely put themselves through the above described process. However, they may not be consciously aware of the dynamics involved. People who work through a childhood fear of this magnitude usually do so somewhat haphazardly over a period of years, without knowing for sure exactly how they did it (unless they seek and get competent professional help). Later on, as adults, if they are asked or if they happen to encounter a situation that reminds them of their past (for instance, observing a child who is terrified of dogs), they typically characterize the process they went through as "I remember when I was afraid of dogs, but I grew out of it." The end result of the first scenario was that the boy worked through his fear by de-activating his limiting belief about the nature of dogs. This allowed him to express himself in a way that he finds pleasing and that otherwise would have been impossible. The second scenario that could result from the child's inadvertent creative experience with dogs is that he isn't attracted to the possibility of playing with a

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dog. In other words, he could not care less about being like the other children or interacting with dogs. In this case, his belief that all dogs are dangerous and his new realization that all dogs are not dangerous will exist in his mental environment as contradictory concepts. This is an example of what I call an active contradiction, when two active beliefs are in direct conflict with each other, both demanding expression. In this example, the first belief exists at a core level in the boy's mental environment, with a great deal of negatively charged energy. The second belief is at a more superficial level, and has very little positively charged energy. The dynamics of this situation are interesting, and extremely important. We have stated that beliefs control our perception of information. Under normal circumstances, the boy would have been perceptually blinded to the possibility of interacting with dogs, but the experience of seeing other children playing with them created a positively charged concept in his mental environment that dogs are not all dangerous; some can be friendly. However, he hasn't done anything to de-activate the "all" in his belief that "All dogs are dangerous," and, as far as I know, beliefs have no capacity to de-activate themselves. As a result, beliefs exist in our mental environment from the moment they are born to the moment we die, unless we consciously take steps to deactivate them. However, in this scenario, the boy has no desire and consequently no motivation to step through his fear. Therefore, the boy is left with an active contradiction where his minimally charged belief that not all dogs are dangerous gives him the ability to perceive the possibility of playing with a dog, but his powerfully charged belief that all dogs are dangerous still causes him to experience some level of fear every time he encounters a dog (maybe not enough fear to cause him to run in terror, because some of that fear will be offset by the other belief, but there will certainly be enough fear to cause a great deal of discomfort). The ability to "see" and consequently know that a situation is not dangerous, but at the same time find ourselves immobilized with fear, can be quite baffling if we don't understand that what we discover as the result of thinking creatively or realize from an inadvertent creative experience doesn't necessarily have enough energy to become a dominant force in our mental environment. In other words, our new awareness or discovery could very well have enough energy to act as a credible force on our perception of information, thereby causing us to perceive possibilities that would otherwise be invisible; but it might not have enough energy to act as a credible force on our behavior. In making this statement, I am operating out of the assumption that it takes more energy to act or express ourselves than the amount of energy it takes to observe something. On the other hand, new awareness and discoveries instantly and effortlessly become dominant forces if there's nothing inside us that's in conflict with them. But if there are conflicting beliefs and we aren't willing to de-activate the conflicting forces (expending some effort), especially if they're negatively charged, then acting on what we've discovered will be a struggle at the very least, and perhaps down right impossible. What I have just described is the psychological dilemma that virtually every trader has to resolve. Let's say you have a firm grasp of the nature of probabilities

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and, as a result, you "know" that the next trade is simply another trade in a series of trades that has a probable outcome. Yet you find you're still afraid to put that next trade on, or you're still susceptible to several of the fear-based trading errors we've discussed in previous chapters. Remember that the underlying cause of fear is the potential to define and interpret market information as threatening. What is the source of our potential to interpret market information as threatening? Our expectations! When the market generates information that doesn't conform to what we expect, the up and down tics seem to take on a threatening quality (become negatively charged). Consequently, we experience fear, stress, and anxiety. What is the underlying source of our expectations? Our beliefs. In light of what you now understand about the nature of beliefs, if you are still experiencing negative states of mind when you trade, you can assume there's a conflict between what you "know" about probable outcomes and any number of other beliefs in your mental environment that are arguing (demanding expression) for something else. Keep in mind that all active beliefs demand expression, even if we don't want them to. To think in probabilities, you have to believe that every moment in the market is unique, or more specifically, that every edge has a unique outcome. When you believe at a functional level that every edge has a unique outcome (meaning that it's a dominant belief without any other beliefs arguing for something different), you will experience a state of mind that is free of fear, stress, and anxiety when you trade. It really can't work any other way. A unique outcome is not something we have already experienced, therefore it is not something we can already know. If it were known, it could not be defined as unique. When you believe that you don't know what is going to happen next, what exactly are you expecting from the market? If you said "I don't know," you are absolutely right. If you believe that something will happen and that you don't need to know exactly what that something is to make money, then where s the potential to define and interpret market information as threatening and painful? If you said "There is none," you are absolutely right again. Here is one more example of how beliefs demand expression. Let's look at a situation where a child's first encounter with a dog was a very positive experience. As a result, he has absolutely no problem interacting with dogs (any dog for that matter), because he has not encountered one that's unfriendly. Therefore, he has no concept (an energized belief) that it is possible for a dog to inflict any damage or cause him to experience pain. As he learns to associate words with his memories, he will probably acquire a belief along the lines of "all dogs are friendly and fun." Therefore, every time a dog comes into his field of awareness, this belief will demand expression. From the perspective of someone who fi with a do?, it will seem as if this child has an attitude of reckless abandon. If you tried to convince the child that he'll get bitten someday if he doesn't exercise caution, his belief will cause him to either discount or completely disregard your advice. His response would be something like "No way!" or "It can't happen to me." Let's say at some point in his life he approaches an unfamiliar dog that wants to be left alone. The dog growls. The warning will go unheeded and the dog attacks the boy. From the perspective of the boy's belief system, he's just had

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a creative experience. What effect will this experience have on his belief that "all dogs are friendly"? Will he now be afraid of all dogs as the child in the first example was? Unfortunately, the answers to these questions are not cut and dried, because there may be other beliefs, also demanding expression, that don't have anything specifically to do with dogs that come into play in a situation like this. For example, what if this child has a highly developed belief in betrayal (he believes he's been betrayed by some very significant people in some very significant situations that have caused him to experience intense emotional pain). If he associates the attack by this one dog as a "betrayal" by dogs in general (in essence a betrayal of his belief in dogs), then he could easily find himself afraid of all dogs. All of the positive energy contained in his original belief could instantly be transformed into negatively charged energy. The boy could justify this shift with a rationalization like "If one dog can betray me, then any dog can." However, I do think this is an extreme and very unlikely occurrence. What is more likely is the word "all" in his original belief will instantly be de-activated and that energy will get transferred to a new belief that better reflects the true nature of dogs. This new experience caused an energy shift that forced him to learn something about the nature of dogs that he otherwise refused to consider possible. His belief in the friendliness of dogs remains intact. He will still play with dogs, but he will now exercise some discretion by consciously looking for signs of friendliness or unfriendliness. I think that a fundamental truth about the nature of our existence is every moment in the market, as well as in evervdav life, has elements of what we know (similarities) and elements that we don't or can't know because we haven't experienced it yet. Until we actively train our minds to expect a unique outcome, we will continue experiencing only what we know; everything else (other information and possibilities that are not consistent with what we know and expect) will pass us by, unperceived, discounted, distorted, outright denied, or attacked. When you truly believe that you don't need to know, you will be thinking in probabilities (the market perspective) and will have no reason to block, discount, distort, deny, or attack anything the market is offering about its potential to move in any particular direction. If you are not experiencing the quality of mental freedom implied in that statement, and it is your desire to do so, then you must take an active role in training your mind to believe in the uniqueness of each moment, and you must de-activate any other belief that argues for something different. This process isn't any different from the one the boy in the first scenario went through, nor is it going to happen by itself. He wanted to interact with dogs without fear, but to do so he had to create a new belief and de-activate the conflicting ones. This is the secret to achieving consistent success as a trader.

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3. Beliefs keep on working regardless of whether we are consciously aware of their existence in our mental environment. In other words, we don't have to actively remember or have conscious access to any particular belief for that belief to act as a force on our perception of information or on our

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behavior. I know it s hard to "believe" that something we can't even remember can still have an impact on our lives. But when you think about it, much of what we learn throughout our lives is stored at an unconscious or subconscious level. If I asked you to remember each specific skill you had to learn so that you could drive a car with confidence, chances are you wouldn't remember all the things you needed to concentrate and focus on while you were in the process of learning. The first time I had the opportunity to teach a teenager how to drive, I was absolutely amazed at how much there was to learn, how much of the process I took for granted and no longer thought about at a conscious level. Possibly the best example that illustrates this characteristic is people who drive under the influence of alcohol. On any given day or night, there are probably thousands of people who have had so much to drink that they have no idea that they have no conscious awareness of how they drove from point A to point B. It is difficult to imagine how this is possible, unless you consider that driving skills and one's belief in his ability to drive operate automatically on a much deeper level than waking consciousness. Certainly, some percentage of these drunk drivers get into accidents, but when you compare the accident rate with the estimated number of people driving under the influence of alcohol, it's remarkable that there aren't a great many more accidents. In fact, a drunk driver is probably most likely to cause an accident when he either falls asleep or something requires a conscious decision and a fast reaction. In other words, the driving conditions are such that operating out of one's subconscious skills is not enough.

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SELF EVALUATION AND TRADING

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How this characteristic applies to our trading is also quite profound. The trading environment offers us an arena of unlimited opportunities to accumulate wealth. But just because the money is available and we can perceive the possibility of getting it, that doesn't necessarily mean that we (as individuals) have an unlimited sense of selfvaluation. In other words, there could be a huge gap between how much money we desire for ourselves, how much we perceive is available, and how much we actually believe we are worth or deserve. Everyone has a sense of self-valuation. The easiest way to describe this sense is to list every active belief, both conscious and subconscious, that has the potential to argue either for or against accumulating or achieving greater and greater levels of success and prosperity. Then match the energy from the positively charged beliefs against the energy from the negatively charged beliefs. If you have more positively charged energy arguing for success and prosperity than negatively charged energy arguing against them, then you have a positive sense of self-valuation. Otherwise, you have a negative sense of self-valuation. The dynamics of how these beliefs interact with one another is not nearly so simple as I'm making it sound. In fact, it can be so complex that it could take years of sophisticated mental work to organize and sort out. What you need to know is that it's almost impossible to grow up in any social environment and not acquire some negatively charged beliefs that would argue against success or accumulating vast sums of money.

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Most of these self-sabotaging beliefs have long been forgotten and operate at a subconscious level, but the fact that we may have forgotten them doesn't mean they've been de-activated. How do we acquire self-sabotaging beliefs? Unfortunately, it's extremely easy. Probably the most common way is when a child engages in some activity that a parent or teacher doesn't want him to do and the child accidently injures himself. Many parents, to get their point across to the child, will respond to a situation like this by saying, "This (whatever pain you are experiencing) wouldn't have happened to you if you didn't deserve it," or "You disobeyed me and look what happened, God punished you." The problem with making or hearing statements like this is that there's a potential for the child to associate every future injury with these same statements and, subsequently, form a belief that he must be an unworthy person, undeserving of success, happiness, or love. Anything we feel guilty about can have an adverse effect on our sense of self-worth. Usually guilt is associated with being a bad person, and most people believe that bad people should be punished, certainly not rewarded. Some religions teach children that having a lot of money isn't godly or spiritual. Some people believe that making money in certain ways is wrong, even though it may be perfectly legal and moral from society's perspective. Again, you may not have a speoifir recollection of learning something that would argue against the success you perceive as possible, but that doesn't mean that what you learned is no longer having an effect. The way these subconscious self-sabotaging beliefs manifest themselves in our trading is usually in the form of lapses in focus or concentration, resulting in any number of trading errors, like putting in a buy for a sell or vice versa, or allowing yourself to give in to distracting thoughts that compel you to leave the screen, only to find out when you return that you missed the big trade of the day. I've worked with many traders who achieved various levels of consistent success, but found they just couldn't break through certain thresholds in acquiring equity. They discovered an invisible but very real barrier similar to the proverbial glass ceiling that many women executives experience in the corporate world. Every time these traders hit the barrier, they experienced a significant draw down, regardless of the market conditions. However, when asked about what happened, they typically blamed their sudden run of bad luck on just that—luck or the vagaries of the market. Interestingly, they typically created a steadily rising equity curve, sometimes over a period of several months, and the significant draw down always occurred at the same spot in their equity curve. I describe this psychological phenomenon as being in a "negative zone." As magically as money can flow into a trader's accounts when he is "in the zone," it can just as easily flow out, if he is in a negative zone where unresolved self-valuation issues mysteriously act on his perception of information and behavior. I am not implying here that you have to de-activate every belief that would argue against your ever-expanding positive sense of selfvaluation, because you don't. But you must be aware of the presence of such beliefs, and take specific steps in your trading regimen to compensate when they start expressing themselves. CHAPTER

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CHAPTER 11

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THINKING LIKE A TRADER

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If you asked me to distill trading down to its simplest form, I would say that it is a pattern recognition numbers game. We use market analysis to identify the patterns, define the risk, and determine when to take profits. The trade either works or it doesn't. In any case, we go on to die next trade. It's that simple, but it's certainly not easy. In fact, trading is probably the hardest thing you'll ever attempt to be successful at. That's not because it requires intellect; quite the contrary! But because the more you think you know, the less successful you'll be. Trading is hard because you have to operate in a state of not having to know, even though your analysis may turn out at times to be "perfectly" correct. To operate in a state of not having to know, you have to properly manage your expectations. To properly manage your expectations, you must realign your mental environment so that you believe without a shadow of a doubt in the five fundamental truths. In this chapter, I am going to give you a trading exercise that will integrate these truths about the market at a functional level in your mental environment. In the process, I'll take you through the three stages of development of a trader. The first stage is the mechanical stage. In this stage, you:

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1. Build the self-trust necessary to operate in an unlimited environment. 2. Learn to flawlessly execute a trading system. 3. Train your mind to think in probabilities (the five fundamental truths). 4. Create a strong, unshakeable belief in your consistency as a trader.

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Once you have completed this first stage, you can then advance to the subjective stage of trading. In this stage, you use anything you have ever learned about the nature of market movement to do whatever it is you want to do. There's a lot of freedom in this stage, so you will have to learn how to monitor your susceptibility to make the kind of trading errors that are the result of any unresolved self- valuation issues I referred to in the last chapter. The third stage is the intuitive stage. Trading intuitively is the most advanced stage of development. It is the trading equivalent of earning a black belt in the martial arts. The difference is that you can't try to be intuitive, because intuition is spontaneous. It doesn't come from what we know at a rational level. The rational part of our mind seems to be inherently mistrustful of information received from a source that it doesn't understand. Sensing that something is about to happen is a form of knowing that is very different from anything we know rationally. I've worked with many traders who frequently had a very strong intuitive sense of what was going to happen next, only