I'd like to introduce Mark Douglas. Mark is best known for his books, probably The Discipline Trader and my favorite Trading in the Zone, which I had the privilege of writing a foreword for. I have to tell you, Mark's book, Trading in the Zone, I really had a... big impact on me because it deals with the mental aspect of trading. You can also find out more about Mark's products at MarkDouglas.com.
So here he is, Mark Douglas. A lot of familiar faces. I'm just getting in front of the room. I'm kind of amazed actually how many people I recognize.
It's pretty nice. What's that? What? You have to get the microphone volume turned up?
Oh, you couldn't hear me just then? Really? Oh, I'm sorry. Well, first of all, I don't think this microphone is on for you.
This microphone is on for that back there. So I don't actually have a microphone. This is not amplifying my voice. So if I'm not talking loud enough, just let me know.
Normally I talk loud enough. I don't know why I maybe started out. So anyway. But anyway, it's nice to be here. It really is.
It's nice to be. I flew in from Scottsdale, Arizona. And who read the paper today?
who read the Orlando paper? Nobody read the paper this morning? You did? Only one person?
Yeah, there's an article actually in the Orlando paper about the middle way through the front section talking about how hot it is in Arizona right now, or at least in Phoenix. People don't seem to believe just how hot it gets there, but I'm telling you, it really gets hot. It's like, how many people had the heat on last night in their room? I'm not kidding. I'm really not.
Last week we had temperatures up to, if they report it, if the new stations report the temperatures of being 116, that means they're 118 to 120. And we set a record last Monday for a, set a record for the highest low temperature in Arizona recorded history. It didn't get below 96 degrees. That was our low of the day, 96 degrees. Now, not to take anything away from Arizona weather, because. Because eight months out of the year, it couldn't be more heavenly in Arizona.
I mean, the weather is absolutely spectacular, but we do pay for it. We pay for it this time of the year. And so, you know, if you're interested in coming out to Arizona, I would definitely suggest it, you know, late October through maybe late April. But otherwise, this time of the year, be prepared for some really unbelievable temperatures. But this is what we need right here.
We need this rain because we're in a really severe drought. But anyway. anyway, enough about Arizona. You guys want to know about trading, right? Trading psychology, more specifically.
I guess what I'm going to talk about is the psychology behind creating consistency in your trading. An interesting thing that I found even last, about three weeks ago, I did a presentation in Toronto. There were probably about 100 people in the room, and I was really kind of amazed. gazed at how many people really didn't have a definition of what consistency was.
Just think about it for a second. That they really didn't know what does it mean to really create consistency. Like when I asked the question to the audience, nobody really could answer the question.
What is consistency? I mean, if you're going to create it, if it's something that you're going to... to manifest in your life or in your trading, it certainly has to be something that you know what it means.
You have to know the parameters of it. And simply, I'm just going to simply define consistency as I'm going to as a nice, steadily rising equity curve. That's all.
Just a nice, steadily rising equity curve, okay? At a nice, say, 45-degree angle. Will that equity curve have any drawbacks?
Drawdowns? Yeah. But what kind of drawdowns? Small drawdowns.
Small drawdowns that reflect any trading system or methodology or any particular way in which you decide to trade. trade the kind of losses that you will experience as a result of being a trader. It's a natural part of the business that we will have small drawdowns.
But what isn't consistency are the kind of, let's say, a kind of equity curve that looks like this with a huge drawdown and build it right back up again, another huge drawdown, build it back up and another huge drawdown. Now, most traders who don't understand the nature of trading or the nature of the psychology behind what it means to be consistent, they will attribute these huge drawdowns to something that happened in the market. They'll always try to find a reason to determine what is it about what the market did on this particular day or this particular trade or whatever series of trades created this huge drawdown that caused that to happen. And then go on a search to find what it is. What I'm going to establish, hopefully today in the next two hours, is that those huge drawdowns are not the result of something you did not know about the market.
They are not the result of something you did not know about the market. They are the result of something you didn't know about yourself. And there are ways to prevent that.
And those ways to prevent it are what it means to really create a nice, steadily rising equity curve. And those ways basically fall into four general categories. None of this is, by the way, none of this material is in that book. So don't, there's no point in looking.
I just didn't want to waste your time. There's no material in the book. You've got the videotape, I mean come on. So you know, you just need to sit back and listen.
Anyway, so we've got four basic categories. One is that you have to have an edge. In other words, you have to know enough about the nature of the market and how it moves so that you can determine when there's a higher probability of one thing happening over another.
That's how I'm defining an edge. When there's a higher probability of one thing happening over another. And then the next category is that you have to learn how to think in the market's perspective.
I just simply, as a heading, would say that you have to learn how to think in probabilities. Now this is really kind of where most traders have their, let's say, have the greatest amount of difficulty. First in recognizing what it is, what it means to think in probabilities, and then implement, once they recognize it, implementing some process or series of steps where they're actually retraining their mind to think in probabilities now this is what i'm going to spend most of the time on in the next two hours and and just before i even get into it just so you kind of have a little bit of a background is that our minds do not naturally think that way our minds don't process naturally process information in a way that will cause us to let's say be in harmony with or you or have, let's say, be in correspondence with the nature of the way the market exists. And so we have to do something very specific to train our minds to think in probabilities if we want to create consistency. The third category is all the, let's say, conflicting energy that exists inside of us.
I'm going to say conflicting energy, conflicting beliefs. or whatever that would argue against us accumulating vast sums of money as a trader. Now, what kind of things am I talking about? Anybody have any ideas of what I might be talking about?
A general belief system. A general belief system. What's that?
Go ahead. A general belief system about childhood. But can you think of anything specific?
Self-doubt. Self-doubt? Well, okay.
But anything more specific than that even? Filthy rich. Now look at the word. Filthy and rich.
Okay, where does that word filthy come from? It can come from a number of different sources, but what people have to understand is that we grow up, we can grow up, we don't say we do grow up, we can grow up with any number of things that we've learned throughout our lives that are going to fall into the category of what I'm going to just say are self-sabotaging beliefs. In many cases, they're religious-based beliefs. Because essentially as traders, what are we doing? We are basically taking money from other people with no services rendered.
That's basically what we're doing as traders. And there are a lot of religious beliefs that would, let's say, that would really rail against the idea of doing something like taking money away from other people with no services rendered. And so as a result of, we build up our skills, we build up our knowledge.
about the nature of trading, we get better and better at it, and all of a sudden find ourselves Or maybe not in the moment find ourselves, but when we look back and with a little bit of introspection say, why did this happen? We make trading errors. Errors that cause these kinds of drawdowns.
Sometimes it can be simple ones, like even a buy for a sell. I did it just the other day. But it didn't create a huge loss because I caught it, but the point is that...
If I wasn't conscious of what I was doing and why I was doing it in the moment, I could have very easily let that trade go, and it could have been more than what I anticipated. And the problem is that when we experience these kind of drawdowns, they create psychological damage. They create the kind of psychological damage that's very difficult to recover from, or can be difficult depending on one's skill level in being able to do so.
And what kind of psychological damage am I talking about? The lack of self-trust. We don't trust ourselves anymore.
And when we don't trust ourselves to do what we need to do, when we need to do it, without any reservation, without any hesitation, what ends up happening is that we end up generating fear. And what we're going to find out in a little bit is that fear has a very insidious effect on our ability to be objective and see what the market is offering us in any given moment. Because we can define the market as this kind of never-ending opportunity flow. And the market is basically giving us an opportunity in any given moment to get in, add to, detract from, or get out.
But it's this never-ending flow. Now, if we're not perceiving it as this never-ending flow, the market's not causing us to perceive it that way. It's what's going on inside of us that's causing us to perceive it as something other than this never-ending opportunity flow. And those are the kinds of internal forces...
that cause these kind of drawdowns. That's the third area. The fourth area is learning, let's say, building a specific kind of mental framework that will allow you to recognize when you've crossed through the threshold of euphoria.
So let's say from normal confidence to overconfidence or from normal confidence to a state of euphoria. In other words, there is... What I'm going to call a psychological threshold.
Below this threshold, you're just confident. Once you pass through it, you're in a state of euphoria. And why would being in a state of euphoria be a problem?
What's that? Loss of objectivity. Anything else? Feeling invincible. Why is feeling invincible a problem with the...
when you're interacting with the market. Everybody understands the implications? In other words, when you've crossed the threshold into a state of mind of euphoria, it is impossible to perceive risk.
That is the nature of euphoria. In other words, the nature of euphoria is that from our individual perspective, from the perspective of our state of mind, in that state of mind, it would be impossible for me to perceive that anything can happen other than what I expect to happen. Anything.
The only thing that's going to happen is what I expect to happen. And as a result of being so absolutely, so absolutely sure that what I expect to happen is going to happen, what would be the next step in this process? To break my money management rules, right? In other words, to put on a position that would be much larger than what I would normally trade. Maybe 10 times.
Maybe 20. Well, there's no risk. Why not? Right? Why not?
Now the problem, of course, with putting on an inordinately large position is that it doesn't take very much movement for the market to put you in a huge losing trade. And the problem there is that if I've got this huge position on with being absolutely positive that it's going to work, then the market just goes against me by just a little bit. I can go from this state of euphoria, from this state of, let's say, in essence, heaven on earth, to a state of extreme agony and pain of hell on earth virtually instantaneously. Can I not?
And then once I get into this state of mind right here, I will be in mind freeze. My mind will freeze up. I'll be, let's say, paralyzed to do anything. And I just sit and watch as the market takes my money away. Something snaps inside of my mind, so okay, that's enough, and I get out.
And then I look back at my equity and I see one of these huge drawdowns, okay, and I think, oh my God, how did that happen? Now, if you don't understand the underlying dynamics of what I just talked about, you're going to go look at the market and you're going to try to find what happened in the market that caused that. What set of variables, what set of market variables caused that to happen?
You see, the market didn't have anything to do with it. Nothing. To create consistency, in essence, what we have to do is learn how to trade without making errors. Does that make sense to everybody? Right?
But then what is a trading error? Okay, if that's the case, did everyone nod their head? Yes, yes, okay.
It makes sense, right? To create consistency, I have to reach higher and higher levels of error-free trading, right? There's a correlation there. In other words, everyone sees the correlation.
right? But then if I said, okay, what are trading errors? List them.
What? Not following your rules of the trading error. Okay, good. See, but these are things you should be able to, well, right off the top of your head, right?
You guys are all in the same boat. in the business of trading. Every single one of you would probably say, yes, my goal is to create consistent results.
And I say, what do you want? What's your objective? What are you trying to accomplish here? Well, I want consistency.
And yet if we just establish that consistency is a function of lack of errors, you should be able to rattle off those errors right off the top of your head so that you can recognize them when you're making them. Right? What's the biggest error that virtually all traders make, except for the ones who have gotten to the point where they don't make them anymore? What's the biggest number one error that traders make?
What? Nope. I know I'm right, okay.
Yeah, but see, I know I'm right, but how does I know I'm right manifest itself? Into a trading error. What? You can't take it because you're locked into the wrong position and you did not...
I'll agree with everything you said. I'm just going to say it a little bit differently. What's that?
Yeah, not predefining your risk. Everything we just said, I'm just going to say it a little bit differently. Not predefining your risk.
Now, I'm not going to ask people to raise their hands, but I bet there are people in this room who still will get into a trade without predefining their risk. Now, why won't people predefine their risk? Why is that so hard to do? Why do you think that's so hard to do? What do you think the underlying dynamics are?
Well, yeah, you don't want to be wrong. Now, see, when you've learned to think of probabilities, what you're going to learn... and what you're going to understand is that trading is not a right or wrong endeavor.
It has nothing to do with being right or wrong. But this is really important. Yes, we don't want to be wrong and we don't want to lose money.
And there's a problem here in terms of the way our minds... are designed to think. If I think of trading, getting into a trade as being something I can be right or wrong about, and I have not accepted the risk, meaning I have not accepted the dollar value of the potential loss that I can incur from that trade by not predefining it, or by predefining it and still not accepting it, then my mind has the potential to associate whatever's happening in the market now with something that's happened in my past. meaning our minds are wired to associate meaning that if I haven't changed the way that I think about trading I have the potential to look at any given trade as, well let's say any given trade has the potential to tap me into the accumulated emotional pain of what it means to be wrong or every time I've been wrong in my life yeah, exactly I'm going to say that again. If I haven't redefined trading to think about it in the appropriate way, based on the way that I'm going to explain in a moment, being wrong on a trade has the potential to tap me into the accumulated pain of every time I've been wrong in my life, because that's the way our minds are designed to think.
They're designed to associate. So if that's the case, little wonder that I'm going to avoid predefining my risk. Because here's what's going to happen. For me to predefine my risk, see, I don't want that to happen. I don't want to be in that state of pain.
For me to predefine my risk, what do I have to do? I have to gather evidence that will suggest why this trade might not work. Right?
I have to gather evidence to say, okay, what are the things that could happen that would tell me, or what does the market have to look like, sound like, or feel like to tell me this trade isn't working? And I have to gather evidence to tell me that so that I know how to recognize it. But the problem is, is if I gather too much evidence, I might talk myself out of the trade. Right?
And if I talk myself out of the trade and it turns out to be a winner, then I could be in a state of agony that might be even greater than had I put the trade on and it turned out to be a loser. So how do I compensate? So I've got a mental dilemma here. I've got a dilemma. How do I resolve the dilemma?
Gather enough evidence, in other words, have the trade be so technically or fundamentally sound, whatever method you might use, to the point where I have convinced myself that I'm right. And see if I'm right, there's no risk. Right? Why pre-define the risk if I'm right?
There is no risk. I wouldn't be doing this if I didn't think I was right. What's that?
I'm still, there's people, go ahead, say that again. Yeah. Right. Right. Inaction.
Inaction is arrest. Fear. Go ahead.
I think part of your belief system takes in hope. It's something we are trained to have. We always look forward to making things better. So when I'm wrong, that fellow jumps up and says, I didn't go like this.
I know, exactly. I'm going to give you an example that really, yeah, that typifies exactly what you're saying. And see, here's the thing, here's the problem with trading. I'm just going to put up some typical errors that we make over and over again all the time.
Let's see if we can... How do we need to adjust it? Go forward or back?
I'll just move it up a little bit. Anyway, here's what's interesting about these errors, okay? One, hesitate.
Get in too late. Jump the gun. Get in too soon. Don't define your risk in advance of putting out a trade.
Define your risk. Don't take your loss into account. it turns out to be a bigger loss.
Get out of a winning trade too soon, leave money on the table, get out of a winning trade, let's see, let a winning trade turn into a loser without having to take any profits, move a stop closer to your entry point, get stopped out, and the market trades back in your favor. Now here's what's really interesting about trading. And the biggest one, like I said, the biggest one is that not predefining your risk.
And I just went through the whole dilemma of the psychological dynamics behind that. Does everybody understand that dilemma? Go ahead.
Could you just restate, you said, being wrong has the potential of... Tapping you into the accumulated pain of every time you've been wrong in your life. And that's definitely something we're going to avoid. Our minds will automatically alter the way we perceive the market to help us avoid that from that happening, okay?
Now, I'll explain the underlying dynamics of that in a second. But there's a real important point that I want to make here. Is that these are all trading errors.
Will everybody at least acknowledge they're all trading errors? I mean, are we all together on this? Okay. However, here's what's really interesting about trading and why it can be so difficult to create consistent success. It's because you can make every single one of those errors.
over and over again and still find yourself in a winning train you don't have to know what what you the microphone didn't pick up but someone back there said thank god Now think about the nature of trading. What do you, what skills, what skills do you need to find yourself in a winning trade? What? No, no, no, no, no, no.
What skills do you need to find yourself in a winning trade? None. Zero.
Zero. Think about that. You don't need to know anything to find yourself in a winning trade.
Right? Nothing. You don't have to have any skills whatsoever.
And if you can find yourself in a winning trade without having any skills whatsoever, once, can it happen again? And can it happen again? Yeah. We don't know what the limit is to how many times it can happen without having any knowledge whatsoever. What do you need to know to find yourself with a winning blackjack hand?
Nothing. What do you need to know about roulette? Nothing.
What do you need to know about craps? Nothing. What does that suggest to you?
Do you see any correlations here? Do you see any correlations? What does that suggest to you about the nature of trading? It's gambling.
Absolutely. Now, interestingly enough, when I proposed this in Toronto three weeks ago, they really railed against it. Oh, you would not believe how difficult it was for them to wrap their mind around the idea that trading was gambling.
Not a very religious statement. What's that? Not a very religious statement.
Yeah. Yeah. And interestingly enough, to really be consistent, to create consistent results, you have to acquire a mindset that is really consistent with the kind of mindset that a good, not a compulsive gambler, but a professional gambler would have.
Or the kind of mindset that the casinos have. Is that your average living in Las Vegas? I don't know. Well, I don't know.
I mean, because look at it. What do the casinos do? They spend billions of dollars building these grandiose hotels.
Now, think about this. They have to justify spending that kind of money. They spend billions of dollars, you know, building these grand hotels to attract people into playing an event, wagering on an event that all of us know has a random outcome.
And yet they create consistent results for themselves. There's a reason why. Because they think about it in the appropriate way. As traders, if you can learn to think about this in the appropriate way, you can become the casino.
Because your technical analysis will put the edge in your favor. You will get an edge. But if you can't use that edge appropriately, meaning that if you consistently make these errors, or any other type of errors, you will not create consistent results.
You will create random results. And the problem with creating random results, even though it can be a lot of fun, because you can end up on huge winning streaks, because keep in mind, you can make every single one of those errors and still end up in a winning trade. You can be the best analyst in the world, or the worst analyst in the world. You can have the best reasons or the worst reasons. It doesn't make any difference.
You can still end up in a winning trade. But as long as you're susceptible, if you're as long as you're susceptible to this, as long as you're susceptible to these huge drawdowns, you are creating accumulated psychological damage that will have an enormous impact on your ability to make consistent money. Eventually what will happen, if you don't understand the underlying dynamics of these drawdowns, by trading randomly, you'll end up with typically analysis paralysis.
You'll become an incredible market analyst and the inability to take advantage of what you perceive as an opportunity. You won't be able to put your trades on. And you'll see the gap between what you know, what you understand, what you've learned about in terms of opportunities, and your bottom line results grow ever wider, wider and wider and wider. So are we kind of ready to get to the way we need to think to, you know, if I kind of set this up all right for you guys?
So where do we want to go? What do you guys want to know now? I used to go to Vegas for 13 years with the Shopping Center Convention.
You say the Shopping Center Convention? Okay. I never gave up.
I never gave up. I've been trading full-time for six years. You're putting much more than a nickel in.
Is there something really sick about me? Sick? No, I... Maybe I get this answer later.
Well, no, I... No, I'm... I'm going to say no, I don't think. I don't see the correlation between why you think because you went to Vegas and didn't gamble.
I mean, why you think. I mean, I can think of things. If it's gambling, this is not to me.
Yeah, well, the sooner you think about this. What I'm saying to you now is that the sooner you think about this as gambling, the easier it will be to create consistent results. I already have it. Well, great.
Yeah, if you know, so why would you say that there was, why do you think that there was some sort of sick implication there? Well, because I was afraid of the risk of gambling in Las Vegas, but I'm not afraid of the risk of trading. Okay.
If you've accepted the risk, that's one of the key... issues right there. One of the reasons why people have such a difficult time and make these errors is because they have not accepted the risk.
If you've truly, what does it mean to accept something? Because he's bringing up a really good point. What does it mean to accept something?
What is the definition of true acceptance? Well, I understand where the not controlled comment comes from and let it go. I'm not going to argue with either one of those statements other than to say that the way I define acceptance is that when you've really accepted something. You've reconciled it, meaning to the point reconciled it where every other, there's no other potential, there's no potential for anything else inside of you, meaning inside your mental environment, any belief that you've ever acquired to argue against what it is that you've accepted.
There is no conflicting energy. Not something you have to rationalize away or justify or anything else. True acceptance means there's no conflicting energy.
And essentially, as traders, of course, what we have to do is get to the point where we've accepted the risk of trading with no conflicting energy. Because if there's anything else inside of us that argues against what it is that we're doing, for whatever reason, it will create some degree of fear, and to whatever degree of fear that we're operating out of, will narrow our focus of attention and take us out of a state of objectivity, or let's say take us out of this constant opportunity flow that the market's offering us. We'll be further and further away from that flow. So what we have to do is learn to train, or what we have to do is step into a process of training our minds to think in probabilities. Now what exactly does that mean?
How do we know that the market exists from a probabilistic perspective? How do we know that it's even gambling in the first place, based on however it is that we're going to define gambling? Isn't gambling, let's say, an event, a game that has a random outcome? Does trading have a random outcome? There's no difference, is there?
And how do we know that trading has a random outcome? How do we know that whatever particular way that you might define your edge, Meaning whatever methodology you use to determine this is a time to buy and this is a time to sell or vice versa, or this is a time to get in, this is a time to get out, this is a time to take profits, this is a time to add to or detract from your position. Whatever that is, how do we know?
How do we know for an absolute fact that there's a random outcome? It's not a guaranteed result. Yeah, but how do you know that? Because the market moves after you go out.
Understandably, yes, the market moves. And what's creating that movement? You, right?
No, well, no. But what, no, really, what's creating the movement? Other buyers and sellers, right?
So when you, if you decide to buy at this point right here, what is now required for you to find yourself in a winning trade? No, what's that? There has to be more buyers, right? Someone has to be willing to bid the price up further.
What's that? Yeah, someone has to be willing to... bid the price up further. If you buy, someone has to buy after you.
If you sell, someone has to sell after you. If those people aren't there, then you're not going to find yourself in a winning trade. It's that simple. If those people aren't there, you were the last buyer.
Right? At least in that time frame. In that time frame, you were the last buyer. What else can happen to determine, you know, regardless of what our edge is, that we might not find ourselves in a winning trade? What?
No, not new, no, just really fundamental, just really fundamental. I'm just getting, what it takes for you to get, for you to find yourself in a winning trade, someone has to buy or sell after you. What else can happen? The opposite. You could be a buyer and some huge seller comes into the market, right?
So in essence, I'm going to make the statement that it only takes one trader somewhere in the world to negate the positive outcome of your edge. Theoretically, usually it's more, but theoretically, it only takes one trader somewhere in the world to negate... the positive outcome of your edge. Does anybody want to argue with that statement?
Now, interestingly enough, no one wants to argue with it. We, you know, chances are, and we didn't get a rate, I didn't ask for a show of hands, that there are people in this... this room who have put on and maybe still, well let's say before this morning, put on trades without pre-defining the risk, now I'm going to ask you if you really truly believed that it only takes one trader somewhere in the world to negate the positive outcome of your reg, if you really believed that, would it be possible for you to put on a trade without pre-defining your risk? Anybody else?
I got one no. Anybody else? Yeah. You guys agree or not? See, if you really...
This is really what we're talking about here. We're talking about a set of beliefs that create a state of mind. A state of mind that compels you to be consistent.
That compels you to do exactly what you need to do, when you need to do it, without hesitation, without reservation. If you really believed that it only took one person somewhere in the world to negate the positive outcome of your edge, you would not be capable of putting on a trade without predefining your risk. Because the moment that you started to do it, it would create a conflict.
And somehow or another you'd have to argue away the conflict. You'd have to argue away in your mind and justify why you're going to put on this trade knowing that all it takes is someone somewhere in the world with a different belief about what's high and what's low to make that trade a loser. Are you guys with me on this?
How many people in this room have ever played slots? When you put your quarters or dollars in slot machines and you push the button or pull the handle and the numbers didn't come up, tumblers didn't come up in a way that gave you a payout, did you think you were wrong? Why? Because I accepted the risk. You accepted the risk, and what else?
What other reason? Why? Next time. Next time? Okay, and what other reason?
I got two siblings instead of three siblings. Because I have no hope. Because you have no control?
Okay, what other reason? These are good. All good reasons. What?
What's that? That's accepting the risk, but there's another reason. No, not necessarily.
You expected the winner, you wouldn't put the money in. What else? Yeah, you believe in random outcomes. Your belief in random outcomes prevented you from making the connection about being wrong.
You believe that the outcome was random, and therefore there's no connection. How is it that you think that thousands of people, millions of people, on a daily basis, can go into a casino and shove money in these machines, and not come away, you know, totally emotionally traumatized? If these were tra...
Traitors, they wouldn't be able to do it. If there were traitors sitting there with the kind of mentality that traitors have sitting in front of these machines, it would be impossible. You guys would be walking away completely traumatized.
The reality of trading is that it is a probability game. Because here's what, here's, here's, if you just break it down. The most fundamental level, what do you have? If you just take the market and break it down to this most fundamental level, what do you have? Buyers and sellers that do what?
Create what? Up and down ticks. Right? At the most fundamental level, what we have are buyers and sellers who create up and down ticks.
Now how do they create their up and down ticks? What has to happen for a tick to go higher than the last or lower? than the last.
What's that? Volume. What's that?
Somebody has to have a stronger belief in the future. Why do we know that for a fact? They want to pay more.
In other words, if you look at trading at the most fundamental level, and this is really critical that you understand this. If 9 was the last price, there's only two ways you can make money in trading. You've got to buy low and sell high or sell high and buy low.
Now, if 9 is the last posted price, what's low? 8 is low and 10 is high, right? Now, what does it tell you if someone is willing to actually buy it at 10 instead of buying it at 9 or 8? Yeah, they believe it's going to go to 11 or otherwise it would have waited, right?
But what about the guy? selling it to him. He also has a belief too. He wouldn't be selling it to him if he didn't think that the next tick was going to be 9 or below.
So what you've got is you've got two conflicting and competing forces in every single trade. Both traders are doing it to make money. both traders believe they are right or they wouldn't be doing it. But what's the difference?
One has to have a stronger conviction in their belief because they are willing to do the opposite of what they have to do to make money, at least in that moment. The opposite is they are buying high instead of buying low. They are creating movement. They are actually stepping up and creating movement where the guy on the other side of the trade is passive doing exactly what he thinks he needs to do.
He's selling high relative to the last price. So all market movement is simply a function of what, no matter what the reasons are. See, it doesn't really matter what everyone's reasons are for doing all this. It doesn't matter. Because as we already know, most people think they've got good rational reasons.
The reality is they're trading randomly anyway, aren't they? So what it all boils down to is all market movement is a function of what traders believe about the future and their degree of conviction in their beliefs. Now, all this interaction, all this belief and conviction and the degree of conviction results in simply up and down ticks.
Just up and down ticks, okay? Now, what technical analysis has done for us is basically help us recognize that there are patterns in the group dynamics. In other words, you've got a finite number of people who are interacting together.
day after day, week after week, and they will create behavior patterns. The dynamics here aren't any different than individuals who will respond in exactly the same way under the same conditions. or circumstances over and over and over again. Groups do the same thing.
They create behavior patterns. So we've got individual ticks that form into these larger patterns, and these patterns, we have found, repeat themselves over and over and over again. Right? And as a result of the way our minds are designed to think, it is natural for us to think that if I can find consistency here, meaning this pattern repeats itself over and over again, that the outcome should also be consistent too, right?
Wrong. The outcome will be consistent wrong to an extent. The outcome will be consistent over a what? Large sample size of trades.
So you've got individual patterns where the patterns themselves can look exactly like the previous one, can measure mathematically exactly like the previous one. But will the outcome be the same as the previous one? And we've got people shaking their heads, which is good.
Not everyone's shaking their head, you know, agreeing. But the point is, how do we know for a fact that the outcome may not be the same? Because even though, like I said, visually they can look exactly the same and measure exactly the same, there are still always going to be different people involved in this trade. And it only takes one person somewhere in the world to have a different idea to negate the positive outcome of that trade, for example, if you bought that support line.
Just one, just one trader, that's all it takes. So what it means, it's like, it isn't any different than the concept of, if I flipped a coin, an evenly weighted coin, a thousand times... I had a thousand flip sample set.
I will find that each sample set has a relatively even distribution between the number of times heads come up and the number of times tails come up. Are you with me on this? It'll be close to 50-50.
That is a pattern. That's a pattern I can rely on. But within that thousand flip sample size, do I know the distribution between the individual heads and tails? In other words, I don't know what the distribution is. I can get ten heads in a row, I can get ten tails in a row, I can get five heads, three tails, heads, tails, heads, tails, heads, tails.
All in all, it's going to come up to 50-50. Casinos. Casinos.
They've got basically a 4% or 4.5% edge in blackjack based on the way they've got the rules set up. That means that of all the hands played, or let's say if there's a million dollars wagered on any particular table, they're going to end up with $45,000. That means that takes into consideration all the big winners, all the big losers, everybody in between. Do they fret?
They sit there and fret over every single hand that's played? No, they don't. They've learned to think about it appropriately.
Go ahead. Mark, a little early in my trading career, I went to a seminar, and the person speaking said to the group, if we flip a coin 20 times, how many of you think there's any chance that we would have, say, heads as a winner and tails as a loser, that we would have 12 or more heads or tails in a row? And nobody in the group believed that it was possible.
We then proceeded to flip the coins a little. Out of the 20, 14 came up heads and a little. I believe it.
Yeah, that's, to me, that's, yeah. And everybody was just astounded. Right.
Because nobody ever thought, man, just like, do you think I ever possibly have that? that many losers in a row, there's proof positive. Oh, yeah.
Just when you think it won't. Absolutely. But if you did a flip a thousand times, you still come up close to 50-50. I understand. So now, just based on what I've just said just now, what would that require of us to create consistent results as traders?
Try to find a 50-50. Well, no, you've got to have an edge. You've got to have an edge. In other words, yeah, to execute your trades without thinking about the outcome of each individual trade. In other words, every single error, guys, look, and girls here, every single error that's on that list, you cannot make, you cannot make any one of those errors without believing you think you know what's going to happen next.
Just take a moment and contemplate what I just said. You can't make any one of those errors without somehow thinking or believing that you know what's going to happen next. And that's why you can't create consistent results if you're not creating consistent results.
It's because you're still susceptible to making those errors. And the way you're susceptible to making those errors is because you're susceptible to defining all these errors, these up and down ticks, defining the up and down ticks. in some way as potentially painful.
In other words, you are taking basically a neutral event that you're observing. And what do I mean by neutral event? What? No, no.
Neutral event emotionally. Neutral in the sense that can the environment, let's say, or let me ask you, is the information that the market generates about itself and its potential to move inherently joyful or painful information? Is it positively or negatively charged information?
What's that? Well, no, I'm asking from the market's perspective. Is the market, the information that the market generates about itself, is it positively or negatively charged? It's neutral, right? Okay, it's neutral.
Is there such a thing as positive? positively charged information? No? No, not by, no, no, no.
Just in the environment. Is there such a thing as positively charged information? Yes, okay. Is there such a thing as negatively charged information?
Okay. In other words, people expressing affections. and love can be positively charged, right?
Or is positively charged. People hurling insults at you is negatively charged, right? Okay, so the market does not generate as a characteristic of its existence positive or negatively charged information. If that is the case, then how is it that we can feel fear?
Yeah, in other words, somehow or another we've interpreted the information in a way that causes us to feel that way, right? So from the market's perspective, it's neutral. It's the interpretation process that causes us to define it in a way or interpret it in a way.
where it's potentially painful. And as soon as it becomes potentially painful is when we know what we think is going to happen next. In other words, why am I hesitating?
Why am I hesitating? Why am I getting in too late? Why do I do that?
Yeah, because I think I know because I don't think it's going to work, right? Why am I hesitating? I don't think it's going to work and I've got to wait. Because I don't remember. I know what's going to happen next.
Or at least I think that I do. Why am I jumping the gun? I know I'm going to miss out. Right?
I'm going to miss out. I've got to get in now. Why don't I predefine my risk? Yeah, I know I'm right. What?
I'm not participating for 10 years. You know, I was worried about that. How much time have I got here?
Five minutes? About nine. About nine? Okay, I'm sorry.
Go ahead. I'm sorry. Take ten.
Take ten. I'm not participating for 10 years. Yes.
So I did my work for testing. My analysis is correct. My technical fundamentals.
I don't know. You cannot be wrong. You cannot what?
I cannot be wrong. Oh, you cannot be wrong. Yeah, right.
Exactly. See, every single error. that we make is always going to be the result of thinking, feeling, or believing I know what's going to happen next.
But the problem, as I said before, is that this is only an error. It's only an error within the context of what you're trying to accomplish. Now think about what I just said.
These are only errors within the context of what you're trying to accomplish. If you're trying to accomplish consistency, then these are trading errors. If your objective is not consistency, see?
even though you might say that it is. If the reality of your trading is that it's not consistency, then every single thing that you can do here could result in a winning trade, and it's not an error, obviously, then, is it? If I can hesitate and it ends up in a winning trade, then I did the right thing. If I can jump the gun and I end up in a winning trade, I did the right thing.
It's only the accumulation of these errors that cause these massive drawdowns that end up hurting us. Okay, so what we have is we have the market works the same way in terms of, let's say trading works the same way, in that we've got patterns, the patterns repeat themselves, but the outcome to each individual pattern is random. And we know that because there are always different participants making up any particular pattern that might look, sound, or feel, or measure exactly the same as the last time that it occurred in the market. Which means that there's always a risk. It's just like, a number of you people have read Trading in the Zone.
Remember the example I used in Trading in the Zone? About working with a trader who came to me for consultations, and he was like a really terrific analyst, but he could never be a trader. ever made money as a trader and he blew through a bunch of his family's money and his friends and anybody could talk into opening up an account for him.
And so after going through a lot of people's money and a lot of people being pissed off at him, he came to me for help and I said, hey, look, you know, you've got a number of different issues here that you're going to have to work through that might take, you know, an extended period of time. Why don't you get a job doing something, you know, that someone will pay you for and, you know, and earn your money legitimately. And so he got a job as an analyst. clearing for him in Chicago.
And he was a good analyst and they paid him really well for it. And so the president of the firm, who was a retired grain trader, never traded using technical analysis. He was always down in the soybean pit. And the way traders make money in the pit, especially locals, they trade their mentality and the way they trade and how they make money is very, very different. than making direction-based decisions off a screen.
But anyway, so, in fact, it's so different that you almost really couldn't classify the two as being trading. The guys in the pit would say they're traders. The guys on the screen would say they're traders. There's such a vast difference between the two that one of them can't be trading.
But anyway, you'd have to call us something else. You'd have to just call us something else. But anyway. So he sat down with the analysts to learn about this mysterious technical analysis, and that's exactly what he looked at.
It was somewhat mysterious. And the analysts would always talk in real definite terms, very arrogantly, like, okay, this is going to be the high of the day, this is going to be the low of the day. So in one particular day, the market was trading in between what he said was going to be the high, going to be the low, started drifting down to the low. And so the chairman said, hey, you know, so this is going to be the low of the day, right? Yep, that's right, this is the low of the day.
So he picked up the phone right next to him with a direct line to the soybean pit and said, you know, sell two million bushels at the market. You know, and the soybeans dropped ten cents in a matter of, you know, like five cents. And the guy's looking like, what the hell happened? Hey, random results. That was the pattern that he was looking at told him that that was supposed to be the low of the day.
All it takes is one trader somewhere in the world to negate the positive outcome of your edge. Okay? But the reality of trading or thinking in probabilities has to do with five fundamental truths about the nature of the market and trading.