The Art of the Trade [Secure eReader]
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eBook by R. E. McMaster
eBook Category: Personal Finance/Business
eBook Description: In July, 1998, trading veteran and author R. E. McMaster sold the market short just two days after its high--and two weeks before the 1998 market freefall! How did he know? McMaster's groundbreaking The Art of the Trade focuses on the psychology of trading. It tells you how to trade more effectively by integrating the analytic (logical) and intuitive (emotional) aspects of your personality into one properly balanced and powerful system. In addition, McMaster discusses specific trading strategies that have given him over 25 years of success in the markets. Like no book you've read before, the unique and powerful The Art of the Trade will show you how to achieve the mental and emotional balance required for successful trading.
eBook Publisher: McGraw-Hill Companies
Fictionwise Release Date: June 2002
2 Reader Ratings:
The word trade in English usage is both a noun and a verb. As a noun, a trade is an individual's occupation, a calling, a job, what you do daily to earn a living in the economic arena of life. As a verb, to trade is to swap, barter, exchange goods and/or services, or in the context of this work, to buy and sell stocks, futures contracts, currencies, and options on the listed "trading" exchanges.
In reality, to trade (verb) consistently in a successful manner, you must approach "trading" as a trade (noun). Trading is not some cavalier, whimsical on-and-off affair. The art of trading is a trade (occupation). Whether your main profession is trading on exchanges, managing a business, or selling real estate, you must consider trading as a lifestyle, a trade. When you trade actively, you can trade securities or commodities on many exchanges. You don't have to specialize in stocks, bonds, currencies, or commodities, because they all trade pretty much the same way, technically speaking. You do need the skill and experience of understanding the way markets work, however.
In today's complex society, our trade (occupation) requires specialization and division of labor, but trading in markets requires just the opposite: integration of many skills, perspectives, and intuition. My unique approach to trading is holistic, integrating insight from diverse disciplines, such as science, mathematics, philosophy, religion, medicine and alternative medicine, psychotronics, and politics, as well as focused commodity and stock trading, investing, international currency management, and agricultural involvement.
The premise of this book is that human knowledge is progressive. As we have developed a better understanding of ourselves from research in these many fields, we have more clues about our spiritual, mental, emotional, behavioral, and physical processes that we used to take for granted, that we were unconscious about, that we were simply intuitive with regard to, or that fell through the cracks and led to repeated cycles of error. This book synthesizes some of this new thinking so it can be integrated into the level of consciousness of traders, so they can be more aware synergistically of the factors they need to pull together, to have an opportunity to trade more successfully on a consistent basis.
As Figure 1.1 shows, reality is the integration of spirit, energy/frequency, matter, life, and money. Spirit is living, conscious energy with personality, power, and purpose. It can manifest as energy/frequency, and when it slows down below the speed of light and sets up a standing electromagnetic field, it is transformed into matter. When you add to matter consciousness, awareness on various levels, it becomes life. (People, of course, have logic, emotion, will, ego, and self-awareness.) Money is stored evidence of the human spirit, energy, and accumulated life over time. When people die, the assets they leave behind are evidence of their stored spirit, matter, energy, life, and money. Their legacy reflects how they spent their lives. Energy, matter, life, and money all operate in the realm of time. Spirit is outside time but also permeates it. This is how the pieces of reality as we know it fit together.
Trading also inescapably involves money. In our late twentieth-century society, money has effectively become the measure of all things, especially success. Money is basic to our survival too. So, while The Art of the Trade is about making money, it considers much more -- survival, status, and self-worth.
This book will also show you how to use both sides of your brain -- a critical component of successful trading. The left side of the brain controls your verbal skills, focuses on details, and involves practical, concrete matters, orderly sequences, and your reactions to the physical world. It is noted for reasoning, mathematics, language, scientific skills, and logic. The right side of the brain is visual, spatial; it provides you with the overall picture. It is emotional and abstract, and deals with shapes and patterns. The right side of the brain is where the spiritual world interfaces. It is the region of your brain from which your imagination, creativity, art, insight, and intuition spring forth.
Any time you trade, you have subjective perceptions regarding the future. You are operating in an environment of uncertainty, investing in the unknown where there is limited and imperfect information. You must balance the intuitive insights of the right brain (traditionally called feminine) with the analytical work of the left brain (traditionally called masculine). In Eastern terms, the yang (left brain) must lead, ground, catalyze, and integrate with the yin (right brain). The conscious must illuminate the subconscious. The analytical (left brain) must provide a grounding foundation from which intuitive and creative energy (right brain) can emerge. This is why trading is an art, not an exact science.
It is no accident that many of the consistently successful, qualified analysts and traders are musicians. W. D. Gann, a renowned trader from the first half of the twentieth century, was a serious student of music. He saw the similarities between the harmonics of his era and the ebbs and flows of the market. Gilbert Kaplan, former publisher and editor of Institutional Investor magazine, has conducted the London Symphony Orchestra and even has cut several CDs. I find that playing the piano helps integrate both sides of my brain. Music is not only creative and artistic; it also draws on science and mathematics, thus utilizing both sides of the brain.
As I learned the hard way, making and keeping money has little to do with money itself. Rather, making and keeping money is a function, or by-product, of playing the trading game correctly and consistently. To do this, you must have a rich reserve of psychological capital, and an integrated left and right brain, in addition, of course, to financial capital. I have seen far too many traders burn out like shooting stars, burn up their psychological capital, lose their ability to trade successfully, lose their money, and even die prematurely, because of lack of balance in their lives. They did not understand that trading is an art as well as a science. They did not integrate the analytical (left brain/yang) and intuitive (right brain/yin) elements of successful trading. They did not balance their psychological capital with financial capital.
This book will help you maintain your emotional and mental reserves -- which I call psychological capital -- in order to preserve and increase your financial capital. In fact, your most important capital is not money; it is your psychological capital, which empowers you to trade to make money. Without it, you will not be able to preserve or increase your financial capital for long. (And, of course, good health supports your psychological capital. "You're not wealthy unless you're healthy.")
Your psychological capital reserves depend upon the degree to which you manage stress in your personal and professional life. Just as athletes need downtime between races to run successfully, traders need downtime to recharge so they can mentally freewheel and be refreshed to reengage the markets. Floor traders who go from opening bell to closing bell, trying to squeeze every penny possible out of every trade, day after day and week after week without taking a break, are bound to burn out quickly. I'd say the majority -- perhaps 80 percent -- are like that. This is why many floor traders are in their twenties or early thirties. When you deplete your psychological capital, you become blinded in your ability to discern the markets. You lose the fine edge that is often the difference between success and failure.
I learned this lesson firsthand. I began trading in the early 1970s, when I was a young second lieutenant in the U.S. Air Force, a few years before my first son was born. I worked my way up to perhaps two or three trades a day and within a few years was able to make fairly consistent profits. In 1979, when my son was six, he developed a severe form of epilepsy. Doctors did not expect him to live; and if he did, they told my wife and me that he would likely need to be institutionalized. I spent the next 13 years investigating every possible accommodation, medication, and alternative medical approach, never knowing when a seizure would strike. He was in the unlucky 5 percent for whom normal epilepsy medication was ineffective. But my long and tedious, heart-wrenching efforts paid off. Today he is married and basically lives a normal life. But at the time, the stress in my personal life wreaked havoc on my ability to trade effectively. I cut back my personal trading activity to about two or three trades a week and my personal profits plummeted by almost 50 percent.
Back in 1971, my very first investments consisted of a few hundred dollars of junk silver coins and some South African gold-mining stocks. Then, in 1973, I traded my first contracts in the futures markets -- OJ and lumber -- very difficult markets to trade because the volume and open interest are so low. I didn't know any better. However, some luck enabled me to profit to the tune of more than $1000 per contract in orange juice and lumber futures. I said to myself, "Wow! This is fun and easy." But it wasn't long before the sad truth settled in. It took a great deal of work to learn The Art of the Trade. I was not able to break even consistently for another three years, long before my son became ill. And it took several more years before I felt I was consistent, confident, competent, and comfortable trading. The effort was equivalent to the energy I spent on my undergraduate and master's studies combined, and appropriately it took almost the same amount of time.
That time and energy were well spent, however. Knowing how to trade is a skill I would not exchange for anything in the world. It has provided me with the ability to earn a living in any market, anywhere. Whether you're trading Japanese yen on the SIMEX in Singapore, or any other security or commodity or currency on any of more than 50 exchanges around the world, the technical patterns and rules for successful trading are basically the same.
The market will find every hole in your personal and professional armor.
Trading can be invaluable in providing insights for dealing with the personal and professional issues that all of us face in life. The trading life cycles of the markets are a microcosm of your own life cycle. As you trade and learn about the market and how it oscillates, you see many parallels to what you experience in your own life and business. The only difference is that futures market contracts have shorter life spans, like a compressed holographic view of life.
Trading has helped me learn a great deal about my own strengths, weaknesses, biases, fears, and hopes. It has helped me become "street smart" more quickly than I would have otherwise become. For example, the markets don't allow you the time to live with your illusions. People can survive for many years with their illusions, doing things incorrectly, imprecisely, or inefficiently, but that is not so in the market. You can be successful in business by riding a primary trend like the computer industry without dealing with your personal issues. But the market demands that you deal with your personal issues, in part because of the emotional charge attached to money. The market will find every hole in your personal or professional armor.
I have learned to be more patient, admit when I am wrong, cut my losses short, let my profits ride, be more precise, attentive, effective, efficient, and focused. Trading the markets successfully has forced me to become more professional and to get my act together personally. Another important lesson from trading that I apply to my life is that if a certain action works out, I stay with it. If it doesn't, I get out. "Going with the flow" in life is the same thing as "trading with the trend" in a market. Most important, I have learned that there is very little in my life that I can control. I can only do the best I can, and be content with that.
Many traders are looking for the Holy Grail in one computerized technical system or another. In 1978, as one of E. F. Hutton's nationally approved commodities trading advisers (CTAs), I helped develop the first computerized trading program used nationally to trade commodity futures contracts. As a pioneer, I have learned there is no Holy Grail. There is only the hard work of left-brain analysis that allows the creative and intuitive right brain to kick in, creating The Art of the Trade.
Copyright © 1999 by R.E. McMaster