Successful investors may use different systems or approaches to the market, have
different educational backgrounds and be of various ages. However, they would have
the following beliefs that enable them to reap profits from the markets:
1. Self-confidence. This comes from both knowledge of the markets and self-
knowledge of their strengths and weaknesses. They effectively believe that they will
make profits in advance. They believe the game has been won before they begin. If you
are not self-confident in your own ability, it is unlikely you will ever become a
successful trader.
2. Money itself is not important; this allows them to emotionally detach themselves
from trading.
3. Losing money can and will occur, and is acceptable to these investors.
4. Profits will occur over a period of time and these can be run to a significantly
larger size than their losing trades.
5. These investors love and enjoy what they are doing, and therefore have no problem
devoting regular time to trading.
6. Open-mindedness and adaptability. Successful traders remain open-minded and
receptive to new ideas when it is necessary. They find it easy to adapt and change and
they are not concerned with admitting when they are wrong.
A well thought out and logical trading method, combines with the above beliefs, will give
any trader an edge in the quest for profits.
BECOMING A DISCIPLINED
INVESTOR
“A key to self management is the capacity for self-observation, it is not the same as over-
criticism … it is rather a consistent monitoring of one’s performance from a perspective
significantly detached to allow accurate evaluation.”
A. Garfield
It is clear that knowledge of oneself is just as important in trading as knowing facts,
economic theories, news or trading methods. In the trading world, often emotion reigns
supreme, facts are ignored and there is no wrong or right. The person who has control
of himself due to his discipline and emotional self-control will ultimately emerge from
the battlefield a winner.
However, coming to terms with our strengths, weaknesses and personal traits is not
easy. It is not easy to analyse yourself objectively because you will naturally have a
subjective perspective.
When trying to understand yourself, you must be willing to be totally honest with yourself.
This can be difficult and painful. The person must have the ability to accept the results
of looking within. Most people, however, find it difficult to admit they made a mistake.
Ask a room full of people how many of them are happy admitting their mistakes and you
will see few, if any, hands go up. Admitting mistakes, however, is a positive not negative
attribute in trading, as it is in life. The world is full of people who want to be right, but
the reality is everyone cannot be right all of the time.
“Learning is after all not whether we lose the game, but how we lose and how we have
changed because of it, and what we take away from it that we never had before to apply
to other situations’ losing in a curious way is wining.”
Richard Bach
All of us have physical and mental disabilities, which prevent us from achieving all our
goals and desires. No one is perfect. It is possible, however, to isolate and work on
weaknesses. This is similar to reviewing and working on your trading method. You
must understand the strengths and weaknesses of the system and try to improve it,
but realise perfection is impossible. Remember, in the final analysis you have inherent
weaknesses and may not have all the required attributes for trading, but neither does
anyone else. The more traits you possess, the greater your advantage, but the more
you work at obtaining these traits, the better your chances for success.
THE SECRET OF MARKET SUCCESS
“For surely we are not … no simply contending in order that my view or that yours may
prevail, but I presume that we ought both of us to be fighting for the truth.”
Socrates
The aim of any investor is to make money by correctly identifying and acting upon the
truth. The truth, however, is elusive, as there is no scientific method to get us to the
truth. The truth is difficult to see as it can be totally different to what your emotions
and natural instincts are telling you. Furthermore, the fact that the majority of people
agree or disagree with you has no relevance in the pursuit of the truth.
To succeed in trading you need to understand that there are no certainties, only
probabilities, and to seek the truth you need to have a deep understanding of yourself
and the market you operate in, and how you relate to it. You need to stand-alone and,
from your perception of what is going on around you, decide what the truth is.
I started this essay with a quote from Lao Tzu, who founded the Chinese philosophy of
Taoism over 2,500 years ago. Many of the beliefs of Taoism are relevant to trading.
Trading is a re ection of life. This is why there are so many contradictory ideas and
shades of grey instead of black and white answers. Just like life, trading is unpredictable;
people who believe that there is a scientific law to investing that can predict commodity
price movements are missing the point. Trying to reduce everything to numbers if, in
Lao Tzu’s words, like trying to catch running water in a bucket.
Many elements of Taoism hint at the psychological course of events. This is particularly
relevant in trading. Tao in English means “the way”. Tao is the missing link in trading,
it is effectively the ability to see an event before it is definitely known, that is the key.
It is really the intuitive ability to see and then to act.
In the world of Taoism you need the ability to use both analytical and intuitive skills.
Relying on both right and left hemispheres of the brain to process and analyse information,
this is the key to identifying and acting upon the truth. Once you have brought your
thoughts to bear on the facts of a situation, then you need to let go. This is the incubation
stage where you are letting your thoughts go where they may, without the in uence of
anyone else. When you learn to think and act in this manner, you will be surprised how
you see many situations the crowd will never see.
Investors spend millions each year on “Holy Grail” trading methods, books and tapes
that they believe will give them regular and consistent profits from the market, with low
drawdowns. These people will never make money; in trading there are no certainties,
only probabilities, and a trader must accept this if he is to make money.
FINAL WORDS
A scorpion wants to cross a river, but he can’t swim. He asks a frog, who can, if he can
hitch a ride on the frog’s back. “You’ll sting me,” says the frog. “It would not be in my
interest to sting you,” says the scorpion, “because then I would drown.”
The frog thinks about the scorpion’s logic, finds it impeccable, agrees to take the scorpion
on his back, and then braves the waters. Halfway across the river, the frog reels a
burning spear in his side; the scorpion has stung him after all. As they sink beneath the
waves, the frog cries out, “Why did you sting me Mr Scorpion, for now we both will die?”
“I can’t help it,” replies the scorpion, it’s in my nature.”
(From the movie “The Crying Game” 1992)
We are all human, and we all have emotions that are inherent in our biological make-up,
we can’t rid ourselves of them. What we can do is understand them, and try to control
them. If we don’t, our trading will be doomed to failure.
Obviously there is limited space in this essay to cover all the psychological aspects of
trading. I would, therefore, strongly recommend you consult the enclosed reading list
for further information.
FURTHER READING
Some of the information enclosed has been from direct experience. However, a
considerable in uence on my trading has come from the enclosed material.
Recommended:
1. The Disciplined Trader
Mark Douglas
2. The New Investors Quotient Jacob Bernstein
These books cover all aspects of psychological problems encountered in trading and give
clear guidance on how to avoid the emotional traps that destroy most traders’ equity.
These two books complement each other, and are essential reading.
