in this section we're going to cover the underlying nature of the mental skills that you're going to be learning and then at the end of the section I'm going to put these skills within the context of three developmental modes that you're going to eventually learn to trade in which would be first the mechanical mode then the subjective mode and then the intuitive everybody kind of have a good idea where we're going today maybe a little bit better of an idea than when you kind of walked in here yeah okay okay so anyway what I want to do is let's just let's just go through and take a little bit of an attitude survey here kind of get an idea where you're at there are no right or wrong answers here it's just a matter of what you believe about the nature of trading so we get kind of money making money is a Trader primarily a function of analysis who would agree with that come raise your hands it's all right raise your hands so you're telling me that only a few people would agree part of it okay okay uh I often find myself thinking there must be a way to trade without having to take a loss come on be honest come on wish oh yeah you all I say I find myself thinking that there must be a way to trade without taking a loss right okay okay by the way the first one one one of the things one I mean this is one this is a primary uh uh one of the things we're going to talk about a lot of making money as a Trader primarily function of analysis that that that really isn't the case at all what you're going to learn in other words trading is execution trading is execution how what you decide to do of course is analysis and the problem is that it depends on what you're using your analysis for if you're using your analysis to avoid the risk then then certainly making money is not a function of that because you will you will virtually consistently lose but we're going to talk about that more in a little bit okay okay uh I have trouble getting out of a losing trade who has anybody here still have trouble getting out of a losing trade okay that's fine you won't have that trouble after today I I I'm really my goal is that when you walk out of here you will understand in no uncertain terms that there was absolutely absolutely no reason to hang on to what you will Define in advance as a losing trade do you find yourself planning trades you never execute and executing trades you never planned that's a pretty common thing that affect most Traders there's always a cost associated with finding out what the market May do next it's good to think that that means you're accepting the risk that there's a certain amount of mean cost meaning a certain amount of risk involved to finding out what the market what may do next if I were to thoroughly analyze my trading results I would find that my average losing trade is much bigger than my average winning trade well there a few people in here that that might still be fall in that category it only takes one Trader somewhere in the world to negate the positive outcome of any particular trade who agrees with that anybody raise your hand if you agree with that please nobody raises their hand oh this is big I love it thank you very much thank you very much for not agreeing with that because you couldn't be further from the truth you couldn't be more wrong this is one of the things you're going to learn it only takes one Trader somewhere in the world to negate the positive outcome of your trade or your Edge that's all just one you're going to learn that today I wouldn't put on a trade if I wasn't sure it was going to be a winner who agrees with that statement please raise your hand please who agrees that say good good good I'm saying good because because what I'm seeing is that yes there is a gap here that we're going to have to fill between your particular attitudes about trading now and and where you're going to end up with hopefully by the end of the day I would answer this question absolutely not I wouldn't put on this trade if I wasn't sure it was going to be a winner I trade trade from the perspective Ive of I don't know if any trade is going to be a winner and I I don't have to know as a matter of fact that is one of the principle let's say principle Concepts that you will have to adapt to become a consistently successful Trader and what the pros have adapted and the reason why they can do what they do is because they have learned not just learn but they believe without a shred of doubt that they do not have to know what's going to happen next to make money and don't even think about it in those terms they don't even think about it in those terms it's not a matter of what's going going to happen next when you understand the nature of how technical analysis how your technical formulas and your mathematical formulas interact with Market behavior and what they can and can't do and what their inherent limitations are you will also understand that I wouldn't put on a trade if I wasn't sure it was going to be a winner is absolutely one of the one of the worst mistakes you can make to be a consistently successful Trader it is in fact is probably the number one kind of perplexing at this moment yes good okay I always Define my risk before I enter a trade does everybody here in this room at the point where they always predefine their risk who doesn't raise your hand please raise your hand I want to know where everyone's at come on it's all right okay sometimes I find myself blaming the market for what went wrong uh well let me ask you this do anybody anybody feel betrayed by the market ever any anybody ever feel betrayed by their by their their their their signals their technical signal or whatever methodology that they use we're going to talk about that in detail too the more Trader learns about the nature of the markets the easier it will be for him to execute his trades who think there's a correlation there that the more I learn about the nature of markets and price movement the easier will be to execute your trades who think there's a positive correlation there okay again couldn't be further from the truth there's a negative correlation there the more you learn the harder it's going to be to execute your trades to be it depends why you're learning it of course but we'll get into that to be a successful technical Trader you have to determine what the market is going to do next I already said that's not the case so so you'll you'll know how to answer that one but but if I hadn't said it how would you have answered it who would have said yes if I hadn't have already told you guys couple people and you came to Houston oh come on oh come on okay trading skills who are the professionals we already talked about that and why would it be beneficial to think like a professional Trader we already talked about that what's the answer ah anybody can make money okay we kind of already established the fact that anybody can make money as a Trader consistent yeah we're talking about consistency what we want to do is we want to close that profit Gap we want to we want to make sure that our bottomline results reflect the potential of our methodologies okay and that's what the professional has learned how to do the professional has learned how to close that profit Gap they have learned the appropriate skills to do that they're people just like you and me okay they're no different they really aren't they've evolved into a different way of thinking about trading that's the the reason why they can do it and you can do it too with understanding and awareness that is really primarily what this Workshop is about anyway because because when you think about if you've read stories of people who who have have aspired to Greatness in the as a traiter You'll Always Find with almost all of them that there's this underlying thread this underlying theme that that virtually all of them have lost one or more of what they considered a fortune before they started becoming consistently successful why do you think that underlying threat or theme exists in their lives what's that why do you think that commonality exists because at some point they lose so often and then come back from losing that one they gain the confidence that they can do it and as a result the fear dissipates and as soon as the fear is gone they're trading from a Carefree state of mind and when you trade from that Carefree State of Mind everything about your trading changes remember that the primary skill that we're talking about here is simply trading without fear this is a trading skill it is the primary skill that you will have to acquire to create consistency to trade without fear what does uh consistency look like I've already went through on the on the grease board here and showed you a a uh consistently Rising Equity curve with the draw Downs the normal draw Downs being a reflection of what can anybody remember what I said about that what that normal losses that reflect any trading methodology right okay what skills are necessary to experience a winning trade now think about now I'm going to contrast okay I'm going to do a little bit of contrasting here just to just to show you one of the reasons why it can be so difficult to get even into a frame of mind where we start asking the the appropriate questions about what do I need to really be consistently successful because what does it really take to experience a winning trade what skills do you need anybody got any idea what skills do you need to experience a winning trade click of what click of the mouse what's your name sirrice Maurice says a click of the mouse who's who's with Maurice on that come on who's who's with Maurice on a click of the mouse got one two anybody else three four he's absolutely right that's all it takes there are no other skills needed no other skills needed other than the actual physical ability to put your finger on the mouse button and click in the buy or the sell and you can find yourself in a winning trade you can find yourself in a in a spectacularly winning trade far beyond what you could ever imagined and what skill did it take what what what did it take just just doing it that's all just doing it at that at that moment do you need an edge do you need to have do you do you even have to know even know what an edge is is it possible to just be to to walk up to your computer and the arrow happened to be on the buy button you click and then find yourself in a winning trade you didn't have an edge did you you just clicked it what did it take it took nothing do you need a plan need no plan do you need the discipline to execute the plan no you don't need that either do you now see you're G to see the the opposite of all this of course is is what we're going to be talking about in terms of creating consistency but go ahead what you're saying is a blind squirel will catch will eventually find a nut what you're saying is a blind squirrel will eventually did you say a squirrel I'm sorry squirrel squir okay squirrel okay go ahead yeah I can click a mouse you know the arrow hits the buy I click I get a great trade I'm that's good it's all the things that lead up to me that's the implementation but what about all the things that lead up to that implementation oh I understand I'm not I'm not negating that at all I'm just saying that that that that the reality is you don't need anything that's all I'm saying because I'm contrasting here I'm just making a contrast between what you need to be consistent and what you need to win oh okay that's all I'm doing okay you just sum that up with what I was about to say there's all the difference in the world between having the skills necessary to experience a winning trade as compared to having the skills necessary to consistently experience a winning TR absolutely that's what I'm that's all I'm talking about here because see there's because what this does is this the non understanding this contrast creates what I call like a huge psychological Gap because if you don't because it's very easy for us to think that trading is easy and if you believe that trading is easy even if you're get even if even if all your experience is starting to tell you that it's not it doesn't mean that that experience is dropping down to a level of realization where you change your behavior or change the way that you think about trading if your first impression if your first experience was that this couldn't be simpler and then you spend you know how many X number of years or half a lifetime finally coming to the real realization that you know what yeah to to win like what do you need like I could I could be in a casino and and plunk a $100 bill down you at a blackjack table and and end up with a blackjack what did I need nothing I just happen to win now if I want to be a professional blackjack player and make a make a consistent income from playing Blackjack well that's that's a whole another matter isn't it and we're talking about the same things here with Trading there' be a number of skills that I'd have to acquire to be able to make a consistent reliable income as a blackjack player and there are people who do it do you need a good reason to put the trade on to win do you need a good reason no no not at all what characteristics distinguish the pro from the typical Trader well they plan their trades no they execute their plan without error ah we'll talk about trading errors in a minute big difference okay they can move in and out of their trades with an ease and effortlessness that would Boggle the mind of the typical Trader okay what do you need to achieve consistent results well you're GNA you're going to need an edge you're going to be able to identify an edge you're going to have to have a trading methodology are you not right okay and you have to have a plan on how to utilize that edge in other words you're going to have to determine risk parameters how much does it cost me to find out if this particular Edge that my methodology provides me how much is it going to cost to how much is it going to cost me to find out that this Edge is working on this particular trade or not that's your risk parameter are you guys with me on this okay money management parameters in other words how much your your in other words contract size or number of shares that you trade all these have to be T all this has to be taken into consideration you could have a standard amount or you could have an amount that fluctuates based on you know based on other criteria that you use you know to determine you know the the level of trade that it is like it could be like a five-star trade or a onear trade with a festar trade you're going with a maximum position with a onear trade you're going with a minimum position and profit objectives you have to be able to set profit objectives see just having a methodology to get you into a trade is not enough you have to be able to determine what the risk is on a consistent basis you have to know you have to know what your money management parameters are and you have to be able to determine where to take profits these none of these are easy things to do are they trade execution the ability to execute trades flawlessly so you can utilize your trading plan to its maximum potential this is this is the big one right here this is the area because when you get right down to it trading is about ex trading is execution the act of trading is executing trades and if you're going to execute trade you're going to have to be able to do them without erors because it just it doesn't make any sense to think that you will that you will achieve a consistently Rising Equity curve if you're constantly making trading errors trading errors would be defined as mistakes mistakes that detract from your bottom line results now the interesting thing about mistakes is that when you're when you're trading from the let's say the perspective of you know it doesn't really take anything to win then there really aren't any mistakes that you can make because anything that you do could end could result in a winning trade for any reason but when we're talking about making consistent money or an income that we can rely on then everything changes about this Everything Changes what I'm talking about here is I'm talking about these like five or four broad skill sets to be able to create consistent results the kind of results that you can rely on as an income you're going to have to learn an edge you're going to have to acquire a trading methodology that gives you an edge I'm defining an edge is that there's a higher probability of one thing happening over another that's what an edge is is and you're we're going to learn the nature of probabilities here in a moment you're going to have to have you know you're going to have to uh have a plan on how do you how you utilize that edge meaning what the risk is position size and profit objectives then you're going to have to be able to execute you're going to have to get to the point where you can execute that edge without making errors for you to be able to execute that edge without making errors you're going to have to learn how to trade from a Carefree State of Mind meaning you're going to have to Aspire to the point where you can trade without fear and to trade without fear you're going to have to learn how to think in probabilities that's basically where we're going here and I said this primary skill was learning how to trade without fear learning how to trade without fear is a function of learning how to think and probabilities meaning we're going to we're going to set aside or move from thinking in a trade bytrade mentality in other words what this trade is going to do for me right now am I right or wrong on this trade and we're going to move to a series of Trades perspective because that's what your methodology does anyway any trading methodology just gives you a a win or loss ratio over a percentage of trades in other words if I take the same take the same criteria that's in any kind of mathematical any kind of technical formula that's mathematical B mathematically based or or a a a technical price pattern that you would be able to see visually what we're going to learn is that my edge meaning a higher probability of one thing happening over another is simply going to give me a higher win rate over a series of Trades let's say the next 20 trades one 2 3 4 5 6 7 9 10 11 12 13 14 15 16 17 18 19 20 and that the actual on a trade bytrade basis I don't know which one's going to win or which one's going to lose in advance there is no way for me to find out there's no way for me to determine that that on a trade bytrade basis no matter what reason or rationale that you come up with is that there's no way to assure yourself that it's going to be a winning trade there's nothing that can tell you that that trading methodologies give you a win percentage let's say 70% of the next 20 trades are going to be winners there's no way I'm going to know which of the 70 you know which which 12 or 13 are going to be the winners or which six or seven are going to be the losers what you're going to learn this is what Traders what Pro the professionals have learned is that there's a random distribution between wins and losses over any given set of criteria that Define your Edge there's a random distribution I will get a higher percentage of wins to losses but I just don't know which trades are going to be it requires a complete shift in the way you think about trading when you make this complete shift everything about your trading will change now I'm expecting you to make it now because I'm just still get I'm still we're still in the introduction we won't really get into the meat of this until a little bit but this is this is where we're going okay that's all I want to get this is where we're going you're going to you're going to genuinely learn how to think in probabilities because when you've integrated when you have genuinely integrated these Concepts into your mental system at a functional level your fear will go away you do not need to lose everything to get to the point where you can figure out that well you know I've got nothing to lose anymore so I don't have anything to be afraid of you don't have to do that okay you don't have to do that all you have to do is commit yourself to learn how think about trading in another way and your fear will go away because what we're going to learn is the correlation between what we believe and what we feel there's a direct correlation between if I'm going into a situation with a certain belief that let's say that my particular Edge is going to tell me what's going to happen on this trade right here I wouldn't even put this trade on unless I thought it was going to win when you really understand the nature of price movement which is what we're going to get into after we go through this section on on skills when when you really understand that you will never think that way again when you really understand the nature of price movement you won't think that way again and that is one of the biggest problems that most the typical Trader has let's say the typical screen based Trader is that is that they really don't understand the nature of how how prices move and the underlying Dynamics because you haven't had the exposure you you haven't had the exposure to to to the direct markets your only exposure has been those blips on the screen and as a result there there's a real Gap in in understanding about what's really happening when you understand what's behind those blips what's behind those photons that show up on your screen when you really understand that you will think about trading in another way in in a completely different way it won't even occur to you to do some of the things that you're doing now won't even occur to you okay now so I've got so we've got I've given you three so far the next broad area that you're going to have to learn it's like it's like you can you can be an expert at at defining an edge you can even you can even be able to execute your trades flawlessly and but run into the next challenge and that's what I just call self-sabotaging beliefs in other words all of us have a sense of self- valuation all of us have this this sense that we're what we're worth as a person you might say and if if you were to take like an old Ben Franklin accounting scale okay and this is positive and this is negative meaning if you were to list every experience in your life if you had let's say conscious access to every experience in your life that contributed to a positive sense of self valuation that yes I am a worthy person because what we're running into but I kind of got to ahead of myself what we're running into is this is that when you learn how to define an edge and learn how to execute your trades flawlessly what you're what you're now exposed to is the possibilities for unlimited wealth there's really there's really not there's really nothing holding you back or let's put it this way there's nothing on the outside that's holding you back but there might be something on the inside that's holding you back those things on the inside could be self-sabotaging beliefs in the sense that if you listed all of the experience that contributed to a positive sense of self-valuation and all experiences that that that contributed to a negative sense of self-valuation that I'm not worthy as a person I feel guilty about this this this and this that you could end up you know you could you go you you can go P plus negative or you know net positive or net negative what could end up happening is that if you don't have the let's say the skills or the awareness to realize that as your Equity curve as you start making money these internal forces if you have net negative these internal forces start building up to the point where they'll cause you to make unconscious trading errors where you're not even really aware that you hit the sell button instead of the buy button those kinds of things and you have to you have to become aware of when these forces are starting to build up inside of you and either compensate for it by not trading by to stop trading or to find a way to neutralize them and there are there are various techniques available but all I'm saying is that is that these kinds of these kinds of that the result of self-sabotaging beliefs don't really have anything to do with your direct trading skills in other words your ability to identify an edge and your ability to execute your trade but they can have an enormous impact on your Equity curve I would assume to that you would be monitoring your Equity curve and you would start seeing your curve go down in an abnormal way and you would start looking for your whatever is happening to you let's say you're not feeling well or whatever uh your wife just divorced you I'm just or maybe something yeah these are all yes all good things right that you're bringing up I mean these are what what I'm saying is though the you show two extremes a normal draw down and then the the Boomer bus draw down there must be some way to know at least I'm I'm I'm looking for to know when you start looking that you're self-sabotaging that's my question good question as a matter of fact there are software program prrams available now that will tell you that there are software programs available that will tell you when in other words I'll give you an example there there give you an example when I was working with Traders with especially like hedge funds managers and and and and and larger Traders there there are people first of all there are people that that their their sole job was if they were let's say they were Central here let me think about how important this is they had let's say this is they're in the middle and they've got and they've got let's say you know 10 or 12 money managers these are guys that all have they're they're managing funds okay this guy's sole responsibility was to shift money from here to here to here to each manager based on chart patterns of their Equity Curves in other words they would chart the equity of these particular Traders just like price patterns in the market to determine their potential for inordinately large draw Downs because of self-sabotaging beliefs that's how sophisticated the market has become that's how relevant these issues are so that you can actually chart your equity and then you start to go like this oh well and they do another one like that something's happening here okay I mean it was it was just what was really kind of amazing to me when I was working with Floor Traders especially I mean this one guy this pops into my brain just just as you as we're talking about this I mean you know he came in for for a consultation and he had his worst day in his life ever worst trading day lost more money than what he's ever lost in his life and I said well you know and and and it's like normally almost virtually in every case it something catastrophic happening in that person's life what was always amazing to me is how much of a disconnect that that the person would have between the catastrophic event in their life and what they ended up doing as a Trader in the market and I said well you know well what's going on and he just I just said well what's going on and just he's kind of and well yeah my wife and I had this really bad argument last night and you know and I when I left you know when I left for the for the exchange this morning you know he he slapped his kids around and he kicked his dog and you know it's like and then he came in and had his worst day and didn't make the connection between what you know between what happened what happened at home and what he did on the floor I mean he might have felt completely justified in with the argument that he had with his wife and slapping his kid around and kicking the dog but that's that's what's going on consciously but let's say subconsciously you know everyone has let's say if the person's relatively normal not a psychopath you know they've got they've got some sense of of fairness and and he's and he feels guilty about what he did and he took that guilt out in in the way he traded that day the the market is not a good Arena to be doing this by the way okay this is this is not a good area to be working these kind of emotional issues out go ahead we need the microphone you want me to you want me to put it right here and I'll just I'll just hand it to him my next question would be the the market also changes the patterns of the or your Edge may change in relation to the market to distinguish between your own troubled State let's say and Market Behavior Uh I can see that maybe one of these fellas here in the pie there might be using a system that is not as valid as it used to be when the market changes how would you know if you were the guy in the center whether he was just having a a bad stay with with whatever is going on in his personal life versus uh a change in his system in relation to the market another good question you wouldn't know immediately but upon investigation you could find out in other words by just talking to the guy or what what you or what you do is that see see what you do is you're trading sample sizes too in other words when you have a particular methodology that has that has a defined criteria for when you get into a trade what you do is you trade in a limited sample size so that if you trade in 25 trade sample sizes or like 20 or what whatever what you do is you analyze your results at the end of that at the end of a sample size and if your results are satisfying then what you do is you take another sample size if the results are not satisfying then then because you all because you knew exactly what you did and under what circumstances you did it you limited your variables what you do is then you can go back and tweak your variables to see if you can improve your improve your results because because what's your name Tom because what Tom what Tom was really bringing up is is the fact that you're right because we're taking a limited set of variables a mathematical formula to that that's being applied to a dynamic event and that Dynamic event are traders who are acting on their own behalf creating price movement and they basically they create patterns that were they doing the same thing over and over again but you've got new people coming in with new ideas and old people leaving and as a result these patterns can change over time diminishing the results of a particular Edge so what you want to do is you want to make sure that your sample size is large enough to adequately test that edge but small enough so that if the edge is diminishing in its Effectiveness you're not losing an inordinate amount of money before you find that out does that answer your question so that's how they find out okay besides that there are I said there's software available that'll even tell you now there's software yeah there's software available that'll that'll track your track your edges or to track your equity in a way that can indicate whether or not you're ready to take a hit I don't know the name of it but you know because I just found out about about it myself so what are are some other ways that you can uh address maybe a emotional problem you might be going through or other things outside of the trading area besides stop trading well you say there I mean there there are a number of techniques a number of books available there's there's counseling you know I mean I'm going to make I'm going to make a recommendation of a particular book later on you know when we get into a little bit more detail but but uh you know it's it depends on the effect that it has on your trading I mean you don't necessarily have to stop trading but you all but you have to make an objective assessment as to what as to your State of Mind in other words you know you you can actually say to yourself am I in the best state of mind to be trading today and you know and the kind of answer that you get back from yourself you know if it's relatively objective it's like if you're really not in the best state of mind because of things that are going on in your life and some troubling aspects that you haven't reconciled then but you don't want to stop trading well at least you're aware of it by another another technique would be by keeping journals because most really good Traders keep pretty extensive journals over about you know what they're doing and what they're thinking while they're doing it and then you make this assessment so that at least if you're not you don't want to stop tradeing you still want to put your put whatever edges on you have for that day you scale back in other words if your maximum position size is let's say 5,000 shares you're not in the best state of mind maybe you only want to trade a thousand maybe you only want to trade 500 in other words to take these things into consideration and you'd be surprised by just being aware of it and taking into consideration a lot of times these these things will will reconcile themselves I don't does that help you yes it does thanks okay okay okay and the last area of these these broad skill sets that we're talking about is develop the ability to recognize if you've crossed the threshold from normal self-confidence into a state of euphoria you guys are laughing fin I finally got some Giggles out Giggles out of you guys here what's so funny about this anybody want to anybody wna want to share what's that you don't want to be in a state of euphoria no you're right I mean being in a state of euphoria let's put it this way the primary let's say the the the primary characteristic of the state of euphoria is that it's a state of mind of complete and absolute riskless everybody get what I just said you are in a state of riskless in other words you have no ability whatsoever to perceive risk so if for an example if this line right here if below this line represents normal self-confidence and above this line is Euphoria and and this threshold is different for everybody by the way I mean there are certain chemicals that scientists have found that you know that that flood our that flood our mind and our body when we've crossed this this threshold I have I've worked with traders who will flip into a state of euphoria with one winning trade okay usually for most people it takes more than one winning trade but I have worked with I have worked with people that they'll flip into a state of euphoria with one winning trade now the problem with this and it's a great state of mind to be in I mean to be in a a in in virtually a riskless state of mind I mean it's like hey uh you know that's it's it's really a cool place to be but the problem is that when we're in a state of euphoria as a Trader we are I mean it's it's virtually guaranteed that we're going to make a trading error and the kind of trading error that we'll make in a state of euphoria usually has to do with position size so for an example if you're normal if you if you normally only trade a thousand shares in a state of euphoria it's like okay let's let's mortgage the house okay it's like you know let's go to 10,000 20 30 whatever thousand shares because you see you absolutely know for for a fact you wouldn't be putting on putting this trade on if it wasn't going to work see you know for you know for a fact see because there's no because you don't have any any ability to perceive risk at all now the problem even though it could even end up being a winning trade it's not that it's not that the the trade might not end up being a winner but here's typically what's going to happen if you're a normal 1,000 share Trader and you go up to 10,000 shares if when you put a th000 shares on and the market went against you 5 cents a share wouldn't be any big deal you got 10,000 shares on when you absolutely knew for a fact that the trade was a winner and it goes five or 10 cents against you it has the potential to flip you into a state of pure unadulterated Terror instantaneously you'll go from Euphoria to a state of Terror in one instant because your expectations about what was going to happen we're so Resolute it creates a psychological shock that puts you in a state of mind freeze Mind Freeze Mind Freeze is when you are conscious of what is happening but find yourself totally immobilized to do anything about it and so if the market happens to go 10 cents against you but keeps on going okay you just sit there in watch completely immobilized while the market takes your money away until finally something flips you out of that and you say he you know you just come back to your senses and you had enough and you get out of the trade I know this probably never happened to anybody in this group but but but uh but I've worked with many people who who it has happened with so so this is not something unfamiliar to anybody here Terror [Laughter] uh it's it's like going literally from a state of mind is like literally going from Heaven to Hell instantaneously and keep in mind the Dynamics here it was all based on your expectation it's all based on your expectation so you guys have got this okay there there's so when we're talking about consistency see this is goes back to when I was doing the contrast okay is that to to experience a winning trade you need nothing I'm not saying that you don't put something into it but the fact is you need nothing there's no skills that are required to experience a winning trade but to experience consistent results as a Trader the kind of results that you can rely on as an income there are there are these are there are some pretty kind of profound skills that we're talking about are we not you got to have an edge you got to have a plan on how to execute the edge you got to be able to execute the plan flawlessly or at least without you know without minimum number of errors or otherwise they're going to detract from your results you got to be able to recognize when you might have some self-sabotaging beliefs that are that are rising to the surface to saying hey you know this is too much money why have you why do you think it is that you have probably read in the in some of the trading books I know I'm sure you have read at some point that someone gives you the advice that when you have windfall profits to stop trading and take a vacation why do you think that that advice exists why do you think people have written that down I just gave you the underlying Dynamics for why that's true it's not just the Euphoria Terr no it's not just no it's not the terror afterward it's it's the possibility for self-sabotaging beliefs coming in and saying I am not worth this much money Mone even though it's what I want it's what I desire it's what I've been working for it doesn't mean that you believe you really deserve it you have to believe you really deserve it to keep it or at least recognize that you don't necessarily believe it and don't do anything to give it away in other words take a vacation put it in the bank let yourself get used to having it and and at which point you'll say you know what yeah you know I do deserve this money and then you'll be less likely to give it away the one of the best examples that I I could that I could give you to illustrate this is a Floor Trader that I work with again another Bond Trader not as big as the other Bond Trader that I was that I that I referred to earlier he was the kind of Trader who had this reputation as as as I mean being completely consistent when I when I met him he was he would make anywhere from I'd say $5 to $220,000 a day that was his daily his daily thing okay day in day out5 $220,000 a day never had these catastrophic bad days that was his reputation and it was true so what did he me for well well he he had hired a bunch of guys to trade his money thinking that he's gonna this is very common you kind of have a funny look but this is very common in Chicago where once you've become successful and established what you want to do is is is bring in you know as many let's say bring in young talent that you can you know uh uh teach your particular techniques and just you know multiply what you make based on their efforts I mean that's you know but the problem is that the guys that he brought into his group they were you know I mean I don't know how to put it I I want to be I want to be nice I want to uh they were just they were just basically leeches I mean they a lot of them when I you know talk to them it's like I don't even there's some some of them I don't even think wanted to be Traders they just they just saw the opportunity to be able to get money from him for and the opportunity to do something they hadn't done before and and it was you know it was these were not the kind of people that that you would that you would hire under these circumstances they weren't really suited for it in many cases weren't really suited for it at all especially the trade down on the floor so he wanted particular he wanted ideas on on how to you know how to how to build this this group up into you know a really successful Trading Group and while we were talking one day we had ordered lunch in somebody a delivery person came to with the lunch and he uh and he was a devout Catholic by the way this this is a very important part of this he was a devout Catholic and he so devout that he carried a rosary with him all the time he had a Rosary in his pocket and so when he uh he he paid you know took his wallet out of his pocket paid for the lunch and he took the change and he just sort of unconsciously started to put the change in the same pocket with his rosary and then we real Iz what he was doing took his hand out like that and I said well you know say hey what's going on he said well you know I can't put money in can't they can't have money touch the rosary and so we started exploring his beliefs about money and his beliefs about religion in relationship to money and certainly his beliefs about the Catholic church and their beliefs about money and you know once and it's something he never really thought about but when he thought about you know the Catholic Church certainly doesn't believe that money's dirty so why should he believe that money's dirty in that respect in other words it's not spiritual to have money in a way that you know in a way that it can in other words there's a dichotomy in his mind between his ability to his ability to make money in the pit and yet you would think that in a in in this kind of a situation he would be giving his money away because he felt guilty about having it well he didn't give it away as a tra because he was just too strong of a traiter to do it but he was giving it away and in with this organization the kind of people that he had around him and other words it wasn't going out the front door the money was going out the back door so he did find a way to to extract that money about his beliefs about money religion the Catholic Church their beliefs about money realize the the you know the inconsistencies and and so as as we're coming to kind of reconciliation about this I gave him an exercise to see if if in fact he'd really accepted what it is that we were talking about and what do you think the exercise was come on what do you think the exercise was it's not that hard go ahead put some money in that pocket that's right put put put money in the pocket with the rosary put the money and the rosary together he couldn't do it he literally his his his AR his his arm he tried to put the money in is was like it got it got like he could not do it his beliefs that we talked about were so strong that it literally wouldn't consciously let him do it but he worked on it see he he wanted to get to the point where he he recognized the validity of the things that we were talking about and so he did want to do it so he kept on trying it took him about a week and once he got the money in with the rosary he' like all these conflicting beliefs he had about the nature of money and the guilt that he that he felt over it it just they just sort of all melted away and he fired all these people he didn't even try to make them Traders because he realized that they you know these were not guys that you know that really wanted to be traders in he realized what he was doing he realized he was just he was just giving his money away what gives the professional Trader the ability to execute their trades without error they are confident meaning they are no longer in cumbered by the same fears that plague the typical Trader trading without fears is learn mental skills I've already given you examples of mental skills remember what what we say about about the ability not to choke okay under that would be an example of a mental skill learning to trade without fear hesitation or internal conflict is a function of believing that you don't have to know what's going to happen next on a trade bytrade basis to win or make consistent money this is a this is the heart of it right here everyone okay this is the heart of it and again we're still in the introduction believe it or not okay so I'm I'm going to reinforce all this but eventually what you're going to do is get to the point where you believe that you do not have to know what is going to happen next on a trade bytrade basis this trade and this particular trade in this particular trade you don't have to enter these trades thinking that you know what's going to happen next to when to make consistent money and that when you stop believing that you will start making consistent money because it's the it's your expectations about this trade winning that's that's going to mess you up go ahead what you're really saying is you have to have a belief in your plan or your methodology and you're looking for a probabilistic result saying over a period of time I will execute 60 70 80% of my traits the one I'm going into now could be a good one could be a bad one I don't care that's right exactly right perfect thank you this is where we're going okay thinking assuming or believing you know what will happen next creates an unrealistic expectation in a in a specific outcome what's wrong with an unrealistic expectation well think about let's say expectations in relationship to the the characteristics of humanity you could this cuts across all everybody and cuts across all cultural all cultural lines or barriers everyone well first of all we get get to that point what is an expectation an expectation is a mental representation in other words a belief an assumption or an opinion or whatever thinking assuming or believing a mental representation of what the next moment meaning next moment next 5 seconds or the next in 10 seconds or the next hour or whatever is either going to in the environment in other words we have a mental representation and we have an external environment that expresses itself okay so my mental representation meaning my expectation if the en if the environment shows up in a way that is consistent with what I believe then what what what will my state of mind be this is a universal characteristic of humanity this isn't any different with anybody anywhere How Will I feel what will be my state of mind what will be my experience I'll be in a state of satisfaction a state of well-being I could be joyous I could even end up in in a state of euphoria the degree to which the environment does not express itself in a way that's consistent what I the way consistent with the way I think it's either going to look like sound like taste like smell like or feel like okay I will be in a state of dissatisfaction a state of betrayal disgust anger fear Terror your ability to create consistent results as a Trader is all about what you expect when you change your expectations to be consistent with the way way the environment the market environment exists the fear will go away when you change your expectations in a way that's consistent with the way the actual Market environment exists your fear will go away and you'll be able to do exactly what you need to do when you need to do it without conflict without hesitation and be able to close that profit gap between what your methodology will give you and what you end up with in your bottom line unrealistic expectations cause us to Define and interpret and therefore perceive Market information as threatening ultimately we can look at we can break the market down to its lowest definable component parts we break the market down to its lowest definable component parts what we end up with is up and down ticks okay an uptick an uptick is one incremental price change where the price move from one to two from two to three four five six whatever and then down ticks okay when we're operating out of unrealistic expectations we're going to tap into four Prim primary trading fears that will cause all the errors that we make as Traders those fears are the fear of being wrong losing money missing out and leaving money on the table and those fears will actually cause us to perceive these up and down ticks as threatening and what we're going to learn about the nature of fear a little later is that fear will cause us to focus on the object of our fear so that we end up creating the very experience we're trying to void therefore if I'm trying if I'm afraid of being wrong I will actually perceive this information in a way that causes me to be wrong if I'm afraid of losing I will perceive these up and down ticks in a way that will actually cause me to lose if I'm afraid of missing out I'll actually create the experience of missing out and if I'm afraid of leaving money on the table that's exactly what I'll end up doing now when you think about the nature of these up and down ticks and the photons that appear on your computer screens is is there is there an inherent characteristic in that information that's threatening in any way in other words is it is it information is it in other words when we talk about the nature of emotional pain which is which is the threat of pain okay the the fear not physical pain where we have a if all of us have a normal nervous system and we come into contact with a physical object object you know if I hit this with my arm it's going to hurt if you hit it with your arm it's going to hurt so so we've got some Universal commonality but with emotional pain it's not that way at all although we think that it is it's not because emotional pain requires an interpretation and then interpretation comes from what we believe you guys with me on this on the interpretation part because see the information itself the up and down ticks have no charged to them whatsoever they're not positively or negatively charged they're just up and down ticks that based on your ability to read those up and down ticks tell you what the what the potential is for the market to move in any particular direction if you're perceiving them as threatening in some way that's definitely going to cause you problems when it comes to creating consistent results in fact you're going to find it impossible okay let's talk about some typical trading errors the typical trading errors the professional has evolved the Beyond don't Define the risk in advance of putting on a trade why in the world now of of all the trading books that you've ever read out of all the workshops you've probably been to I'm sure that you have been exposed to this particular piece of advice countless times and yet it is it is the primary trading error that people commit all the time they don't predefine the risk in advance of putting on a trade if you don't predefine the risk in advance you're operating out of the mindset that you think you know it's going to happen next and what I'm going to establish from you when you establish for you when we get into the next section is that that is absolutely not the case it doesn't mean we don't think that but the reality is it isn't the case see because when we have when we predefine our risk let's put it this way if if I'm a typical traditor operating out of the four fundamental fears the fear of being wrong the fear of missing out losing money Etc we got a real problem here because our minds are naturally wired to associate in other words they automatic our minds will automatically make connections meaning this that if I if I'm I get into a trade and I end up being wrong I expect it to win and I'm wrong I have to admit that I'm wrong it isn't just admitting that I'm wrong on this one trade our minds because the way our minds are wired it has the potential to tap us into the accumul the accumulated the accumulated negative energy of every time I've been wrong in my life okay so if this circle represents a huge ball of negative energy inside of our mental environment about what it means to be wrong being wrong on just one trade could tap us into that pain and it's going to work differently for everybody everyone's Minds works works a little bit differently but that's the potential if you wonder why people seem to live and die on the outcome of the next trade this is one of the reasons why this is why it's so important because it has the the potential to tap us into the accumulated negative pain of every time we've been wrong in our lives every time we've lost something in our lives every time we've missed out on an opportunity that we didn't take advantage of every time we've been in in an opportunity and didn't get the maximum amount that was available those were the four fears so the problem with predefining our risk is this is that if I'm afraid of being wrong and I don't know how to think about trading appropriately in a probabilistic mindset I'm not going to get into this trade unless I think I'm right and the problem with predefining the risk is that it requires that I gather evidence as to why it might not work predefining your risk requires that you gather evidence as to why it might not work well I wouldn't even be getting into in the first place if that were the case so I'm not I'm going to gather as much evidence as possible to make sure that I'm doing the right thing because if I start Gathering evidence as to why it might not work then I might talk myself out of taking the trade and then if I end up talking myself out of taking the trade and it turns out to be a winner I'll probably be in more emotional pain than what I would have been in had I taken the trade and it turned out to be a loser so I just make sure that I've got all my ducks in a row and I don't take the trade unless I do and therefore what I have done now think about this what I have essentially done done is Define the risk out of the trade I've gone through a mental process in which I have literally defined the risk out of the trade why do I have to put a stop in the market predefine my risk if I know I'm going to win a professional Trader just doesn't think that way they would not I'm not saying that they never thought that way I'm not saying that that they didn't experience the exact same thought process that I just took you through I'm saying they have evolved Beyond it they would never allow themselves to get into a trade without predefining the risk in other words what does the market have to look like sound like or feel like to tell me this trade isn't working the next error Define the risk but don't take the loss and it turns out to be a bigger loss that's probably again probably one of those things that never happened to anybody in this room but just in case someone watches the DVD where this sort of thing has happened I I included it same Dynamics basically hesitate get in too late why are you going to hesitate why you going to hesitate to get in if you're if the criteria that you use to define an edge Define an edge is present in this moment why would you hesitate because you don't think the trade's going to work you have doubt in other words you are either thinking believing or assuming that you know what's going to happen next look at the connection here you couldn't hesitate unless you either assumed think or believed that you know what's going to happen next if you operate out of the perspective that you don't know what's going to happen next I don't need to know what's going to happen next take money then there's no point in hesitating jump the gun get in too soon where the signal never actually develops coming off of a winning trade you're going to jump the gun when you come off a winning trade or a series of winning trades right and you're just so excited about what you see developing the signal isn't quite there yet but you know what Le let's get in before everyone else and you never actually get a signal that's a trading error now see the point that doesn't mean that you couldn't win see what you're going to find is that when you trade on what I call a trade bytrade basis so we're going to make the we're going to make the the distinction between trading trade by trade and Tra trading over a series of Trades when you trade trade by trade it means that each individual trade is like a life or death thing in other words I I wouldn't be putting this trade on if I didn't think this trade was going to win not that not the other the the the um the opposite of that was which is I'm going to put on the next trades because I think that 70 or 75% of them or 50% of them are going to win there's a huge difference in perspective so if you're coming off a winning trade or a series of wins you're likely to jump the gun but the interesting part about all this is that each one of these errors that I'm giving you could all result in a winning trade you could do every single one of these things and still win you could not predefine your risk and still find yourself in a winning trade you can hesitate and find out was exactly exactly the right thing to do in that moment you can jump the gun and find out it is exactly the right thing to do in that moment you cannot take your loss and the market comes back in your favor all these erors that we're talking about you can commit over and over again and they could end up having you can end up experiencing positive results except one thing one thing is that when you indulge yourself in behaviors and these kinds of behaviors it could lead to usually no that could it virtually every time leads to a catastrophic loss catastrophic you put on a trade without predefining your risk three or four times in a row and turns out to be a winner and then the next one you don't do it that's the one that's going to be the catastrophic loss see so on a trade bytrade basis you can do anything for any reason and commit any error or what would be considered an error in the perspective of trying to create consistency and still win and still have winning stre streaks and still have a lot of fun but you're setting yourself up for catastrophic losses get out of a winning trade too soon and leave money on the table there's there isn't a Trader alive who hasn't experienced that let a winning trade turn into a loser without having taking any profits all these errors are the result of thinking assuming or believing that we know what going to happen next move a stop closer to an entry point get stopped out and the market trades back in your favor in other words what would that tell you if you if you're here if you buy at this price right here and you put your stop here this is all you're really saying is that this is this is how far I'm going to let the market trade against my position to tell me that this trade is either not working at all or that the potential for it working is so diminished that it's not worth me staying in any longer and then the market starts to drift down to your stop and then you move your stop up and and get stopped out and then the market does this what would that tell you about your attitude what he knew what was going to happen yeah and you hadn't accepted the risk of that trade did you see see people can put stops in the market it doesn't mean they've really accepted the risk you can put a stop in the market but it doesn't mean you've genuinely accepted the risk this would tell me someone came to me and said Mark this is what I did this is what I know I know that you didn't accept the risk of that Trader you wouldn't move the stop move it the other way too what can move it the other way yeah you move the other way too you know because well that's because you don't want to admit you're wrong the professional Trader is no longer susceptible to these typical trading errors because he's learned to think in probabilities when you understand the relationship between how prices move and the mathematical formulas and price patterns that make up a trading methodology patterns that make up a trading methodology quantifies that movement into tradable edges then why you have to learn the skill of thinking probabilities will become self evid in other words when we get through the next section the way you need to think I want you guys to be at the point where it just becomes completely self-evident it's to why you need to think in probabilities to make consistent money it'll just makes sense it's just like oh yeah okay this makes absolute sense the three developmental modes of trading now I I gave you the broad skill sets that you have to learn to to create consistency well within W those broad skill sets are within the three what I call three developmental modes of trading there's mechanical trading subjective trading and intuitive trading there's three stages in other words in mechanical what you want to do is you want to you want to trade with rigid a rigid criteria that defines your Edge all execution decisions are made in advance of Market activity the market either confirms your conforms your definition of an edge or not and you you execute your you execute your trades based on a plan in other words what you're doing doing in the mechanical mode of trading is you're limiting the number of variables that you're dealing with in the market because what you want to find out is this you want to find out what works and what doesn't this is where to find out what works and what doesn't you can paper trade and other words you can you can actually take a particular trading strategy and methodology and forward trade it with paper trading or if you've got software that that does the analysis for you you can do it that way too but it's better to probably paper trade it so that you're actually inter acting with your particular variables that are defining an edge so you're finding out what works and what doesn't if you use an unlimited number of variables that define an edge when you're training randomly you never never find out what works and what doesn't so you have to learn that you have to have confidence in that but the other part of it too is finding out whether or not your own personal psychology is made up in a way that you can actually execute that edge and the problem with the execution part of it is that paper trading doesn't cut it you actually have to have money on the line and so what you do in the mechanical stage is that you use the mechanical stage as a means to learn trading skills in other words your focus is on skills and not necessarily on how much money you're making or not making because when you've acquired the appropriate skills the money will simply just be a byproduct of those skills and then what you do is that if you find that you cannot execute your plan then you're going to have to going to have to get into a mode where you learn exactly how to do that which is what we're going to get into later on but the point is is that that that what I recommend to people is that they're having problems executing their trades in most cases is because they're probably they're probably their position size is too large in other words if they're if once they once they learn that they that that there's a a specific regimen in which they can learn to be consistent you know what they want to do is they want they want they want their cake and eat it too sort of in other words they want to learn the techniques but they don't want to cut themselves off from still making a lot of money when the reality is they don't have the psychological skills to be able to execute trades based on the way they were trading before so they if they were a 5,000 share Trader before they'll set up these exercises that we're going to talk about later on the afternoon with 5,000 shares and then and then completely blow it and can't do it the reality is their psychological up is such that they may only be able to trade do it and do it flawlessly with 10 shares so I work with people who had to go down to one to be able to execute it flawlessly they had to go down to one share and then they work their way up then they go to two then they go to Five they go to 10 they just work their way up I mean is there anybody in this room who hasn't paper traded and who is there anybody in the room who hasn't experience being able to execute your trades flawlessly on paper but that when you when you try to execute your plan with real money it it doesn't work see the plan the plan's working you're not working this is what mechanical trading is all about okay mechanical trading is finding out just how big that Gap is you cannot take for granted that because you recognize an opportunity to enrich yourself in some way that you have the skills to be able to take advantage of it appropriately you can't take it for granted and most everybody does so mechanical trading gives you all this information it gives you it tells you what works and what doesn't in the market and what works and what doesn't with you so that you know what you need to focus on to be able to make consistent money you guys you guys with me on this is it making sense okay then you can evolve if you want to the subjective stage of trading because you can make consistent money trading mechanically okay that's I mean it's but most people like to be able to use their their rational thinking and process and try to figure things out and the subjective stage of trading is simply this is a broader more flexible mode of trading where you use everything you've ever learned about the price movement to determine your edges in other words you know all the different patterns you've learned all the different nuances of of of of Market Behavior will determine you know where you get in how much profit you take where you set your stops you see in the subjective mode of trading in the subjective mode if someone said to me okay uh I'm buying here and my stop is here but the Market's starting to come down to my stop and get out right here and I don't let my stop get I don't let myself get stopped out at my original spot and truly for someone who's evolved in the subjective mode of trading that's all right you can do that because you're you're not doing it out of fear and you're not doing it out of the fact that you haven't accepted the risk you're doing it because you recognize the pattern that the market is giving you is such that there's a high probability you are going to get stopped out and so therefore you might as well just scratch your trade or or or get out with with a little bit of a loss it's not because you're afraid there's a huge difference you guys with me on this and then the last stage is the intuitive this is the most advanced mode of trading it would be the equivalent to getting a black built in martial arts it's when you find yourself in the zone tapped into the collective consciousness of the market giving you a sense of the flow if you look at the market as being you know a collection of individuals ual you can tap into that you can find yourself it's not something you can Will yourself into you just find yourself into in this Zone where you're just seeing and doing things that you can't necessarily explain at a rational level and the problem is that there are people everyone has intuitive capabilities there are but but some people it's completely shut off and with others you know they don't trust it because you know they they they don't they can't make the distinction between what's intuition and what's just their mind hoping that something's going to happen or hoping that you know what they see is is is really what's going on and making it feel like intuition the problem is until you've acquired these fundamental skills that we're talking about you definitely don't want to be trading based on intuitive impulses you just want to make note of them when you've got the skills then find yourself in the zone then go ahead and do whatever whatever comes to your brain until youve flipped yourself out of it meaning when you start thinking at a rational level you mostly you flip yourself right out of the right out of the Zone because your rational mind wants to know wants reasons your rational mind wants logical reasons and these intuitive impulses don't come from that part of your brain they come from that creative part of your brain and by definition creativity is bringing something forth that didn't previously exist may exist somewhere in the world or in the universe somewhere but it didn't exist in your mind and it's outside the parameters of what you already believe so there's going to be an instant conflict between what you think at a rational level and your intuitive impulses until you train your rational mind to accept your intuitive impulses got that