by Mark Douglas
Of course, the same is true for trading. We need technique to achieve consistency. But what technique? This is truly one of the most perplexing aspects of learning how to trade effectively. If we aren’t aware of, or don’t understand, how our beliefs and attitudes affect our perception of market information, it will seem as if it is the market’s behavior that is causing the lack of consistency. As a result, it would stand to reason that the best way to avoid losses and become consistent would be to learn more about the markets.
This bit of logic is a trap that almost all traders fall into at some point, and it seems to make perfect sense. But this approach doesn’t work. The market simply offers too many—often conflicting—vari—ables to consider. Furthermore, there are no limits to the market’s behavior. It can do anything at any moment. As a matter of fact, because every person who trades is a market variable, it can be said that any single trader can cause virtually anything to happen.
This means that no matter how much you learn about the market’s behavior, no matter how brilliant an analyst you become, you will never learn enough to anticipate every possible way that the market can make you wrong or cause you to lose money. So if you are afraid of being wrong or losing money, it means you will never learn enough to compensate for the negative effects these fears will have on your ability to be objective and your ability to act without hesitation. In other words, you won’t be confident in the face of constant uncertainty. The hard, cold reality of trading is that every trade has an uncertain outcome. Unless you learn to completely accept the possibility of an uncertain outcome, you will try either consciously or unconsciously to avoid any possibility you define as painful. In the process, you will subject yourself to any number of self-generated, costly errors.
Now, I am not suggesting that we don’t need some form of market analysis or methodology to define opportunities and allow us to recognize them; we certainly do. However, market analysis is not the path to consistent results. It will not solve the trading problems created by lack of confidence, lack of discipline, or improper focus.
When you operate from the assumption that more or better analysis will create consistency, you will be driven to gather as many market variables as possible into your arsenal of trading tools. But what happens then? You are still disappointed and betrayed by the markets, time and again, because of something you didn’t see or give enough consideration to. It will feel like you can’t trust the markets; but the reality is, you can’t trust yourself.
Confidence and fear are contradictory states of mind that both stem from our beliefs and attitudes. To be confident, functioning in an environment where you can easily lose more than you intend to risk, requires absolute trust in yourself. However, you won’t be able to achieve that trust until you have trained your mind to override your natural inclination to think in ways that are counterproductive to being a consistently successful trader. Learning how to analyze the market’s behavior is simply not the appropriate training.
You have two choices: You can try to eliminate risk by learning about as many market variables as possible. (I call this the black hole of analysis, because it is the path of ultimate frustration.) Or you can learn how to redefine your trading activities in such a way that you truly accept the risk, and you’re no longer afraid.
When you’ve achieved a state of mind where you truly accept the risk, you won’t have the potential to define and interpret market information in painful ways. When you eliminate the potential to define market information in painful ways, you also eliminate the tendency to rationalize, hesitate, jump the gun, hope that the market will give you money, or hope that the market will save you from your inability to cut your losses.
As long as you are susceptible to the kinds of errors that are the result of rationalizing, justifying, hesitating, hoping, and jumping the gun, you will not be able to trust yourself. If you can’t trust yourself to be objective and to always act in your own best interests, achieving consistent results will be next to impossible. Trying to do something that looks so simple may well be the most exasperating thing you will ever attempt to do. The irony is that, when you have the appropriate attitude, when you have acquired a “trader’s mind-set” and can remain confident in the face of constant uncertainty, trading will be as easy and simple as you probably thought it was when you first started out.
So, what is the solution? You will need to learn how to adjust your attitudes and beliefs about trading in such a way that you can trade without the slightest bit of fear, but at the same time keep a framework in place that does not allow you to become reckless. That’s exactly what this book is designed to teach you.
As you move ahead, I would like you to keep something in mind. The successful trader that you want to become is a future projection of yourself that you have to grow into. Growth implies expansion, learning, and creating a new way of expressing yourself. This is true even if you’re already a successful trader and are reading this book to become more successful. Many of the new ways in which you will learn to express yourself will be in direct conflict with ideas and beliefs you presently hold about the nature of trading. You may or may not already be aware of some of these beliefs. In any case, what you currently hold to be true about the nature of trading will argue to keep things just the way they are, in spite of your frustrations and unsatisfying results.
These internal arguments are natural. My challenge in this book is to help you resolve these arguments as efficiently as possible. Your willingness to consider that other possibilities exist—possibilities that you may not be aware of or may not have given enough consideration to—will obviously make the learning process faster and easier.
CHAPTER 2
THE LURE (AND THE DANGERS) OF TRADING
In January 1994, I was asked to speak at a trading conference in Chicago, sponsored by Futures Magazine. At one of the luncheons I happened to be sitting next to an editor for one of the major publishers of books about trading. We were having a lively conversation about why so few people become successful at trading, even people who are otherwise very accomplished. At one point, the editor asked me if a possible explanation for this phenomenon might be that people were getting into trading for the wrong reasons.
THE ATTRACTION
I had to pause for a moment to think about this. I agree that many of the typical reasons people are motivated to trade—the action, euphoria, desire to be a hero, the attention one can draw to himself by winning, or the self-pity that comes from losing—create problems that will ultimately detract from a trader’s performance and overall success. But the true underlying attraction to trading is far more fundamental and universal. Trading is an activity that offers the individual unlimited freedom of creative expression, a freedom of expression that has been denied most of us for most of our lives.
Of course, the editor asked me what I meant by this. I explained that in the trading environment, we make almost all of the rules. This means there are very few restrictions or boundaries on how we can choose to express ourselves. Of course there are some formalities such as having to become a member of an exchange to be a floor trader, or meeting the minimum financial requirements to open a brokerage account if you’re an off-the-floor trader. But otherwise, once you are in a position to start trading, the possibilities that exist for how you go about doing it are virtually limitless.
I went on to give him an example from a seminar I attended several years ago. Someone had calculated that, if you combined bond futures, bond options, and the cash bond markets, there would be over eight billion possible spread combinations. Now add the timing considerations based on how you read the prevailing market conditions, and the various ways to trade become virtually limitless.
The editor paused for a moment and asked, “But why would having access to such an unrestricted environment result in fairly consistent failure?” I answered, “Because unlimited possibilities coupled with the unlimited freedom to take advantage of those possibilities present the ind
ividual with unique and specialized psychological challenges, challenges that very few people are properly equipped to deal with, or have any awareness of for that matter, and people can’t exactly work on overcoming something if they don’t even know it’s a problem.”
The freedom is great. All of us seem to naturally want it, strive for it, even crave it. But that doesn’t mean that we have the appropriate psychological resources to operate effectively in an environment that has few, if any, boundaries and where the potential to do enormous damage to ourselves exists. Almost everyone needs to make some mental adjustments, regardless of their educational background, intelligence or how successful they’ve been in other endeavors.
The kind of adjustments I’m talking about have to do with creating an internal mental structure that provides the trader with the greatest degree of balance between the freedom to do anything and the potential that exists to experience both the financial and psychological damage that can be a direct result of that freedom.
Creating a mental structure can be difficult enough, especially if what you want to instill is in conflict with what you already believe. But for those of us who want to be traders, the difficulty of creating the appropriate structure is invariably compounded by a backlog of mental resistance that starts developing at the very earliest stages of our lives.
All of us are born into some sort of social environment. A social environment (or society), whether its a family, city, state, or country, implies the existence of structure. Social structures consist of rules, restrictions, boundaries, and a set of beliefs that become a code of behavior that limits the ways in which individuals within that social structure can or cannot express themselves. Furthermore, most of the limitations of social structure were established before we are born. In other words, by the time any of us get here, most of the social structure governing our individual expression is in place and well entrenched.
It’s easy to see why a society’s need for structure and the individual’s need for self-expression can conflict. Every person who wants to master the art of trading faces just such a fundamental conflict.
I’d like you to ask yourself what one characteristic (a form of personal expression) is common to every child born on this planet, regardless of the location, culture, or social situation the child is born into. The answer is curiosity. Every child is curious. Every child is eager to learn. They can be described as little learning machines.
Consider the nature of curiosity. At its most fundamental level, it is a force. More specifically, it is an inner-directed force, which means there’s no necessity to motivate a child to learn something. Left on their own, children will naturally explore their surroundings. What is more, this inner-directed force also seems to have its own agenda; in other words, even though all children are curious, not all children are naturally curious about the same things.
There’s something inside each of us that directs our awareness to certain objects and types of experiences to the exclusion of others. Even infants seem to know what they want and don’t want. When adults encounter this unique display of individuality expressed by an infant, they’re usually surprised. They assume that infants have nothing inside of them that makes them uniquely who they are. How else would infants express their individuality than by what in their environment attracts or repels them? I call this inner-directed guidance the force of natural attractions.
Natural attractions are simply those things about which we feel a natural or passionate interest. Ours is a big and diverse world, and it offers each of us a great deal to learn about and experience. But that doesn’t mean each of us has a natural or passionate interest in learning about or experiencing all there is. There’s some internal mechanism that makes us “naturally selective.”
If you think about it, I’m sure you could list many things to do or be that you have absolutely no interest in. I know I could. You could also make another list of the things you are only marginally interested in. Finally, you could list everything you have a passionate interest in. Of course, the lists get smaller as the interest levels rise.
Where does passionate interest come from? My personal view is that it comes from the deepest level of our being—at the level of our true identity. It comes from the part of us that exists beyond the characteristics and personality traits we acquire as a result of our social upbringing.
THE DANGERS
It is at the deepest level of our being that the potential for conflict exists.The social structure that we’re born into may or may not be sensitive to these inner-directed needs and interests. For example, you may have been born into a family of extremely competitive athletes, but feel a passionate interest in classical music or art. You may even have natural athletic ability, but no real interest in participating in athletic events. Is there any potential for conflict here?
In a typical family, most members would put a great deal of pressure on you to follow in the footsteps of your brothers, sisters, or parents. They do everything possible to teach you their ways and how to get the most out of your athletic ability. They discourage you from seriously pursuing any other interests. You go along with what they want, because you don’t want to be ostracized, but at the same time, doing what they want you to do just doesn’t feel right, although everything you’ve learned and been taught argues in favor of becoming an athlete. The problem is, it doesn’t feel like who you are.
The conflicts that result from what we’re taught about who we’re supposed to be and the feeling that resonates at the deepest levels of our being is not at all uncommon. I would say that many, if not most people, grow up in a family and cultural environment that gives little, if any, objective, nonjudgmental support to the unique ways in which we feel compelled to express ourselves.
This lack of support is not simply an absence of encouragement. It can be as deep as the outright denial of some particular way in which we want to express ourselves. For example, let’s look at a common situation: A toddler, who for the first time in his life, notices “this thing,” which we call a vase, on the coffee table. He is curious, which means there’s an inner force that’s compelling him to experience this object. In a sense, it’s as if this force creates a vacuum in his mind that has to be filled with the object of his interest. So, he focuses on the vase, and, with deliberate intent, crawls across the vast expanse of the living room floor to the coffee table. When he gets there, he reaches up to the edge of the table to pull himself to his feet. With one hand firmly on the table to maintain his balance, his other hand reaches out to touch this thing he has never experienced. Just at that moment, he hears a scream from across the room, “NO! DON’T TOUCH THAT!”
Startled, the child falls back on his butt, and begins to cry. Obviously, this is a very common occurrence and one that is completely unavoidable. Children have absolutely no concept of how they can injure themselves or how valuable something like a vase can be. In fact, learning what is safe and what isn’t and the value of things are important lessons the child must learn. However, there are some extremely important psychological dynamics at work here that have a direct effect on our ability to create the kind of discipline and focus necessary to trade effectively later in life.
What happens when we’re denied the opportunity to express ourselves in the way we want to, or we’re forced to express ourselves in a way that doesn’t correspond with the natural selection process? The experience creates an upset. Being “up-set” implies an imbalance. But what exactly is out of balance? For something to be out of balance, there has to be something that’s in balance or in equal proportion in the first place. That something is the relative degree of correspondence that exists between our inner, mental environment and the exterior environment where we experience our lives.
In other words, our needs and desires are generated in our mental environment, and they are fulfilled in the exterior environment . If these two environments are in correspondence with one another, we’re in a state of inner balance and we feel
a sense of satisfaction or happiness. If these environments are not in correspondence, we experience dissatisfaction, anger, and frustration, or what is commonly referred to as emotional pain.
Now, why would not getting what we want or being denied the freedom to express ourselves in some particular way cause us to experience emotional pain? My personal theory is that needs and desires create mental vacuums. The universe in which we live has a natural tendency to not tolerate a vacuum and moves to fill it, whenever one exists. (The philosopher Spinoza observed centuries ago that, “Nature abhors a vacuum.”)
Suck the air out of a bottle and your tongue and lips will stick to the mouth of the bottle, because you have created an imbalance (a vacuum), which now must be filled. What are the dynamics behind the expression “Necessity is the mother of all invention”? The recognition that a need creates a mental vacuum that the universe will fill with inspiring thoughts (if your mind is receptive). The thoughts, in turn, can inspire movement and expression that result in the fulfillment of that need.
In this respect, I think our mental environment works like the universe at large. Once we recognize a need or desire, we move to fill the vacuum with an experience in the exterior environment. If we are denied the opportunity to pursue the object of this need or desire, it literally feels as if we are not whole, or that something is missing, which puts us into a state of imbalance or emotional pain. (Do our minds also abhor a vacuum, once one has been created?)