The Inner Voice, by Michael Martin is the best stock market book of the nearly twenty I've read.
From it, I take these two excerpts:
Page 160: "The book Talent is Overrated, by Geoff Colvin, got me thinking. In the trading world, education is over-rated. People with average IQs financially outperform those with high IQs a whopping 70% of the time, (footnote 5) and a study on this topic concluded that only 36% of those tested (foonote 6) were able to identify their emotions in real time with any accuracy. Two thirds of people are controlled by emotions that they cannot identify. This has huge implications for traders and what they need to do to become better traders. You need to have a system for finding out what your feelings are trying to tell you-- especially your subconscious feelings. These feelings are always running in the background in everything you do, although you are unaware of them. You probably can see the results of this subconscience system but are likely not to know the progenitors."
Page 161: "If you don't learn about your feelings, your outcome is predicted whether you know it or not. You might as well surrender and learn about your feelings so that you can have a more profound effect in the navigation of your trading career.
With two thirds of the crowd being controlled by emotions they can't identify, you can define part of your trading edge immediately by developing your sense of self awareness. This turns the odds in your favor: By trading against you, your opponents are, in effect, a '1-2 shot' -- and you don't even know what the acronym MACD (footnote 9) stands for. You are the favorite with a large edge, and you might not know how to trade yet."
-----------------
What I have found after personal observance and study is that the stock market in the short term is nothing more than a game like poker. It is the transfer of wealth, by way of a market mechanism of valuing the price of a share of stock, bond, currency, or commodity,from the majority of traders who are captives of their fears and other emotions to the small number of traders who are able to master the human behaviors driven by emotions.
I saw this yesterday in TNA where I impulsively (emotionally) entered against the trend at a point that seemed perfect for me, only to have the ETF run against me. I held instead of stopping it out. Then it occurred to me what I was doing, I was on the opposite side of a trade from the 10% (?) of traders who are successful at this business. Instead of considering the chart as a picture on a screen, I saw it as interaction of buyers and sellers... and I thought about who they were. My practice trade entry was a bad choice, which means that someone who isn't operating out of emotion is on the other side. Later as I thought about it at a sushi lunch with a friend, I considered where else on the chart would there be examples of bad behavior; traders taking an initial trade long against downtrend too soon as well as those who were far too early and decided to average their losing position. After the day had ended, the chart bagan to make sense to me. I saw where those happy traders must have been, where the nervous traders got in (those who got long against trend too early but at a better price than me). And, I saw where the Screwed & Panic-stricken traders were... how the market moved in relation to their emotion-gripped responses to what was happening on their screens. I saw the final plunge of TNA designed to drive them to give up and liquidate their huge losses (what Quint Tatro calls the "Towel Trade" in his book, 'Trade the Trader;' the point on the chart where you can see the last of the fools 'throw in the towel'"). Later after the turn, I could see the candles indicating relief selling by those whom I've called 'Nervous Traders' who got in counter but toward the second half of a trend... they had smaller losses but managed to hold through the move against them. I saw the relief liquidation of the "Screwed & Panic-stricken" traders with big losses who held with white knuckles instead of stopping out. Some of them probably were traders who added to their losers against trend as the price plunged, though by my intuition and prior bad performance of doing the very same, I'd say most of the truly freaked out traders who added to their losers were chased out for huge losses on the final push down (The Towel Trade) before the reversal. Compliments of the 10% of traders who are self-aware and able to manage their emotions.
How did I come to these conclusions? To begin, I've seen it play out hundreds of times; stocks trade in patterns. If you take the spot where I got in long far too early, and then consider lower levels where amateurs were adding to their losers, and then you calculate the average of the prices, you will get the price point on the chart where the rebound from the downtrend hits resistance. The resistance is generated by all the trapped emotion-wracked traders finding relief by liquidating their trade at or near breakeven. Never mind that with this reward for bad behavior they have been exponentially damaged by this "bailout." They have discovered that they can hold onto the stupidity without consequence. "No need for taking a small stop loss at all, this trading shit is a breeze," they say! Until they experience the inevitable trend that doesn't reverse soon enough and ruins them. This is the reason so many Wall Street hedge fund geniuses blew up during the September 2007 - March 2008 vicious downdraft! Even the deep pocket fools get their come-uppance eventually.
So, after all the relief-selling had cleared, the consolidation derived from it also cleared, and price soared up on the buying pressure from traders who were in touch with their emotions, doing it the right way and not out of fear. And to be sure, the uptrend brought in early sellers who didn't stop out as price rose, causing the cycle to repeat as it has every day a market has been made in anything since the dawn of time. This is how a market is made.
The markets are a complex game where wealth is transfered from willing but emotionally ignorant greedy traders to calm, practiced, emotionally correct traders who swim like sharks in the money pool, gorging themselves on the fear-bloated carcasses of the amateurs.
Don't trade with real money until it can be done flawlessly on a trading simulator. Spend time orienting the mind and getting in touch with the emotions which compel the harmful behaviors that hollow out a trading account. Get "The Inner Voice of Trading," by Michael Martin and then REALLY take the lessons to heart. Believe in what he says. Read and internalize all the posts by Scott Farnham at Bankrobber.blogspot.com that deal with the psychological aspects of trading. And expect that a "rock bottom" might have to be hit before really understanding what it is they are trying to convey.
My thought after 10 months of full time market practice and three prior years of part-time study is this:
People have fears that manipulate them. Fears that lead to patterns of self-destructive behaviors of varying degrees of intensity. Gambling, drug addiction, overeating, alcohol abuse, shopping for comfort,sex addiction, and anorexia are just a few examples. I believe these are attempts to medicate oneself, in part or wholly resulting from the inability to face painful emotions. These same emotions are also behind self-destructive trading too, in my opinion. Again, the degrees of intensity vary.
Admit and truly accept being wrong. This is humility. Find the people in your life who love you and care about you and value them instead of material goods. The boast of material things is superficiality, attractive wallpaper covering feelings of inadequacy; a way to make one appear to be stronger or more valuable than what one truly feels inside.
Be positive. Be forgiving of yourself, and from that you will see the value of forgiveness of others. No longer be the prisoner of your hidden feelings.
This is the path I am on. I struggle with it every day. I define my attempts at this as it relates to trading as a form of a "12-Step program," much like Alcoholics Anonymous. One day at a time, I will stop out losing trades. One day at a time I will not exit too soon out of fear of the unknown. One day at a time... that is how I will face the emotions causing me to trade in self-destructive ways. I surrender.
I am certain there is wisdom and benefit for me in the practice of meditation. The buddhists have looked inward for the answers for thousands of years. Christians and Jews have done the same for millenia through prayer. Catholics release their burdens through Confession. Casting off the weight promotes healthy psyches. It is the reason our justice system tends to favor those up for parole when they are contrite and express humility. If you can admit, you are a more acceptable candidate for society. It is a sign of growth and maturity. I'm sure there are many more examples in society which do not come to mind as I write this.
Release the burdens, admit you have made mistakes and are not a bad person for it. Forgive yourself. Mistakes are part of the human existence. Admit that it is ok to take a stop loss.
As an aside on this topic, I recommend this February 2nd essay from Josh Brown at Reformed Broker entitled, "No One Is Ever Wrong Anymore."
http://www.thereformedbroker.com/2012/02/02/no-one-is-ever-wrong-anymore/
It dovetails nicely with what I am talking about.
This is my journey now. Trading is the reason I have come to this juncture in my life. Even if I am never successful as a trder, I will become a better person as a result of the pursuit of it. Of that I am sure.
