Excerpts from "The Inner Voice of Trading," by Michael Martin

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."

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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.

Aside from trading

When I first started this blog a few years ago http://www.bluecollartrader.blogspot.com/2009_02_03_archive.html ), I was pretty much clueless about the markets and offered that the blog would cover things other than trading, "...It is my hope that as I progress as a trader, the content will improve and perhaps be of interest even to experienced market folks. Until then, you can expect mostly personal reflections of trading, discussion of other blogs, of the economy, politics, and finance rather than stunning technical analysis and savvy trading ideas!"

I have limited my discussion of things other than trading and markets to a handful since then, but I thought I'd touch on politics and economy this morning.
My political affiliation has been registered Republican for about 13 years, but with a soundly-beating Libertarian heart. I consider my views not as Republican, or Conservative, but very much Freedom-Loving. I support Ron Paul, but am not 100% in favor of his foreign policy. In terms of electability, he doesn't have a shot. I don't favor the other three candidates in the Repub field; I truly despise Newt Gingrich and will write in Ron Paul's name on the ballot for president in November if Gingrich gets the nomination. I know, it could lead to Obama being re-elected. I don't care, and it makes me sick to say it because I think the current president is among the handful of most incompetent, devisive presidents in American history. But, he is still a better man than Gingrich. I don't mind Santorum, but he is looking at America through rose colored glasses if he thinks that this election can be won on a "values" platform. He is out of touch with the whole economy issue... approaching the election with a focus on faith and family while we bear the deficit/debt burden is short-sighted in the extreme. I'll hold my nose and vote for Mitt if he gets the nod. I suspect he will. I am from the northeast and I understand the "Northeast Moderate" republican platform. I am not comforted by it. But on the other hand, Mitt has shown competence in the things he has achieved in his business life. He does not carry around personal-life baggage like so many politicains do: Bill Clinton, Herman Cain, Newt Gingrich, John Edwards, Al Gore, etc. I am one who still thinks this type of thing matters. If you're character failings lead you to break your promise to the most important person in your life, your spouse, how can we possibly believe that the same character failings won't affect how you govern complete strangers? Either you are trustworthy or you are not. I will admit trustworthiness is not the be-all and the end-all, however. George W. Bush was a good, trustworthy man in my opinion, but his eight years of middle-east policy have assisted in drowning this country's citizens in red ink. I voted for him both times and will have to carry that heavy burden with me forever. His neo-conservative approach has soured me on that brand of Republican governance.
With all this in mind, I offer this paragraph from a recent article (Feb 1st online) in Forbes written by Richard Salsman. It is a beautiful work of truth, delving into US tax policy and the politics of same.
The whole article can be found by clicking this link:
http://www.forbes.com/sites/richardsalsman/2012/02/01/the-inequality-debate-senseless-without-consideration-of-what-is-earned/

And here is the snippet:
Mr. Obama likewise accepts a false theory of “fairness” that rejects the common-sense, merit-based concept of justice that older Americans might recognize as “desert,” where justice means we deserve (or earn) what we get in life, if by our free choice. Legitimately, there is “distributive justice,” with rewards for good or productive behavior, and “retributive justice,” with punishments for evil or destructive behavior. Yet for many decades now, instead of this valid principle of “justice as desert,” most political theorists, politicians, and policymakers have adopted and enacted, explicitly or implicitly, the invalid notion of “justice as fairness,” a scheme presented in the famed 1971 book, A Theory of Justice, by John Rawls, one-time Harvard professor. For Rawls and his acolytes in academia and Washington, “fairness” means not equality before the law but instead equality of opportunity and equality of result. Rawls asserts, as a “moral intuition” (his feelings), that wealth or income gaps can be justified only if they benefit society’s “least advantaged” persons. This is “social justice,” not true justice, and at root it denies that anybody earns anything. At the same time, it insists that needy have-nots somehow “deserve” mandated handouts from those who’ve achieved and have things, that taxpayers are right-less and duty-bound to surrender liberty and wealth whenever a need is claimed.

It should be clear to all who read this that I support kindness and charity with all my being. I believe that our value as human beings can be judged by our willingness to share what we have with those around us. I personally give my time and a portion of our limited amount of money to helping others. What I rail against is government sponsored assistance. Charitable giving is kindness. Redistributive tax policy is confiscation under threat of punishment. One is sourced in the best of human behavior and the other is rooted in darkness of the actions. Like my hard-core New Deal Roosevelt Democrat mother always told me: "The road to hell is paved with good intentions." A societal structure that confiscates wealth from one and hands to another without merit is a perfect example of her wise words.

LOVE THIS VIDEO of Evan Longoria

At Dr. Menaker's site http://www.andrewmenaker.com/ , I found this gem. It is a video of the mental edge that Tampa Bay Rays star young player Evan Longoria used to achieve his elite status in the game. It's about 9-10 minutes but well worth the time. Once a person reaches a certain physical ability, a certain mastery of the skills; the "science" of a task or job, the difference between success and failure is all between the ears. I'm a huge Boston Red Sox fan and have been all my life. How does a guy with the limited physical attributes like Dustin Pedroia get the Rookie of the Year and Most Valuable Player awards in a league where there are some of the most physically gifted athletes in the world? In the end, it comes down to who can perform under pressure. The one who can be in the moment, carefree to focus on what is at hand only, without emotional baggage from the past and without anticipation of unknown outcomes. The "art," rather than the "science" of what one chooses to be involved in, in my opinion, is all about what's between one's ears. Inner peace, inner calm, self-acceptance, being humble and well-grounded: these are the building blocks of sustained excellence and the requirements of prevailing in a highly competitive, performance-based environment.

Here is the video link: http://vimeo.com/6153913