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in the Stock Market is Made by a Tiny Five Percent Trading Elite This book is not about a set of tactics that are going to make you rich in the stock market. I talk about the strategies that I personally use in the stock market elsewhere. This book is about a more important subject – your own personal trading psychology. It isn’t about the psychology of crowds in the stock market, or trying to make money by going against extremes in investment sentiment or contrarian analysis. It is about you. It is about understanding your own psychology as a trader and investor in the stock market. You see you cannot understand the psychology of the millions of other actors in the stock market until you understand your own as an individual. Only once you can understand your own fears and desires and how they affect you when it comes to your own investing can you understand those of the crowd and the reasons behind market moves. The stock market does not create wealth in itself. When you get down to it the stock market is a giant zero sum game. It is a competition in which money is transferred from one person to another when a security is sold. As a player in the market you hope to enter a position and sell it at a profit to someone else. If that person then loses money on the position you don’t care. In fact as part of your strategy you actually want the person to lose money, because you hope to sell out at a higher level than he will. You are not likely to sell if you think your position is going to gain in value. Instead you try to keep it for yourself as long as possible – as long as it goes up in value or until you need the proceeds you can get from selling it for something else. The hard cruel truth is that most people do not make money in the stock market. Terrance Odean, an assistant professor at the University of California, did a fascinating study of investor success rates back in the 1990’s. Odean gathered the trading history of over 60,000 online brokerage accounts and used the data to study trading behaviors investors. Despite doing this study during the time of a
bull market half of the investors in his study actually lost money. The bulk of them simply made a little or lost a little. So called professionals did not do much better, as more than half of them fail to beat the S&P 500 in any given year. Odean found that only a small minority of individuals produce outstanding returns in the market. About one third of the investors in his survey beat the market and out of all of the 60,000 accounts he examined only a small elite 5% produced monumental gains over 2.41% a month and a tiny 1% of traders made over 4.86% a month. In other words the stock market is a place where a few elite traders make all of the money off of everyone else. This mirrors about any other competitive activity, where it really is only a small few who rise to the top. To put it another way - for every five people who get in the stock market and become filthy rich fifty people lose money, even in a bull market. And for every one hundred people in the market thirty people beat the market consistently year in and year out while everyone else either spins their wheels or loses money. After compiling the data Odean concluded that one of the reasons most people have so much trouble in the stock market is because they are overconfident in their abilities. They are simply delusional about their investments. They are pure gullabulls. This is certainly true. Even though the odds seem stacked against you to make money in the stock market, the good news is that when you look at any one hundred people in the market almost all of them are literally throwing money at the market without any game plan at all. People do not enter the market with any strategy at all. They simply buy on hunches, tips, and hopes – and desperately pray for the best when things go against them. It doesn’t take a lot of work and study to be able to take money from them. Yes there are thousands of books and courses that you can get that will tell you how to make money in the stock market and millions of people buy them, but very few people actually apply what
they learn and build a working money making system out of their knowledge. Most new traders in fact go from course to course in search of a magic bullet that will make them money. Their real problem is not lack of knowledge, but a lack of deep knowledge about themselves and how they interact with the stock market. That is why understanding trading psychology is the key to making money in the financial markets. All you have to do is a little work than everyone else. And that isn’t hard, because most people refuse to take just a few hours to educate themselves on how the stock market works. They either believe they will lose money even if they try and do not want to be humiliated or else are just too darn lazy. Most people sit on their asses and watch TV to escape from boredom. Well, I can tell you from experience it is a lot more fun to make money in the stock market than it is to watch TV and if I can do it you can too. You have to decide that you are going to be someone who makes things happen instead of someone who just sits there and lets things happen to them. I like to play poker and I see a lot of similarities between the stock market and poker. Say you have ten people sitting a poker table. If that poker table represented the stock market it would be a game in which almost everyone at the table was making bets and decisions without ever looking at their cards. You would be sitting there trying to make money off of these people and one other good player at the table. You may play against him or avoid him and just continue to play against the gullabulls. All they know how to do is bet. They do not know when they should raise and they never fold. To make money in such a situation all you would have to do is wait until you get some good cards and the odds are lined up for you. Then you call their stupid bets and cash in. At this imaginary poker table what would make you different from the other players? What are you doing that enables you to take their money? The answer is simple. You understand the structure of the game. They don’t. A lot of money can be made in a situation like this and it is.
That is what the purpose of this book is. Most people who start out in the stock market do so with the thinking that if they can find the right strategy they can make money, but it doesn’t seem to happen for them . Most people get in the market and move from strategy to strategy. Or they will follow someone they think is an expert and switch to a new one once they lose a little bit of money, thereby floating from expert to expert and never making any money. At some point they might start to think a little bit about psychology. They’ll realize that they are fearful all of the time in the market – afraid of losing or missing out on gains. So they start to think about their own personal psychology a little bit. They’ll think about their personality and believe they need to find a strategy that will match their personality. If they tried to buy and hold they’ll start to think well I like action so I need to find a short term strategy. They might then dabble in daytrading. Or if they were daytrading they’ll think they need to find a longer time frame to trade in. But whatever the case the key is they are looking for a strategy that will act as a magic bullet for them. The reality is that what they really need to understand is themselves. They need to understand what it means to be an actor in the stock market and how that fact influences their behavior when it comes to their positions. They need to know themselves and dig deep to discover their own motivations, before they will be able to stick to any strategy consistently. This is what understanding the structure of the stock market game means. It doesn’t mean finding the right strategy that will make you money in the market. It means understand how an individual interacts with the stock market and how the stock market influences their behavior. It means coming to have an understanding of your own personal psychology when it comes to taking a position in the financial markets. Without knowing this you will never make money in the stock market overtime no matter what strategy you use. And to learn this will mean going on a journey of self-discovery.
The elite five percent at the top of the trading pyramid are the traders who successfully go on this journey. The masses sitting on their asses never even realize that they need to take such a journey to make money. When they lose money they sit there and blame their losses on other imaginary foes – whether it be supposed market manipulators and fat cats – or just plain bad luck - and they never take responsibility for their decisions and thereby create an environment where they deserve what they get, because there is no free lunch in the stock market. But even most of the people who do put time into the market and realize that personal psychology is a big component of what to them seems like elusive success do not go on the path of selfdiscovery and evolve enough to make consistent money in the stock market. This book will make the difference for you. Most of those that know that psychology is important simply do not know how to fit it into the puzzle. So they keep it aside and try to chase the false solution of finding the right trading strategy, computer program, or the one expert who is always right and never get the success out of the markets that they want. It is like someone trying to become a great baseball player by learning how to bat, but having no idea at all how to keep score. They may be able to hit the ball, but if they do not know what an out or a run is they won’t be able to run the bases and will just sit stand there after they hit the ball. You must know how the game is structured to be able to win. I am sure you know how emotions influence your decisions in the stock market. Your emotions can make you impatient, compulsive, or make the mistake of riding a position down for huge a loss. Every investor in the market has felt fear, chased illusions, and has lacked confidence in themselves when it comes to investing. Many come to blame their losses on these emotions. They make the mistake of thinking that all they need to do is to control them and block them out. If they can control themselves then they can master the market – or so they think.
I was nervous about the market and scared that I was . That fact didn’t matter. All you need to do is see and understand the structure of the stock market for what it is and adapt to it. All it means is aligning yourself with reality .nothing more. It is simply impossible to force away your fears and subconscious desires. Those that try to do this fail. We will take a trip together in this book to try to discover the reasons why this is so by examining the keys to successfully doing this in the stock market and the reasons why people do not do this. I was losing money. First I want to take you on my own journey as a trader so you can see what I had to learn to get where I am. but so few ever accomplish this. But they are wrong in thinking that they can change themselves in that way. Once you do that the great bulk of the fears and emotional angst the stock market may make you feel will simply disappear. While others were making money. There is a simple conflict between what you may expect of the stock market and what it really is. This is all it takes to become a successful elite trader. but failure we will be able to understand our own behaviors better and avoid the pitfalls of others. Few can do this. The stock market offers an opportunity to make virtually an unlimited amount of money to those that can move up into the ranks of the trading elite. You do not need to deny your emotions or try the impossible task of blocking them out to succeed in the stock market. By examining not only success. The rewards can be tremendous. My Story – The One Moment that Made the Difference When I first started to invest in the stock market I was a losing trader despite the fact that I happened to be in the middle of one the greatest bull markets in history. We will examine this soon. But to take advantage of the financial markets requires that you understand the reality of the market. It really isn’t as hard as it sounds. I know of no opportunity like it.They are right in the sense that they need to change.
I had no real job. College had started to bore me. The stock market could. I inherited $15. I didn’t want to look like a fraud. If they could do it why couldn’t I try my hand at it I had thought to myself and maybe it would make some meaning out of things.or at least I never FELT failure . I was just a kid.so I found it hard to believe that I could fail at making money in the stock market. The story starts when my father died of cancer. I had a scholarship and teaching duties that paid for my education and gave me enough money to survive. I didn’t want the humiliation that being a total stock market loser might bring. A few weeks later I doubled my money.at least not in a big way. . But I couldn’t stay upset about it for the rest of my life. As my losses piled up I ignored them. but the path I was on was unlikely to lead me to financial success . I had always been interested in economic history and had read about big figures in industry and the financial markets. I had gotten a Masters Degree in history and was now in the doctoral program. Somehow or another I got the notion that I could use this money and tragedy to learn how to invest the money into the stock market.000 left in my account. My Dad would be proud if I could do something like that. but it took about twelve months to get to this point. But more importantly. At the time I was in graduate school. The change seemed to happen instantly. And then one simple moment changed everything for me. but now I had come so close to losing everything I could no longer deny what I had done. it looked like a great and fascinating competitive arena. I knew he wasn’t going to make it for some time.never going to be able to make money in it. I was upset that my father had died. But if I continued on the course I was on I was going to lose all of my money and be out of the stock market game forever. I only had about $7.000 from a life insurance policy he had. All of my fears of losing and failing totally disappeared forever. What is more I wanted financial success. I had never failed at anything before.
or rich in the mind of someone whose $15. I found Jack Schwager’s Market Wizards series. Weinstein’s book gave me a good strategy that I was convinced would work in the stock market. I read the books and thought I had a good idea of how the stock market worked.So I bought about thirty investment and trading books and read them over the course of a month during a break in studies. But I didn’t use charts or do a lot of work to find my first stock. Each of his interviews seemed to be a story of a trader that started out and faced great difficulty and losses in the market and then came out of the experience to make millions and in some cases billions of dollars. I thought this play could make me rich . I bought it after reading a magazine article. That wasn’t hard to do as graduate school had taught me to read quickly and after awhile they got fairly repetitive. I had no idea I was about to face the same trial by fire. Instead what the books made me conclude was that if these guys could make money in the stock market then so could I. And then I plunked all of my money into it. The article talked about how other internet companies in the past few months that did similar spinoffs so their share prices skyrocket into the IPO and then fall back down to earth once their child company started to trade. The stocks of some of the parents companies went up 300% into the IPO’s. The books that helped me the most were Stan Weinstein’s Secrets to Profiting in Bull and Bear Market and Edwin Lefevre’s biography of Jesse Livermore.000 represented the most amount of money he ever had. in which he interviewed some of the most successful traders in the market. The company was an internet company that was going to spin off a subsidiary company in an IPO. I read many of the classics. It seemed that almost all of the top traders first wiped themselves out before they made a lot of money. . inspiring.
because it was such a sure thing. I somehow got an idea in my head that if I could turn my $15. I told the people on the board that I was going to sell the day it started to trade. because the magazine article showed how all of the other companies in this situation that went up fell right back down to where they started.000 into $50.All of my plans of grand strategy inspired by these books were put aside on the dream of one big play. It would justify to myself perhaps leaving school to trade full time. I remember one day talking with my advisor about something. It would take four more years to finish. I had bought the stock at $16. The big day approached. I could always study and write history stuff on the side if I wanted to.000 that would be proof that I knew what I was doing in the stock market. and there was an exciting world out there. Hundreds of people were on there just like me talking about their expectations for the big pay day that was to come. The fervor on the message board reached a fever pitch as we got closer to the IPO date. A few days after I bought it the stock went to $18. One guy said he was getting a home equity loan on his house to pile into the stock. I discovered Yahoo and the stock market message boards. A great guy and I looked up to him. This company was different somehow they said. . My company had a message board devoted just to it and every night I would get home I would log in to see what people were saying about my stock. I just had to prove to myself that I could do it. Some of them said I was a liar or a short seller. job prospects were bleak. Stocks made people crazy on Yahoo. I was going to classes and teaching and got it in my mind that perhaps the stock market could put me on a new career path. Some of the people on their told me I was wrong. He was going to be become a millionaire overnight. Really what I wanted to do was take a year off from school at the end of the semester and figure out if I really wanted to stay in graduate school or do something else. Then $20. And boy was the stock market exciting.
I sold my shares. because they took too long for me.000 before I left school but it didn’t happen. The stock crashed after I sold just like the article said it would. And every little strategy that caught my fancy at the moment was a strategy I was willing to risk everything on. Some of the people on the message board refused to take their profits and lost it all. The stock shot up over $50 a share the day of the IPO. In fact over the next six months or so I turned my $50. I decided to take a break after this semester of college and go home for a year. Up until that time the most I had ever made in a year was $10. I realized that someone had bought the shares I had sold and was losing money.000 into $7. .000. I realized the stock market was a dangerous game – but it was an incredibly fast game.buying and selling stock every morning or every afternoon with no consistent game plan. This was towards the end of the 1990’s when everything moved – and moved big. I had tripled my money in about two weeks.000. It was the most amount of money I had ever made in my life.No I’m going to sell. Money can come and go at the snap of a finger. All I had to do was read a magazine article. And then the big day came. As I went through my final months I traded like a maniac . I have wondered since that day if the guy who took a loan on his house sold or if he lost everything. I churned my money. I wanted to make money on a daily basis. I had found a way to print money. I didn’t play IPO’s like this. Sometimes I would try to buy a stock making a new 52-week high and try to sell on the close. I wanted to desperately get my account above $50.000. Or I would look at the list of the top gaining stocks of the day and buy on the close and try to sell right on the open on the next day in the hopes of a big gap up. I didn’t apply anything I had learned in those books. My account was up to around $45. Other times I would try to short a stock that went up on what looked like stupid news. Despite being in one of the greatest bull markets of all time I had lost half of my money.
At the same time reality sunk in. Nor did I tell them I was making money. The problem wasn’t the strategies. This made me realize that I wasn’t doing this myself. I knew if I did I’d have to tell him how to make money in the stock market. This would force me to be more responsible. but my main focus really wasn’t making money. I would meet this Andy in a week. I didn’t realize it. All of my friends knew I was playing the stock market. I stubbornly held on to this belief that I could make it in the stock market. When I came back home I moved back home and took a few thousand aside for expenses to last for the rest of the year. I needed to move out.But the losses didn’t bother me as they happened. What I didn’t realize was that I was floating from strategy to strategy when if I had picked out one of them and started to apply it consistently I could have started to make a fortune. First though I had to sit down and decide on one strategy that was appropriate for the current market environment and stick with some hard money management rules. I was down to $7. Once I did I’d start to email him and friends in school my thoughts on the stock market and individual stock ideas. So my friend wanted to introduce us. I couldn’t live at home forever. I didn’t want to meet him at first. I realized that I was trading irresponsibly without rhyme or reason. but the thrill of the game. but myself. And this strategy had to be one that . Andy had owned some tech stocks he bought in the early 1990’s that had made him a lot of money. but I never told them I was losing money.000. I’d have to give him a strategy that would work for him or else he’d lose money too. I was a wild gambler in the market chasing the thrill of big bets and instant action. In one day I made a series of decisions. Then one of them wanted me to meet his boss – Andy Emerson who owned a small car dealership at the time. I just had to keep trying different strategies until I found one that could make me money I thought to myself. I had to start to make money in the stock market or else get a real job. It gave him a taste for the market and he wanted to learn about trading.
If the trade worked I would sell out in 2-3 days. Everyday there were stocks doubling and going up even more than that. and use a strategy that was appropriate for the current market environment with some money management rules was the day that everything changed for me. I’d buy once it broke through that high and put a stop loss order below its recent support level. Looking at what these stocks were doing at the time I could make 30-100% on these trades. But we needed to wait for something really good since this would be his first trade and I need a big lick in the market. The pattern was simple – a stock that had rallied a lot in the past few months and now had spent a few weeks consolidating below its recent high. Within a week I picked out a stock and both of us nervously bought it once it went through its recent high.could make me money quickly so I could stay in the market game. It was the first trade he ever made with an online broker and he thought the idea of buying a stock right after it made a new 52-week high was crazy. I’d look for stocks in which these points were fairly close together and risk 10% on each trade. But he did it anyway based on faith of the examples I showed him of recent stocks that went up like mad after doing . At that moment in time the stock market was in the final stages of the greatest bull market in history. This wasn’t as hard as it sounds. If it failed within a few months I would have to abandon the stock market game and get a real job. I met Andy and told him about this strategy. I told him we’ll risk 10% on it and see what happens.spend a few hours every night to look through several thousand stocks and pick out a dozen or so that had the best chart patterns to go up the most over the next few days. I told him that I was going to wait maybe up to a week to give him a stock that I thought would give us the best return for the risk. That would give me about four big chances to double my money and at least get back to near where I started. The day I made this decision to stop throwing my money around like a wild gambler. Buy low sell high he thought. I wanted something that would double in price. My strategy was simple .
But I knew this was the best strategy for the moment. And that first trade Andy and I made worked. I thought it was and told myself it was. I came to see the market as something which requires creating a set of rules to interact with and all you need to do is stick with them to make money. Now I had faced the reality of what I had done and made the decision that yes I was going to be successful. Despite this fact I never stopped believing that I could be successful in the stock market. but sticking with strategies and rules that work. It doubled my money. because I knew that what was important wasn’t the results of an individual trade.this. Losing money and closing my account would mean I failed. I would only have another two or three chances if this one didn’t work. Over the next few . But I still wanted to be able to make enough money to live off of. I could deal with a losing trade. I had learned that successful trading is creating a set of rules appropriate for the market and sticking with them. making money and being successful at the market wasn’t truly my primary goal during that time. For me I was anxious because I needed the trade to work. For whatever reason. That meant taking a chance on a big trade. It all seemed so easy at first and I just got caught up in the game. but if it really was for me then I would have created some rules and strategies that worked for me and stuck with them. I just threw my money at the market and watched my account gyrate. Instead I was acting out some sort of fantasies or delusions about the stock market. If it didn’t my odds of getting back to even and succeeding at this stock market game would diminish. I had learned to put the odds in my favor instead of just gamble randomly. That meant taking responsibility for the losses I had created and doing what was necessary to have the market really work on my behalf by being in synch with it. Up until that point I had invested with no rules. I had not been approaching the market from a point of reality. On the other hand I knew that I had adapted myself to the current market environment so the odds actually favored my success. If I did that I knew I could make money.
but spreading myself out better. It then bounced back up a bit in the last week of the month and I shorted . The market had one of its largest gains over the course of a few months ever. no longer putting all of my money into a single stock. Sometimes they were break even.com and an opt-in page for the list on the website.months I rapidly grew my account. The market was so crazy it was hard not to make money if you knew what you were doing. In the middle of March the market made a double top and came down. Once I got my account going I also used better money management rules. But the strategy no longer worked. sometimes a loss of 50 cents. In March 2000 even though the stock market was going higher I found that my breakout stocks would no longer go up.000 barrier that had been so important to me before. I still posted on yahoo message boards and in my posts I would have a link to my website. I was fortunate though to get a jump start though from a market that enabled me to make huge gains in individual stocks in just a day or two. We were at the right place at the right time. So for two or three weeks instead of making big gains I would sell out for little losses. It only took a few weeks for my account to break through the $50. I started to get a following and the number of people subscribing to the email list grew rapidly to over 12. When my stocks made a new 52-week high they would go up for an hour or so and then come right back down. I made a little website called swingtradingonline. But we had the right strategy for the situation.000 people in six months. Then all of a sudden the strategy stopped working. I never believe that bull market was going to last forever and the fact that my breakouts stopped working made me look at the market carefully and come to the conclusion that the bull market was ending and a new bear market was around the corner. If the stock didn’t do what it should I’d sell. Every night I’d pick out about a dozen stocks and send them out to my friends on my email list. or even 5 to 10%. who would see them go up.
It took me a year to make myself responsible for my own trading. My email list had also grown exponentially. I was in the market for a year banging my head up against the wall with my eyes shut. with Andy as my partner. I went on to run a paid investment service and eventually a hedge fund. But once I accepted the market for what it is and went with it I started to make money and never looked back. It took almost losing everything to get to the point where I had to learn and apply what I knew or get out of the market for good. After the April drop I played some breakouts in select sectors that were bucking the market trend through the end of the summer and managed to make a little bit of money. I really had evolved into a good trader able to adapt my tactics to changes in the overall market trend. By the end of 2000 my $7.that rally. The market faces you to force reality. or illusions are simply symptoms of not engaging . Only then did I force myself to manage my money correctly and go with the flow of the market. For now I want to emphasize to you the difference that one day made to me.000 was worth over $1000. It was my mindset that was the key to my success and not a specific strategy or trading system. The fact that I was making money in a bear market proved to me that I just wasn’t someone who just got lucky in 1999 because the market went up. fear of loss. because I switched to a new strategy aligned with the new market trend. The bear market was on and I was making money anyway. Then in the Fall I went to exclusively shorting the market rallies and made a lot of money to the downside.000 and I haven’t looked back since. lack of self confidence. I left it a few years after we started it. covering for a big gain in a huge and fast drop that came in April. And you’ll do that by either losing everything you have in the stock market or realizing that your irrational fears. but that’s a story that I’ll get into later on.
Unfortunately when it comes to the masses of people in the market very few people ever do this. And if you want to make a lot of money going forward then you need to sit down and answer this one simple question – if you need your next investment position to a big winner what trade would most likely do that for you? It doesn’t matter if it takes a week to come to your or six months.with the stock market on a realistic basis. If you want to make your money back you need to get in alignment with it. This is what it takes to enter the ranks of the top 5% of traders and investors that make all of the money in the stock market. My early gain was just dumb luck. It’s out there. Only then did I start to make money. My best trades ever came right after I hit rock bottom. Only when I put myself in a situation where I had to make money or it was over did I develop the patience and discipline needed to win – and it paid off big. . Try to put yourself in those shoes right now. In the end they don’t recognize the market for what it is and therefore never understand the rules of the game that they must play by to succeed. It took me a year to see the market environment for what it is. If you were down to nothing in the stock market and had to make your next investment position a big winner what would you to? You would have to wait patiently in the market for an optimal situation to line up that aligns you with the dominant market trend. If you simply answered this question once a year you’ll beat everyone in the market. They simply don’t have the courage to do it or don’t ever realize that they have to until it is too late. How would you do that right now? Are your positions in such an alignment right now? If you are sitting on huge losses in a bear market or a bear sector then you certainly aren’t aligned with the dominant trend of the market.
In other words in the real world we are always operating under a set of rules that guide our behavior. Anyone can buy or sell a position at whim. Most of them drive off the road and crash. However. The Rules of the Stock Market Mark Douglas in his book the Disciplined Trader calls the stock market an “open environment. the stock market does have a structure to it that makes it so an investor who does make decisions based on a set of rules can make money in the market. If drivers did not learn and obey traffic regulations there would be chaos on the roads. and so on. A few arrive safely to their destination. But when it comes to the stock market people are not given any real set of rules to go by. because they require total self-control and self-trust to make money in. And with every position an investor takes there is the chance of making a killing or in some cases losing everything.The first step you’ll need to take to answer it right now though is to understand the market environment for what it is. He claims that in the rest of the world we operate in a “structured environment” where we learn to behave through the rules or commands of others. These rules are so ingrained in us that most of the time we do not think about them at all.” By this he means that the financial markets are different than the normal “cultural environment” that we grew up in. As a result the stock market is in effect a giant highway system in which the drivers are steering their cars with no sense of direction or logic. but to do so they must take the responsibility to separate themselves from all of the other drivers and follow the road signs to get to where they want. how to answer the phone. . The problem is there is no force outside of the individual trader to force him to learn the rules and make sure he obeys them. We automatically know what side of the road to drive on.
Very few stocks go up year after year even if the stock market and economy are. The problem is the stock market requires that people develop and stick with a set of rules that includes a strict money management system of when to cut losses so that they do not become big losses.People start out in the stock market without even realizing that the stock market is different than anything else they have ever gotten into. That is the nature of capitalism. New sectors emerge in the economy all of the time. When people are in the stock market they engage in a similar type of herd behavior by buying and holding stocks with the thinking that they can do so forever to make money. Nothing goes up forever and most stocks and companies actually end up going under at some point. This type of herd behavior is totally natural in many social situations. And in bear markets most stocks go down. because it is what everyone else they know is doing and in fact is what they are told to do by the wall street sales force that wants people to buy and hold mutual funds forever so they can profit from the management fees. For instance have you ever gotten off of an airplane and simply followed everyone else to get to the baggage claim without looking at a single sign? It is easy to do if you have been on a plan for hours and are very tired. There is always competition and that means change. because there is always innovation and competition in the economy. with the stocks of weak companies going down to zero. To invest in a basket of individual stocks in the stock market with the idea you are going to buy and hold them forever would be like opening up a business and thinking you are never going to change a . Every ten years or so there is at least one bear market that brings losses of at least thirty percent. This works in most everything else that we do so it seems natural to do it in the stock market. As a result they tend to do what they normally do elsewhere when they feel uncertain or are in doubt – they look at an expert to follow or else just do what everyone else seems to be doing.
or some supposed market expert they had been listening to in desperation that they find at fault. Many are afraid they will fail so they rather allow someone else to tell them what to do that way if they lose they won’t feel like it was their fault. but that is exactly the type of thing people do when they get into the stock market. They follow the herd and if the herd falls off a cliff so do they. Then they sell out in disgust. You are going to open it up and keep it exactly the way it is forever. It might be an imaginary stock market manipulator they believe secretly controls everything. Then they’ll sit there and blame their losses on someone else. In a brutal bear market they hold on and watch their positions lose more and more value and just sit there and refuse to face reality until it is too late. They start to filter out evidence that they are positioned incorrectly in the stock market and are in danger of losing money and focus on information that encourages their passive behavior.single thing with it. Of course that would be absurd. For most people the stock market is simply an illusion that they share with the masses of investors just like them. Since you are reading this I doubt you are too lazy. But the defining feature of a gullabull is one simple thing – they do not take any personal responsibility for their investment decisions. . When the market eventually goes against them then they enter the realm of distorted thinking and irrationality. Either they are simply too lazy to do so or don’t believe that they can. And since they have been following the herd the entire time they can sell out in a true panic like environment when everyone else sells at once. When it comes to individual gullabulls there is always one of two reasons they refuse to make themselves accountable for their results. They listen to and focus on supposed experts who tell them what they want to hear. If you have suffered from a lack of confidence over trading the stock market the rest of what I have to say will help. They buy into it thinking that they have to do nothing but just sit there and they will get rich. They are a gullabull. their stock broker.
because it does not stop you from doing what you want and no one else does either. . The latter is the only way to make big money in the stock market over time without relying on simple dumb luck. that is what makes the stock market different from everything else you might do. The nature of the market requires you to create a set of rules to guide your behavior and decisions as an investor. and that is what everyone else does. All gullabulls eventually are faced with a choice after they suffer a setback in the stock market of either continuing to follow the crowd and to continue to get the same results over and over again or to break away from the crowd and take personal responsibility for their decisions. When you lose money in the stock market it is simply because your investment position was not aligned with the trend of the market. These are the rules of the stock market game. But in order to take a loss at the right time you first need to develop a set of rules to guide your investment behavior. When you take responsibility for your decisions in the stock market you realize that the stock market doesn’t cause you to lose money. You can literally put all of your money in a 100 to 1 margin futures contract and make a million dollars in a few minutes or wipe yourself out in totally bankruptcy just as fast. You see most gullabulls simply had no idea that they had to take personal responsibility for their investments and simply followed the crowd. The rules are not given to you by anyone or enforced by anyone else so you must create them for yourself and consistently stick by them. Like I said. The stock market enables you to interact with it in any manner you like.And don’t beat up on yourself if you have had big losses in the market up to this point. because they had no idea the stock market required that of them. But you do now. So if you have been following the crowd in the market it isn’t your fault. Taking a loss allows you to adapt to the market so that you will make money. You simply didn’t know.
By knowing exactly what they do you’ll understand what it takes to succeed in the stock market and be able to adopt their methodologies as your own. Most people feel totally overwhelmed by the stock market. but first we need to examine the approach that winning traders and investors have in more detail. . Most people though when they look at the stock market see chaos. Therefore they can’t make any meaning out of the market’s moves or the news surrounding them. but there are some simple methods that can help jump start the process of creating positive belief systems in yourself when it comes to the stock market. If you take a look at winning traders they all have a set of mindsets and attitudes that are much different than the typical stock market loser. I believe there are three essential traits that all winning traders have or develop. Once you begin to take responsibility for your decisions in the market and learn these feelings will go away and you will begin to feel confident about your abilities as a trader. All you can control is how you respond and interact with the market. The reason why is because they have no game plan or even basic understanding of what guides their own behavior when it comes to the market. I’ll get to those in a little bit. The Three Traits of Winning Traders No one can make the stock market do what they want.When you do this you will take responsibility for your investment decisions and recognize the stock market for what it is – an environment that provides you with the potential for unlimited gains and losses and therefore requires you to manage your risk to profit from it. Of course a winning attitude is bred by success and both feed off of each other. It is almost impossible to make money in the stock market if you do not believe you can. That makes them feel small and insecure when it comes to their investments. They have no idea what it is going to do and just get excited when it goes up for them and scared when it goes down.
This is much more important than you realize. There are people who succeed in the stock market and then sabotage their own success. All super traders set concrete goals and work towards them. If you do not set goals for yourself and think about what you are trying to get out of the market you can easily fall into this trap.The first trait is that they know their outcome. In fact I want you to promise to yourself right now that you will take the time to finish this material so that you will understand why I believe it is important for you to know what you are trying to get from the stock market. because they have an inner conflict between their own values of money and work and their involvement in the market. no matter what amount of success you have had in the past. One of the things I’m going to want you do as part of going through this book is to spend some time to sit down and figure out exactly what it is you are trying to achieve from the stock market. But as part of that you are going to have to work together with me. Or else you can simply create a gamblers mentality for yourself. You need to understand your own relationship with money and how you value money in your life. That may be what I did myself when I first started to get into the market. Just sitting there passively and going through this without any mental effort will not help you much. I had this notion that if I could make my account worth . You see when I wrote this book my goal was to spend the time and energy to put a work together that I thought could become critical in helping you achieve greater success in the stock market. First of all if you don’t understand what you want from the stock market and set some concrete goals for yourself when it comes to the market you will simply drift in the market. Right now we are going to set a goal together of helping you master the mental aspects of trading and as part of that you are going to have to work towards it by doing some simple exercises.
000. at least in the sense of getting .000 into about $400. He gambled that entire amount by buying a call option on a stock.$50.000 into $100. The call went up and turned his $10. He got lucky and turned that $100. I doubt he ever made more than $20.000 I then almost lost it all. But I had no concrete idea of what would come after that. Just thinking to yourself "I want to get in the market to make a lot of money" is not enough. because of his wild bet.000 into another call option. desires.000. He then put his entire $100. because when you buy an option if it doesn’t go your way you can lose everything you put in it. I have to think that if he had first sat down and thought about why he was getting into the market and what market speculation truly meant to him he would not have blown himself by using the stock market to play out some strange fantasies.000 a year up to that point in his life. He then put the whole $400. If you do not consciously decide what results you want from the stock market then your unconscious conflicts and possible inner conflicts may create results you do not want. Well his entire $400. Putting a lot of thought into understanding your goals when it comes to the market will stop any potential neurosis you may have dead in their tracks.000 that this would prove to myself that I could make money in the stock market.000 account turned into zero almost overnight. I know of a person who started out in the stock market with $10.000 into another call option. He got into the stock market and acted like a mad gambler. He was just a kid in his twenties and never had that kind of money before in his life. Therefore when I got near $50. or neurosis inside of him.” but obviously he didn’t think much further than that. This was incredibly dangerous. I’m sure when he opened up his account he had the goal of “make a lot of money. What then after you make the money? You need concrete thinking here. The crash of his account broke him mentally and as far as I know he never has recovered from that event.000.
Until that point I was simply throwing money around in the market without any sense of direction or purpose. For one thing doing so will force you to think realistically about the market. and to really work towards achieving your desires. I might have lucked into this due to circumstances. I have found that the best traders almost always first started out as a losing trader or made a lot of money quickly and then lost it like I did. but you know this yourself now. market manipulators. I didn’t realize how important goals were then. but then I sat down for the first time and developed a new goal – make what I lost back as quickly as I could.back into the stock market and becoming a winner. You can form a true path of success for yourself. There is another reason goals are important. or whatever is what makes the difference. their broker. It was the day that I actually created a concrete goal for myself and realized what it was that I wanted out of the stock market that I really began to grow as a trader and make money from the market on a consistent basis. The stock market can be expensive way to figure yourself out. After that I lost most of my money. I didn’t plan it out that way.000. but looking back I can see all of this now. If you set concrete goals for what you want to get out of the stock market you are more likely to achieve them. It is my belief that in the end the real difference between someone who becomes a winning trader and doesn’t is how they deal with that situation when it comes. Whether they can admit they made a mistake and need to set new goals for themselves and find ways to reach them or just sit there and blame forces outside of themselves – such as bad luck. In other words does their . You will motivate yourself to truly learn about the market and use strategies that can work towards achieving your goals. take responsibility for your investments. but with the best high reward/low risk strategy that I could find and then grow as an investor and trader from there. For instance in my first year of trading I had one initial goal – make $50.
This book isn’t about teaching you specific stock trading and investment strategies. But all strategies incorporate money management techniques that define the risks that a trader is willing to take on every position they enter. a fear of taking responsibility. You have to use price in order to place stops and figure out when you should take profits and therefore some sort of basic knowledge of stock charts is necessary in my opinion. As a market participant you must define the amount of risk you are comfortable with in your investments positions. . As you make money and gain confidence you can slowly increase this risk over time to a certain point. They create a game plan to reach their goals in the stock market. I do that for you in great detail in other educational materials that I’ve produced. or a lack of confidence in themselves? I also believe that a lot of people don’t even realize that these types of choices come when they start out in the stock market or reach a real crossroads in their investment accounts. The more structure and rules you create for yourself the easier it will be for you to succeed in the market. By reading this book you will know the choices you face and will be forced to make a decision. That means they develop a strategy that makes them money in the market and stick with it. This takes us to the second trait that all winning traders have – they take action.experience of loss in the market cause them to grow as a trader or do they make no real changes at all due to laziness. even for someone who thinks of themselves as a fundamental trader who uses earnings and stock valuations to make their entry and exit points. This is one reason that I believe all successful traders must incorporate some sort of technical – charting – techniques into their strategies.
The pattern also must be something that works with the dominant market trend. But if you educate yourself about trading and learn about and experiment with different trading strategies until you find one that works for you will find that you will begin to focus on select market data. Most people simply never get any feel for the market at all. I suggest that people first starting out in the stock market focus on trading or investing in one simple repeatable pattern. It took me a year to figure this out when I first got in the market. You will ignore the mass of noise in the market that confuses everyone else and pay attention to only those things that make a difference for your strategy. As a result they become gullabulls who simply hold and hope even when their positions fall on them for month after month in a bear market and then become skittish in bull markets and sell out in fear of experiencing the hell of loss all over again. Using a strategy will force you to narrow the scope of information you are processing and therefore make it easy for you to make meaning out of the stock market. The pattern may play out in individual stocks or exchange traded funds.As you educate yourself and develop trading strategies you will find that you will come to have a good feel for the movements of the market and individual stocks and when their trends change. As a result this will actually give you a good feel for what is going on with the rest of the market and tip you off to when the big trends in the market change. What matters is that you learn to master one simple pattern. . but I started to make consistent gains once I did. For instance if the market is in a bull market then you need to use repeatable pattern suitable in bull markets while something different would be needed in a bear market. That doesn’t really matter. For them the stock market is a source of continual anxiety. because they have no idea what to focus on and experience the stock market as a mass of overwhelming and often conflicting information. Once you focus on this one pattern you should come up with a trading strategy to take advantage of it.
but simply means that this one single position did not go the way he or she expected it would. They create goals for themselves and strategies to reach those goals.You should start small with this one pattern and you can gradually work to discover new patterns or markets as you build up both your equity and your confidence. Stops force the trader to take responsibility for his positions. I even talk about when I believe that a pattern will start to lose its effectiveness and always keep a close finger on the pulse of the broad market trends so that the members and I don’t get blindsided. because at some point the large market trend will change and make it lose it’s effectiveness. This takes us to the third trait all successful investors have. but then adjust their positions and even their strategies at times when things do not go as they expect. This primarily means using stop loss orders and being honest about what the market is doing and their own results. They seem to think that if they take a loss in the market it means they are a failure and they don’t want to experience the feelings they associate with being a failure. not by holding one single position and having it go your way. Every time you enter a position you expect to make money by having it move in a direction that you expect and in a time frame that you expect. You make money in the stock market over time by keeping yourself aligned with the trends of the market. if you set a stop in a manner that warns you that the odds are your original . However. All winning traders adjust to what is happening in the market. They use stops to insure that no trade they make will ever turn into a huge loss. Most people simply refuse to do this. Eventually you’ll have to abandon the pattern. Sticking with one pattern also will help teach you to be patient and wait for market opportunities to line up in your favor instead of seeking to trade just for the sake of trading. In my WallStreetWindow premium service I talk about the patterns I am trading in the market and when I change my strategies. But a successful trader knows that a stop that realizes a position as a small loss isn’t a sign of failure.
This is the only way you can make money in the stock market consistently so once you accept the fact that using stop loss orders and taking small losses is necessary it will be actually a sign of your growth as a trader. Well. because if you do not then there inevitably will be a time in which you will . are people who simply refuse to take responsibility for their decisions and delude themselves about the stock market and the nature of the market. If you refuse to accept this fact it means that you refuse to realize the structure of the stock market game and there is no way you can win at the game until you do. We can say they are delusional. A definition of insanity is someone who does the same thing over and over again with the same negative results and keeps expecting that things will be different the next time. such as the classic case of a gullabull who repeatedly makes money in bull markets and then gets wiped out every time there is a bear market. People who refuse to use money management techniques in the stock market and lose money over and over again. What is more by having the money you had tied up in this position that wasn’t making you money free and available you can put that money to use in a position that can work for you instead of against you. As a trader the most important think you can do is to follow your rules – not simply because that is what will make you money. Terrence Odean says they are overconfident. Instead of the triggering of a stop loss order representing some sort of failure to you what you should realize is that small losses are simply a part of the game and that they enable you to keep yourself aligned with the dominant market trends for as long as possible and to adjust to those trends when they change. Since the position is not doing what you expected if you continue to hold it you may lose money and in fact a huge amount of money. we can assert that most investors in the stock market lose money simply because they are not aligned with the reality of the markets and absolutely refuse to face this fact.expectations are wrong then a triggered stop loss order is actually doing you a favor by getting you out of the position and freeing your money up.
It tells you that your strategy may not be appropriate for the market. Once you do that you will open yourself up to learning which leads to knowing and understanding. and humiliation with them. anger. You don’t freak yourself out when you pay a bill so you shouldn’t get all upset when you take a small loss in the market. Paradoxically if you refuse to take a small loss due to deep seated fears of failure then you will actually end up creating the reality you are seeking to escape. There is no rational reason to associate these type of feelings with taking a small loss in the market. Losers refuse to adjust to changing market trends by using stop loss orders and never learn.give back all of your profits to the market. the market trend may be changing. However. Therefore they repeat the same mistakes over and over again. or that there is a better opportunity for you to make money in a different position. Invest who refuse to use stop loss orders and money management rules set themselves up to eventually experience a crushing loss in their portfolios that will generate the emotions they seek to escape from in the first place. Some people take experiences and make them work for them by learning from them and others stubbornly refuse to learn due to a fear of reality. The market brings massive rewards to those that listen to it and adapt the information it gives them. A triggered stop loss gives you information so that you can adjust your investment positions in the best way possible. what you need to realize is that the stock market is different from things you may have done in the past. It is a part of business. shame. . because there have been times in their life in the past where they felt emotional pain over a failure or a loss. The key to making such fears go away at the start is to simply understand the structure of the stock market game and to have the confidence to be able to play by the rules. Yes it is worth the effort. because they associate feelings of inadequacy. I know many people are afraid of losses. Winners constantly learn from the market. because that is simply necessary as part of the larger process of being a successful investor in the market.
All you can do is take responsibility for your positions and control how you deal with the results that the stock market gives to you and adapt to what the markets does. It is how you perceive what happens that makes the difference. will go a long way to eliminating any fears you may have over trading. A big difference in whether someone can exhibit the three traits that the most successful traders have is how they communicate with themselves about what the market does to their own positions. Failing as a trader means refusing to take a small loss and then losing everything. Are you going to be able to take a small loss when it is necessary and see that event as something to learn from that can lead to a real winning trade or will you be unable to take a loss due to irrational feelings that magnify the importance you hold to any loss you might have in the market? In the end you cannot force the market to move the way you want it to go. Almost everyone is nervous when they make their first trade in the stock market. A losing trade is not a failure. Planning ahead what you will do. If you have already gone through such an . If you cannot believe you can achieve your goals then you never will. What you need to realize is what you may think of as a mistake the market does not define as a mistake. including knowing in advance what events will cause you to take a small loss or book a profit.Creating a Positive Belief System With Positive Brainwashing To be a successful trader in the market requires you to believe that you can be one. This translates into having a positive belief system when it comes to trading and investing. For most investors though that nervousness turns into anxiety as they invest in the market with no game plan at all and end up experiencing a roller coaster of emotional highs and lows as a result of the market repeating its inevitable cycle of bull and bear markets. because you won’t be able to motivate yourself to take the action required to work towards your goals or stick with a strategy if you stay frozen in fear and worries about failure.
you can help create positive beliefs in yourself when it comes to the stock market by working both on your education as a trader or investor and by experiencing results in advance. You are actually doing some of this right now by reading this book and studying the market. I like to think . because there is no way you will ever be a successful investor if you remain mired in fear. Secondly. If this is how you feel then you have a big problem. By educating yourself on what it takes to be a successful trader you are helping yourself become more confident about the stock market. By surrounding yourself with educational material and other successful traders you can encourage yourself and rapidly speed up the process of becoming a winning trader than if you just chose to do everything on your own. For successful traders though those feelings dissipate over time as they get caught up in a positive feedback loop. Luckily you do not have to worry about this too much. A constant fear of being wrong will insure that you end up being wrong.experience it may be difficult for you to imagine feeling confident about your ability to make money in the stock market right now. A virtuous cycle of growing confidence and compounded profits is then created. There is an awesome technique you should also use to help clear out any subconscious fears and worries you may have over the stock market that can rapidly boost your confidence. That’s what I mean by results in advance. They discover that money management rules and strategies appropriate for the broad trend of the market work together to produce positive results and profits. That in turn creates a positive feedback loop in which positive results work to create positive feelings and beliefs in the trader which as a result makes it easier for them to generate more positive results. You’ll be able to actually imagine and see how to achieve the results you want before you actually generate them. There are two ways such feelings go away. First you need to realize that everyone who starts out in the stock market does so with a degree of nervousness and worry.
In fact my faith is so strong that I can actually see the numbers in the account balance grow larger before my eyes. I know most people in the market fail. I believe my account is going to rapidly and consistently grow over time. because I know what they do not know and do what they do not do. Sit back and imagine yourself a year from now as a successful and winning trader in the stock market. For instance you may write something like this. I play by the rules of the stock market and never waver from my own rules. Now I want you to write a statement that sums up for you what it takes to be a successful trader and exactly what you are going to do to reach this state.of it as positive brainwashing. “I am going to take control of my financial destiny by playing by the rules of the stock market. I have been successful in other things I have done by learning how to do them right so I know I am just doing the same sort of things I have done before. I have seen others make a fortune in the stock market by applying these principles that they have handed down to me. I have no fear of losses in the market. By doing this consistently and sticking with my strategies that are most appropriate for the current trend of the market I will make money. All it requires is that you sit down for a few minutes and do a little bit of work. . “ Now what I want you to do is take your statement of faith and place it somewhere that you will see it every night before you go to bed and every morning when you wake up and get ready for the day. because I manage my money in such a way to prevent any loss into becoming a large loss. This insures that my money is put to work for me in the best positions in the stock market that can maximize my returns. Every night and every day I want you to spend a minute or two in a quiet and peaceful place and read it back to yourself. but nothing is going to stop me. How do you feel about the market? Write that down.
. You will end up using these same techniques in other areas of your life. In both games there is no other person or authority to guide your behavior so you can trade or bet anyway you want until you run out of money. where a key to success is using a strategy that is suitable for the trend of the broad market and being willing to change to a new strategy when the trend of the market changes. The same goes with the stock market. It is mind over matter. Both games have a lot of similarities to them. I played a little online and lots of small tournaments in casinos. Do this exercise and some simple studying and reading of market strategies and a strategy will practically come into your hands. even in your subconscious mind that you may be holding in regards to the stock market in just a week.If you do this you will find that you will totally smash any negative thoughts and fears. That means the few winners in both situations are those that have created money management rules that they stick with and have developed a strategy that works. In both games you must know when to cut your losses and just as importantly know when not to play. but poker gave me a different perspective on the psychology of stock trading that I haven’t seen discussed anywhere else. Poker also requires that a player constantly change their playing style due to changes in the game or the way other people at his or her table are playing. The Anatomy of a Loser – Lessons from the Gambling Halls A few years after I first started out in the stock market I started to play poker as a hobby. Combine this exercise of positive brainwashing with clear cut thought out and written goals for what you want out of the stock market and you will find that you will take on the three traits that all successful investors and traders have. I’m not going to start a big in depth discussion on how to play poker. In both poker and stock trading you have to manage risk through money management skills. All that will be left will be to use a successful strategy aligned with the broad trend of the market and that will be easy for you to do if you just do this exercise.
each of whom paid over $500 to enter it. but in poker they are right in front of you. All poker players. One time I played in a poker tournament which had over 500 people playing in it. That is what made poker so interesting for me. In a poker tournament you can literally watch a good portion of the players go on tilt when they get towards the end of a tournament due to the pressure they may feel from getting so close to winning. even the top pros. You need to figure out their playing styles and how they are reacting to what is happening to see how it affects their play. After awhile you realize that a lot of times a person’s playing style is related to their personality and their real motivations for playing. And tilt is a constant factor in cash games. But the big difference between the stock market and poker is that you actually see the people you are competing against. At my table there was one very good player. go through mood swings that affect their play. In the stock market when there is a bear market many investors act as if they are on permanent tilt by just holding on to their positions and riding them down without using stop loss orders – or canceling their stop loss orders. In fact there was a player sitting across from me who I had thought may never have even played poker before in a casino.Both poker and stock investing are really about psychology. Most poker players are losing players who don’t even recognize that fact. To really play good requires you to carefully study the other people at the table. . and some very bad players. There is a common phenomena call “going on tilt” in which a poker player will suddenly deviate from optimal play by playing subpar hands or making wild bets as a result of a losing hand or “bad beat” in order to win their money back or feel in control. who actually went on to the final table and I later saw playing on TV in a tournament. Just as it is with the stock market. When you make a trade you never see the person on the other end of a trade. Every time he tried to do something he was so nervous his hands would shake. in poker it is only a small top ten percent or so of players that are really making most of the money.
but they really aren’t. No one has ever put together a work in which they plot out different trading styles and then break down the psychology and reasons behind them. I play it for the competition and when I first started playing for the challenge and because I enjoyed the process of learning how it works and the psychology of it. you never get a clear understanding of the losers and winners in the market.Watching him. which also helps you understand your own psychology when you are playing and why you are reacting to certain situations and outcomes. Why would anyone spend $500 on a poker game if they hardly had any experience even playing poker? The odds of them winning were so low that they could not be playing for the money. most people are not playing to make money. even if it means losing to get them. They may think they are. In the stock market though. It makes no sense for me to spend a lot of effort and time playing poker with the purpose of making money. I don’t myself. because they like the emotions and feelings it creates in them. There are several key playing styles when it comes to poker and motivations behind them that I think deserve to be examined closely. That is why a lot of people play it. . In other words I was playing because I liked the experience of challenging myself to learn how to play it. I came to realize that since so few people that play poker actually do make money. What they are really doing is playing. because I can make more money in the stock market in a day then I can playing poker for years on end. Once I figured those things out though my degree of interest in it waned. but people have done this with poker. and watching so many people in so many games before this one play so bad made me wonder what these people are really playing for. since you never see the people on the other end of the trades. With poker if you continue to play and get successful at it you start to get an understanding of this. but I came to realize to that not everyone is playing even to try to win. because they can help you understand your own motivations when it comes to the stock market.
is exactly the style that most investors employ in the stock market. They like to sit at the table and talk with other people. because money wasn’t a factor in it all. Are the motivations the same? Why is the calling station so passive? They have no desire for competition. They buy a stock or mutual fund and just sit on it. They like the atmosphere of the casino or the environment they are playing in.” Most people who play like this really have no desire to play the game to win. They aren’t motivated to play because they like the competition. On the flip side since you are calling other people’s bets too much you literally are handing your money to them. This style of play. If you play like this you’ll find that if you bet the other players will fold so you won’t get paid off when you have a good hand. The . just as the gullabull with no game plan has no plan when it comes to his investments. Most investors are totally passive. This is called a loose-passive style of play in Alan Schoonmaker’s book The Psychology of Poker. because they enjoy the social aspects of the game. which is the absolute worst when it comes to winning at poker. In poker the worst style a player can have involves calling a high degree of other player’s bets and almost never making a bet by raising yourself. Usually they play. In poker talk someone who plays like this is called a “calling station. Sitting there as their position goes against them is the same thing as being a poker calling station and calling someone’s bet no matter what cards you have and never raising when the odds are in your favor.I think it would be useful for you to look at a few of the styles of poker play and see how they apply to the stock market. with absolutely no plan on when to sell it. If you ever played poker for pennies or for free then you most likely played in a game in which everyone played like this. But it people play like that for real money they almost always lose everything they come to the table with. Someone who realizes what you are doing totally controls the odds by increasing their bets. They usually are the friendliest people at the table and are motivated by a desire to feel like they belong or to be a part of a party atmosphere.
A gullabull who thinks of himself as an investor can think he is smart to even be in the stock market.either because they . but they don’t . And the same goes for the buy and hold no matter what gullabull. and as long as they hold on to their position they can hold on to the belief that it will someday make themselves rich. In the end gullabulls become bag holders for the people in the stock market that do make money. The calling station never bothers to figure out a good betting strategy that can help them make money in poker and the gullabull never bothers to try to learn how to make money in the stock market either. They don’t try to learn. To the gullabull selling for a loss represents personal failure and the abandonment of the lottery ticket and everything it represents to them. They get into the stock market with unrealistic and fantastic expectations and in order to maintain them end up being totally neurotic and irrational when it comes to the stock market and their positions. For a gullabull buying and holding no matter what is like holding on to a lottery ticket and never seeing if it is a winner.calling station probably fears competition and therefore does not compete. They go permanently “on tilt” in a bear market just as the “calling station” plays in a way which is similar to a good player being constantly on tilt too by making stupid irrational calls. Gullabulls just assume they will make money. They are more motivated by a desire to be in and stay in the stock market at all costs and the psychic benefits they get from that are greater than any desire to really make money. If they were more interested in making money than simply being in the stock market just to be in it then they would take the time necessary to learn how to make money in the market. the gullabull really doesn’t take the stock market seriously either. or is somehow superior to others who don’t have the money to risk in the market. Just as a calling station doesn’t take the game of poker seriously as a game in itself. As long as they hold on to their position they can take on the identity of being an investor just as a calling station can enjoy the party atmosphere of the poker table. because they must.
because he hasn’t gotten any cards good enough for him to play. which they instead blame on fictional manipulators or just plain bad luck. These are players who get a thrill out of dominating the other players with their bets and forcing them to fold. Of course at the poker table there are people who are the mirror opposite of the totally passive calling station. True maniacs are often deeply . These players are addicted to the action of betting and are often called “maniacs” by the other players at the table. or are simply too lazy to apply themselves. This attitude only insures that they will repeat the same mistakes over and over again.don’t even realize they need to. Often you can see a normal player who has had folded hand after hand. but since they can’t stop themselves from betting if the game goes on long enough they inevitably lose everything on a crazy play. As a consequence the results they end up from in the stock market come as a result of pure luck. These are people in the poker psychology books that play a “loose-aggressive style.” who bet nonstop no matter what their cards are. Since they are involved in so many pots and make such huge bets they often cause confusion and fear in their opponents. That is why when they often lose they never take responsibility for their losses. although the milder maniacs will quietly sit there for periods of time and then make a wild bet to achieve that attention or to counter feelings of inferiority they may feel at the table from a lack of confidence in themselves or in the way the game is going for them. Gullabulls are people who always have things happen to them and never make things happen. They are often driven by a motivation to be at the center of attention. In any single poker game when a maniac sits down at the table he often accumulates money by forcing the other players to fold or by getting a good hand when no one else expects it. are afraid they can’t learn. begin to feel insecure and then make a wild maniac type of play to feel back in control in a form of tilt. If they do this with a bluff then they get an even bigger thrill out of. They are men of quiet desperation. That is how they live most of their lives and they take those same personality traits right to the stock market.
They may read up on stock trading. Some of the trading maniacs use the stock market. they aren’t really in it for the money. Their lack of patience makes them constantly switch to new trading strategies or find new reasons to trade to justify being in the market all of the time. Trading maniacs that actually have the knowledge to make money in the stock market go through a repeating pattern of making a lot of money and the suddenly losing it almost overnight. The stock market though can be a much more expensive game for the pure gambler. They simply lack any sense of discipline or patience and this leads them to make big bets in the market and fail to use stops. not as a place to make money. The trading maniac simply cannot do this. They have an unquenchable thirst for constant action and as a result they overtrade the markets. but they can’t stick to any single trading strategy.insecure individuals who can for a moment at the poker table feel larger than life. The money they lose is the cost for their entertainment. but to feel action. If the maniacs were really in it for the money they would eventually figure out that their style of play causes them to lose and adapt it. Even though being a maniac isn’t a real money making strategy. but primarily as a place to gain a sense of importance while the sick gambling types use it as a place to feel in control . Poker players who are gambling addicts usually are maniacs. They are in it to feel big yet are the most self-destructive poker players. All trading strategies require the trader to sometimes step back from the market when the market isn’t in a pattern that fits the strategy. even to the point of having some winning systems and strategies in hand. because their deep reason for being in the market isn’t really making money. but the fact that they don’t proves that they are playing poker more for the feelings that they get from playing than for the money. A good portion of the losing traders in the stock market act like poker maniacs and share many of their same motivations. The middle aged ones often wear Rolexes and act and look like used car salesmen.
desire for acceptance. Instead of yielding to the natural desires and fears that most people have (such as love of action. they are driven by ego and a need to feel empowered from their trading. Winning stock traders are not born. Then they gain confidence and displace their fears and self-doubts that cause most people in the stock market to end up destroying themselves. In the terms of Freudian psychology trading and poker maniacs are adults who behave as children playing with poop. Trading maniacs can do neither and the danger is everyone in the market shares some of their motivations. It has almost always been carefully chosen. One big motivator for people to get in the stock market is to find something exciting and new to do.when they feel uncertain about the rest of their life. TAPS have controlled these feelings and chosen and developed the style that matches poker’s demand for controlled selective aggression. The same goes for the traits and characteristics of winning stock traders. This means a player plays fewer hands.” Schoonmaker writes. The truth is though everyone has a little bit of gamble in them. but when he gets a good hand he bets aggressively to make weaker hands fold and to get paid off as much as possible. The more they are driven by these needs the more prone they are to self-destruction through a spectacular failure. then deliberately developed. Nearly all the best professionals are TAPs. . because they make their desire to become a winning trader great enough to put in the work required to open themselves up to learning.” “The TAP is the most dangerous player. As Alan Schoonmaker writes though. or fears of conflict or risk). In other words they play cautiously most of the time and then play big in the right situations. as are the best players in most games. Most of the poker books advocate a style of play labeled tight-aggressive. One just has to realize though that to make money in the stock market consistently one needs to use strict money management rules and be patient when it is appropriate. They do NOT come to play. They learn to become winners. “this style is NOT natural. Whatever the case.
The danger is in “going on tilt. They aren’t signs of failure and as long as you keep them small won’t cause you much trouble. The difference between the people who go on to become winning traders and those that don’t is whether they can be honest enough with themselves to learn from these mistakes – and then put in the effort necessary to win. You .” When it comes to trading a winning trader goes on tilt when he deviates from his trading plan by canceling a stop loss order and then turning into a desperate gullabull if his position drops on him. Or else they try their hand at trading and become trading maniacs. Look at my own story. I already had a “tight-aggressive” style when it comes to the stock market – and when it comes to the market that means laying low until you see good low risk/high reward opportunities lining up and then taking big positions.taking the money when the money is there to be had. but with clearly defined stop loss points . But I honestly admitted to myself what I had done and then realized I had to start to use a real trading strategy suitable to the market environment I was in that incorporated strict money management rules in order to make money. Only when I almost lost everything did I even realize what I was doing. The first year I traded stocks I did so like a pure trading maniac. Or they become a trading maniac when they have a small loss and then immediately try feel in control again by over trading. I put the priority of making money ahead of whatever desires or needs had fueled my behavior up to that point. But I think the secret isn’t to try to control your emotions.Most people enter the stock market and behave as poker calling stations in the sense that they just buy and hold forever and hope for the best. but to simply accept “bad beats” and small losses when they happen as a part of the game and see them as a small bump in a long journey. Emotions are a big part of both trading and playing cards. I learned these lessons the hard way in the stock market so when I started to play poker it was easy for me to understand the psychology behind it and adapt to it. Then they lose money.
Winning traders don’t focus on the market like that. because that is how big money is made in the financial markets. When you are in it you simply stay in it until you get stopped out or it becomes clear to you that the trend you have been taking advantage of is near an end and you book your profits. When you have this type of attitude you really don’t worry about what the market does.can avoid that situation by realizing that sometimes you just have to be patient for a good opportunity to line up and simply accept what the market gives to you. What they do is keep their attention on their account and making money. because you know it will come and you’ll be able to take advantage of it when it does. They then tune into experts that back up their opinions to try to make themselves feel better when the market goes against them. If you can do that then you can easily adjust to it and stay in synch with it – which is the true key to making money in the stock market. The Perils of Success Most people that invest in the stock market obsess about the market. What I look at instead of worrying about what the market might do without me is my account and how I’m going to make money in it safely. . They focus on the news surrounding the market. the gyrations it makes. Then you go to the sidelines and simply wait for another good opportunity to make money. If that means waiting for a good low risk situation even if the market goes up for a period of time while I’m on the sidelines that is fine with me – because what I want isn’t to follow every gyration the market makes. But the key point here is that they focus on the market and that means most of the time hoping it will go up when it is falling and fantasizing about further gains when it goes up in their favor. and get nervous all of the time. but to make money safely and consistently. If that takes a week that’s fine or a few months that is fine. What you focus on is looking for a good opportunity to make money and being patient until you find one. This is a big difference. For instance a lot of people worry about missing out if they are out of the market.
But they don’t really focus on making money in their account – they simply obsess about the market and what it is doing. Get a bunch of your brokerage statements and simply record the value of your account each month in a spreadsheet and then chart it out. but churning my account. I’ve found that a chart showing my account balance over the years looks like a stock chart with periods of support and resistance. That’s why they are gullabulls. These consolidation periods tend to occur when I get stopped out or sell near the end of a long-term market trend. Overtime I’ve learned to trade less during these periods and sometimes just remain totally in cash. The presence of millions of gullabulls in the stock market makes the existence of the trading elite possible. The reason why you can become one of the top elite traders in the market that make the bulk of the money that is to be made in the market is because the masses simply are too lazy or lack the confidence in themselves to do the work necessary to be a success in the stock market.This is not how most people investing in the stock market think at all. an act that causes . It looks like a secular bull market with occasional big moves up over the course of several months followed by periods of consolidation. One simple thing that you can do that will tell you the truth about your investing abilities and alert you to potential problems is to simply chart out your account balance. If they were truly interested in making money in the stock market they would take the time to learn how to do that and apply energy to doing it instead of just sitting there and letting the market rule them and their accounts. If your account moves totally in synch with the market – even when the market is falling – then you know that up to now you have been simply a part of the crowd –doing what everyone else in the market is doing. You need to recognize that fact and figure out what you need to do to go beyond that type of behavior. If your equity chart shows a wild boom and then a wild bust then you have handled your account like a trading maniac. I then do small trades in a time of transition for the market don’t amount to anything.
To me that is a big danger sign that I’m not in synch with the market or that the strategies I’ve been using are no longer being effective. They make a bunch of money suddenly and then spend the money to upgrade their lifestyle. I’ve also found that equity charts help you set goals and motivate you in your trading. which tend to reflect inner conflicts within traders. I must emphasize the importance of goals to you again. So I really step back and get conservative. If you found that when you reach a certain level of equity in your account that you have fallen back from that point repeatedly then you will realize that you need to be careful and work hard to go through that level – and when you accomplish that feat it is very rewarding. Making money in the stock market without clear goals can be dangerous.the consolidation periods to be full of fewer peaks and valleys. This puts them in a position of becoming . It certainly is a sign that I’ve been wrong about something and the last thing I want to do in such a situation is make a bunch of trades with the intent of making up this loss. By doing this you are completely setting yourself apart from the masses that have no clear cut goals at all when it comes to the stock market except to be in the market like the other smart and rich people and hope for the best. There are two main reasons. What you are doing is putting emphasize on your trading results and creating goals for yourself. In the terms of technical analysis they display less volatility on my equity chart. with the expectations of making another windfall gain again. even going into debt. You’ll find that chart patterns that work in the market actually have predictive value for equity charts. The hard truth is that many successful traders who make it into the top trading elite end up ruining themselves. If I ever have my account fall more than 10% from its highs then I make it a rule to really step back and figure out what is happening. When you chart out your equity it is really an interesting thing to look at. They warn you to take action if you have a big loss or to make sure you don’t get overconfident and become a trading maniac if you make a big gain.
dependent on the stock market making them money. One other big problem some people have is an internal conflict they have about making money. You have to have an understanding about your relationship with money and what you expect to do with the money you make from the stock market in order to maintain a healthy and balanced life and be a successful trader. but that is the way society is structured and there is nothing you can do about. Since these people have put themselves in a position in which they NEED more money they lose their objectivity and end up putting on a series of bad trades out of desperation. This happens more often than you can imagine. If someone quickly makes a lot of money in the market and subconsciously feels guilty about it or that they don’t deserve it they usually find a way to give it back to the stock market. The problem is there are times when it is best to pull back from the market. Most people are taught as children to see money as a reward for doing a good job. But a trader can make a sudden windfall profit in a matter of seconds from one simple decision with the application of very little time or mental energy. If the situation gets worse they morph into a trading maniac or a gullabull and blow themselves up. Is it fair that some can make so much money when others have to work so hard to make less? Perhaps not. It is what people do with money that matters. For the millions of workers at Wal-Mart who make so little that they get food stamps some of the members of the Walton family do . Society though and the economy are driven by money. Neither are good or bad in themselves. If you came home one day and found one million dollars on your doorstep how would you feel about it? Would you feel guilty about it? The truth is money has no morality in itself nor does the stock market. much like you see in professional sports. The stock market is simply a big arena of competition in which the winners are rewarded with almost unlimited amounts of money. because the market isn’t offering any great low risk/high reward trades. Money is used to make transactions and people work for money to live.
nothing at all and make billions. In order to succeed in the stock market over the long-term you must understand your own feelings about money and set down clear cut goals about what you are trying to achieve from the stock market. People feel that they not make enough money or fear that people will resent them for making money. Anyone can do it. 7 – What is the most important thing you need to work on right now to achieve them? . If you want to feel good about the money you make you may want to give some of it charity in order to help other people. Everyone feels financial pressure. but they don’t. If you can get a portion of it by applying yourself and competing for it you have no reason to feel guilty. If you have not yet done this after all of this discussion I’ve had with you about it then it is time for you to do this right now. Some live beyond their means. Go get a piece of paper and answer these questions on it: 1 – What are your goals in life and how does the stock market fit into them? 2 – How much money do you want to make from the stock market and how quickly? 3 – What strategies will you use to achieve this or what steps will you take to discover these strategies? 4 – How will it feel for you to make the money you have set for yourself in the stock market? Do you believe this will make you a better or worse person in society? 5 – How can you become more confident in your ability to make money in the stock market? 6 – What resources do you have to achieve your goals in the stock market. Most of the money in the world simply is held by owners.
I spent several years managing a hedge fund and have talked to at least hundreds of professional money managers over the years and it is my belief that money managers face a large obstacle in being objective about the stock market that individual traders and investors do not face. Outside the world of trading people often think of traders. The problem is the people whose money they manage are almost always pure gullabulls who get angry if the markets goes up and the money manager misses out on a gain and don’t get that upset if the money . and hedge fund managers here. I was a losing trader until the moment I sat down and figured out what I wanted from the stock market and committed myself to achieving those goals. If you don’t think goals are important consider this. But you need to realize that the process of writing these thoughts down commits me to a solid game plane that I stick with and makes it easy for me to deal with the stock market. as geniuses. mutual fund managers. and we need to include professionals involved in the stock market such as brokers. I then send this out to WSW Power Invest members who benefit from that information. Most people would be shocked if they discovered the reality of the situation though – except for a small minority the rest of the so called professionals have no clue about what they are doing when it comes to the stock market. The only difference is they wear a suit. Objectivity and Truth – Managing Other People’s Money If you take the time to really think about the things I have talked about so far you will be on your way to becoming a successful trader and increasing your results if you already are one. because I think this is an important topic that I’ve never really seen addressed anywhere before. That is the power of written goals. Now every week I look at the market and write about the strategies I think are best to make money in the market and how I intend to employ them. I want to wrap upby talking about traders who manage other people’s money.Please take the time to do this exercise. They are simply gullabulls just like the bulk of the people involved in the stock market.
To behave in the way a winning trader needs to act in order to win in the market would require a broker to make sell orders and do things that would anger the typical client who doesn’t have the knowledge to understand them – or even the willingness or time to learn. These types of desires do not make a winning trader or investor. The brokers and Wall Street firms make money by being in control of your money. A broker who really knows what he is doing will often feel like he is unappreciated and working with total swine. but instead is rewarded for hand holding and . because they take actions based on years of fear based conditioning from their clients. You can see this really clearly with mutual fund managers and stock brokers. but he wouldn't blame his broker for that since everyone else is losing money too.manager actually loses money when the market drops. The reason why is simple. Their primary fear is missing out if the market goes up. You would think he is crazy and probably move your money elsewhere. He’ll blame the market and the broker will tell his client to “stay disciplined” and most people will do it . It is a difficult job and most brokers have no idea what they are getting into – or worse remain at the level of a gullabull and act completely neurotic when it comes to the stock market. A new broker is put in a situation in which he is not really rewarded for learning about the stock market and what it takes to be a winning trader. Clients pressure them to behave in a way that molds the broker into a gullabull.because when you get down to it most people would rather lose money by holding then face the possibility of making a decision to sell and being wrong especially when everyone ON TV is telling them to keep holding on. but the gullabull pressures their money manager into conforming to them. because their obsession isn’t really making money consistently. but making sure they make money when everyone else does. Here is the deal – if your broker or investment advisor thought the market was topping out and called you up and convinced you to sell your positions you would most likely get extremely angry at him if the market then went higher. But if the market drops a typical gullabull client may get upset.
The mutual fund manager would rather lose 10% when the market is down 10% than only make 5% when the market is up 10% even if the market is overvalued and does not justify taking on the risk necessary to make a 10% return. although those pressures are a little bit different. Most brokers therefore subconsciously become permabulls without even realizing what they are doing. The goal of a mutual fund is to outperform other mutual funds and they can achieve that goal even if they lose money as long as they don’t lose more than their competitors. The mutual fund manager becomes terrified of “missing out” on any market rallies and therefore focuses only on the side of the market. The proof is in the fact that almost all mutual funds underperform the market averages. I only have met a few brokers who were able to break through this and learn about the stock market and actually be on the level of an elite trader.catering to the basest instincts of his clients. like you are in a typical job situation. A money manager is. They always say the market is going to go up. . To put this in a simpler manner to you – when you get in the stock market you are not pressured to act or trade in a certain manner by someone else. Most of them become mirror reflections of their clients. The same goes for mutual fund managers who are supposed to be fully invested in the market most of the time and are thereby unprepared for market downturns. Hedge fund managers also are affected by the pressures that come from their clients. An investment advisor or broker stands to lose everything by being negative on the market and being wrong and very little by being positive on the market when it is even in a bear market. This is why almost all mutual fund managers you see on TV are permabulls. hedge fund managers face the danger of being molded into a trading maniac. He is put into a similar situation as a typical stock broker. but the pressures are magnified. Whereas most mutual fund managers and brokers are molded into neurotic gullabulls. They never adjust to changing market trends or conditions and are probably the worst investors and traders on the planet. because they always have their funds positioned for a rising market.
The result can be a snowball effect and then an eventual blow up of the entire hedge fund. than you have to expect a few losing months to happen. This means that they are expected to make money every single month. Hedge fund managers can also be impacted by these pressures by booking a profit early to make sure they maintain a positive return for any given month. because there are times that the market simply doesn’t provide a good low risk opportunity to make money in a given month. What all this means is that the small investor actually has an advantage over the supposed Wall Street professionals. Of course this is a problem. which are large hedge funds that invest in several hedge funds on behalf of their clients. The problem is that most people simply cannot do this. or longer. It is impossible to make a positive return every single month and if you want to buy and hold a sector or stock for half a year. They have no reason to feel forced to trade or generate results over the short-term to appease clients. because they do not have to deal with the extra psychological pressures that they do.Hedge funds focus on absolute returns and hedge funds whose biggest clients are fund of fund hedge funds. because they don’t understand the structure of the stock market game and the . This can all lead to a crazed investing mentality. often are forced to focus on the short-term results. Ironically. The irony is that most regular investors somehow think they are at a disadvantage to Wall Street “big boys” when it is the opposite that is true. Such insecurity is more a reflection of their own psychological issues and a lack of a trading plan than it is of some reality in the stock market. because the fund of funds tend to evaluate them on a monthly basis. a year. In the end making money in the stock market comes down to one thing – recognizing the reality of the stock market and aligning your investment positions with it. such a short-term focused method of investing usually makes overall performance worse than it would be otherwise. During those times the hedge fund managers can put on risky trades and then put on even more reckless trades to make up for losses.
.normal psychological obstacles that prevent most people from doing this. This book will help remove those obstacles and if you go through the exercises I’ve recommended you do then you will be able to completely clear them away. As part of the process you also will need to develop your own trading system to make money out of the market. My Stock Market Mastery Course will help you achieve this. See you on the other side in your quest for personal and market truth.