12habitudes of Hi12Habitudes of Highly Scuccessful Traders - Pdfghly Scuccessful Traders
12habitudes of Hi12Habitudes of Highly Scuccessful Traders - Pdfghly Scuccessful Traders
12habitudes of Hi12Habitudes of Highly Scuccessful Traders - Pdfghly Scuccessful Traders
Chapter1
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COMMITMENT
The winning trader has made a commitment to the process of effective trading. Its not a random bet or two. He has
laid down the foundations for success. This profession demands
training, groundwork, practice, and readiness.
This does not mean that you should over prepare, or
strive for a perfection that does not and cannot exist. Thats
research, not trading. As soon as you have something that puts
the probabilities strongly in your favor, youre ready to begin.
You dont want to begin too soon, and you dont want to begin
too late.
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Chapter2
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DRAW A BOUNDARY
We need to have a boundary between ourselves and
our trading. We are not our trading. We do our trading.
We need to have a boundary between present trading
and past trading. Yesterdays trade has nothing to do with todays
trade. Absolutely nothing. Those who confuse yesterdays trading with todays trading inevitably get into trouble.
Now a good boundary is just that. It lets us know where
one thing begins and another thing ends. A boundary sets limits.
A boundary is not a wall, and its not a merging or becoming
one with a trade.
Walls completely separate us from what weve walled
off and dont allow us to take in relevant information. Of course,
there are times when something is so painful or destructive, we
need to construct a wall. And we can, but first we would be
wise to see what if any lessons we can learn.
There are times when we want to merge with a person
or an experience or maybe even the trading. You dont need
boundaries when youre bonding with a baby or making love or
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AN ANXIETY CURE
Anxiety is a forward looking emotion that tells you that
there is something in your future for which you need to prepare.
Ask yourself, What can I do to prepare for this?
And do whatever you can.
Then, in your imagination go out into the future to just
after the successful conclusion of the event you were worried
about. Imagine and visualize the successful conclusion of the
event.
Most people do just the opposite of this. They go out
into the future in their imagination and picture and feel the unsuccessful conclusion of an occurrence. How many times have
you gotten an entry signal and imagined how bad youll feel
when youre stopped out? Dont do this. Imagine instead that
the trade goes where the probabilities tell you it will go.
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Chapter3
TheHabitudeofWillingnesstoAcceptLoss
Whether I get out at a profit or loss does not matter.
Bernard Oppetit
Taking a loss does not make you a loser. This is so important, Im going to say it again. Taking a loss does not make
you a loser. In fact, taking a loss can keep you from becoming a
loser.
Successful traders accept loss as a simple part of the
process of trading. Since loss is an integral part of trading, you
have to be willing to accept the inevitability of losing trades.
Profits and losses are like night and day, like rain and sunshine,
summer and winter, spring and fall. Both profits and losses are
natural to trading. By totally accepting the necessity of taking
some loss, you ease the intensity of trading.
THE IMPASSE
It was as if she were all dressed up with nowhere to go.
More than anything in the world, Melanie wanted to successfully trade S & P futures. And yet, here she sat, after all the
training, after all the courses, day after day, watching the signals go by; and she never put on a trade.
Whats the matter with me? shed ask. Why cant I
just put on a trade?
It was like trying to swim through glue just sitting there
in front of the computer. Shed see the opportunities come and
go. And she wouldnt do anything. Shed sit frozen like an ice
sculpture melting. Then, as the trades went on to make money,
shed feel even worse.
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GROWING LOSSES
Ironically, traders who seek to avoid loss frequently end
up losing and often losing big. Some miss opportunity by failing to pull the trigger. Some wait for confirmation only to enter
when the trade is mostly over. Some lose because they refuse to
recognize a losing situation when theyre in it. Some, in a losing
trade, will avoid taking that loss only to find it get bigger and
bigger. Only when the pain of holding unto the loss is greater
than the pain of getting out of the trade will they get out.
Clearly the quicker you take a loss, the less damage
youll do to yourself both financially and psychologically. Losing trades are like dirty dishes in the sink. Youre going to have
to take care of them sooner or later, so you might as well do it
right away. Once out of a trade, your mind is free to look for
new opportunities. And youve stopped tormenting yourself.
The desire not to take a loss is also behind the disastrous
policy of adding to a losing trade. The worse it gets, the greater
you raise the stakes by putting more money into an untenable
situation.
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RESISTANCE
It happens. But not to those who easily accept losses as
a normal part of the trading game. Its the resistance to loss, to
the absolutely inevitable, that gets you what you dont want.
Part of the resistance comes from making an individual
trade too important. One trade viewed as but one in a series of
trades will not take on such a life and death struggle against
loss. Each trade is statistically unimportant.
Part of it comes from thinking that you have to be right.
You try to work it out so you can prove yourself right. When
you accept the fact that you dont have to always be right about
what is basically unknowable, you take a huge burden off yourself. Remember, its not your job to know, so why should you
need to be right?
Part of the struggle comes from tying your self-esteem
to a trade. You try to avoid loss to prop up your self-opinion.
Respect yourself even when you take losses.
Part of it comes from not focusing on probabilities, but
rather focusing on the possibility. Remember probability is much
stronger than possibility. Youre ready for possibility, but you
focus on what is probable. You want to focus on where you
expect the trade to go. When you look solely at your risk, you
begin to imagine it; and it becomes difficult, if not impossible,
to take the trade.
Some of the resistance to taking losses comes from thinking theres a limited supply of money. True your financial resources are finite but your financial possibilities are unlimited.
Think positively.
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OVERCOMING RESISTANCE
Resistance can be overcome by changing your thinking.
Let me finish the story I told you earlier in the chapter.
Melanie called me and left a message on my answering
machine. This is Freedom! I just dipped into the S & P, and
took out five points!
I laughed with joy when I heard the message. Melanie
had learned to imagine probability of success and accept the
possibility of loss.
Freedom had learned to ask, What if this trades a big
winner?
And that trumped Fears asking, What if I lose?
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Chapter4
TheHabitudeofTakingControlledRisk
Since the beginning of recorded history, gambling
the very essence of risk takinghas been a popular pastime
and often an addiction
Human beings have always been infatuated with gambling because it puts us head-to-head against the fates.
Peter L. Bernstein
THE ODDS
They do it, though, based on the odds. Probability is the
mathematical center of wise risk. Successful traders risk to
win.
Without numbers, there are no odds and no probabilities; without odds and probabilities, the only way to deal
with risk is to appeal to the gods and the fates. Without numbers, risk is wholly a matter of gut.
Peter L. Bernstein1
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EXCITEMENT OR FEAR
The same shot of adrenaline that creates excitement in
some creates fear in others. When you feel that adrenaline pump
as you start to trade, do you interpret it as a possibility that
something wonderful could happen or as a signal that something awful could happen?
Whether you feel excitement or anxiety depends on how
you run your imagination. Sure, theres a possibility of loss and
theres a probability of profit if youve stacked the probabilities
in your favor. For the risk taker and risk manager this uncertainty between small loss or large profit is where the fun lies.
CONTROL
Fear can be a spur to action. Fear creates the fight or
flight syndrome. Good judgement and experience tells you which
to do and when to do it. You dont leave it just to your emotions. You exercise choice. A good trader takes risks, but he is
in control. Controlpersonal skillis a vital part of any risk
taking action. In interviews with stunt men, the need to be in
control comes out clearly.2
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INDIVIDUAL DIFFERENCES
Risk makes certain people come alive. Others are risk
averse. These are our individual differences. We all have different degrees to which we need, experience, and respond to excitement. The important goal is to balance that risk propensity
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Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk, New
York: John Wiley & Sons, Inc., 1996
2
S. Piet, What motivates stunt men Motivation and Emotion, 11 (2) 1987,
pp. 195-213
3
Michael J. Apter, The Dangerous Edge, The Psychology of Excitement,
New York: The Free Press, 1992
4
Mihaly Csikszentmihalyi, Flow: The Psychology of Optimal Experience,
New York: Harper and Row, 1990
5
Alpesh B. Patel, The Mind of a Trader, London: Financial Times, 1997
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Chapter5
TheHabitudeofThinkinginProbabilities
The real trouble with this world of ours is not that it
is an unreasonable world, nor even that it is a reasonable
one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap
for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is
hidden; its wildness lies in wait.
G. K Chesterton
The wildness lies in wait. Still we must think in terms of
probabilities. Why? Because that is all we have.
ALL WE HAVE
Oh, we could do remote viewing. We could call on
psychics. We could look to astrology. We could call for divine
intervention. We could, and some of us do. Our trading is either
in the hands of the fates, the gods, guesswork, or probabilities.
I prefer probabilities. Even if theyre not always probable. Not
always is the operative word. Patterns occurbut not always.
Systems workbut not always. Fundamentals dictate price
but not always.
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Chapter6
And yet we must. The moment we leave a money market or T Bill for a moving market, we have moved from certainty into uncertainty. For some, this is an uncomfortable place
to be. Some see it as an unwise place to be.
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A STORY
Clint Johnson is on line three, his secretary was saying.
He felt the familiar lump in his throat, a sense of shame
and guilt. Tell him Ill call him back, he said.
Hubert Hunchley was trapped in a nightmare that would
not go away. How could he face his clients after losing them so
much money in this last trade? And his own account was down
even more than the clients! He had put on way too large a position.
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Chapter7
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GAINING CLARITY
The long view enables a trader to be optimistic about
the future even as he remains realistic in the present. With an
optimistic view of the future, a trader is able to accept with
clarity current market conditions. A clear view of current price
action is essential to successful trading.
A successful trader accepts the information the market
is giving him even if it goes against his current position. He can
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Chapter8
At the root of many trading problems is a sense of scarcity or a lack of belief in the abundance of wealth and opportunity. With abundance we have more than enough. With scarcity
we have barely enough or not enough.
Successful traders have confidence that the markets will
provide abundant and recurring opportunity and that they can
identify and take advantage of those opportunities.
The same is true in general of people who are successful in life. Successful people believe that life offers a cornucopia of opportunities and that they can identify and take advantage of some of them. For them its really a matter of selecting
which opportunities they will commit to and go after.
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VALUING WEALTH
In talking about an abundance consciousness, Im not
talking about easy come, easy go. No. Thats the inability to
value wealth and let it grow. A spendthrift doesnt honor the
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Chapter9
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EXPLANATORY STYLE
The way you respond to winning and losing periods will
depend largely upon your explanatory style. How do you explain misfortune? How do you explain good fortune? In short,
are you basically optimistic or pessimistic in regards to trading?
Martin Seligman has done pioneering work on this subject.1
When a good thing happens to an optimist, he says its
permanent, pervasive, and personal. When a good thing happens to a pessimist, he says its temporary, specific, and not
personal. Conversely, when a bad thing happens to an optimist,
she says its temporary, specific, and not personal. When a bad
thing happens to a pessimist, she says its permanent, pervasive,
and personal.
OPTIMISTIC TRADERS
Lets break it down into typical comments. After a large
winning trade or series of winning trades, an optimistic trader
will say such things as:
Im a really good trader. Ive developed a really good
system. I have a good feel for the market. Ive got market
savvy. Note these are all personal comments taking credit for
the good trading.
Wow! Im going to make a lot of money. My system
is going to do really well. Soon Ill be trading even larger as
I make more money. These comments suggest that the good
fortune will continue, and therefore is permanent.
This method works well with the bonds, but itll make
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PESSIMISTIC TRADERS
After a large win or series of winning trades, a pessimistic trader will make comments such as the following:
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EEC
You can give the EEC test to your trading. Let the first
E stand for the event. Something happens: thats the event and
it creates its own reality. Let the second E stand for the explanation you give to the event. This explanation becomes your
belief about the meaning and importance of the event. Let the C
stand for the consequences of the explanation you gave the
event. The consequences will be the actions you take in the
future based on the belief engendered by the explanation. Lets
look at some possible examples.
EVENT: You lost money on a trade.
EXPLANATION: Just the cost of doing business.
CONSEQUENCE: You take the next trade your methods offer you.
EVENT: You lost money on a trade.
EXPLANATION: Its impossible to make money in this market.
CONSEQUENCE: You skip the next trade which turns out to be a
winner.
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EVENT:
_______________________________________________________________
EXPLANATION:
_______________________________________________________
CONSEQUENCE:
_______________________________________________________
If you are a pessimist about your trading, you can train
yourself to become an optimist by setting goals and creating
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Chapter10
TheHabitudeofOpenMindednessandClarity
ofThoughtandPerception
Why sometimes Ive believed as many as six impossible things before breakfast.
Lewis Carroll
If a man will begin with certainties, he shall end in
doubts; but if he will be content to begin with doubts, he shall
end in certainties.
Francis Bacon
The successful trader is open minded. He is willing to
take on information that is difficult to accept but which is factual, nonetheless. He is flexible and willing to shift course at a
moments notice. He stops telling himself stories that dont square
with price action. He maintains an attitude of acceptance. He is
willing to want what the market wants.
Such an attitude toward market action seems like a normal given. Its logical. But its not the normal human condition.
As humans, our perceptual apparatus necessarily deletes, dis79
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A MATTER OF IDENTITY
It goes even further than simple economy of thought.
We resist changing our biases because they have become our
identity. Our survival is hooked to our identity. Our identity is
attached to our beliefs, our loyalties, and our history. Once we
have identified ourselves as certain kind of thinkers, believers,
or people who behave in a certain way, we will not easily let go
of that. That is simply who we are. That is simply the way it is.
SOMEWORDS AS CLUES
As you think about your trading, think about these words,
and see if any of them has at some time applied to your trading:
inclination, bent, propensity, predilection, partiality, penchant,
predisposition, attachment, proneness, leaning, fondness, disposition, liking, preference, susceptibility, weakness, proclivity,
drift, slant, impulse, attraction, desire, whim, idiosyncrasy, persuasion, swayed, convinced, cajoled, or just plain certain.
Or maybe you have a negative bias. Think about these
words, and see if they apply to your trading: aversion, disinclination, distaste, distrust, dislike, doubt, unconvinced, rejection,
disenchanted, disillusioned, disgusted, or just plain dont believe it.
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Chapter11
PRACTICING COURAGE
The good news is that courage can become a habit. The
more you exercise courage in your trading, the easier it is to be
courageous. As Thomas Jefferson said, The more you do, the
more you can do. Or as William Shakespeare said, Act the
part and become the part. Ask yourself, How would I trade
if I were already courageous?
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COURAGEOUS QUESTIONS
Trading, indeed all of thinking, is about asking questions. Sometimes it takes courage to ask the right questions. Is
my trading profitable? Is what Im doing working? Am I
up or down on the year? Is there something Id rather be doing? Could I make more money doing something else? Am
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Chapter12
TheHabitudeofDiscipline
Diligence is the mother of good luck.
Benjamin Franklin
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BALANCE
Superb trading is balanced. The twelve habitudes of
highly successful traders all work together to provide a winning
balance. Each habitude enhances and modifies the others. For
example, we have detached preparation and prepared
datachment. We have courageous open mindedness and open
minded courage. We have risk taking optimism and optimistic
risk taking. We have disciplined abundance consciousness and
abundant thinking discipline.
Also each of the habitudes applies to itself to intensify
itself. For example, we have detached detachment, willing willingness to accept loss, risk taking acceptance of risk, probabilities thinking assessment of probabilities, optimistic optimism,
open minded open mindedness, courageous courage, and, of
course, disciplined discipline.
Highly successful trading is a holistic blend of many
habitual attitudes. It is a balanced trading combining desire and
caution, equanimity and power, heart and head, art and science,
adventure and discipline. Let these attitudes and approaches to
trading become your habits of mind. And do it with heart.
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