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The 21 Irrefutable Truths of Trading [Secure eReader]
eBook by John Hayden

eBook Category: Personal Finance
eBook Description: Strategies for traders to master the most important trading tool--their minds. Psychology is 80% of the high-stakes trader's game. And within the mind of any successful trader exist surprisingly similar emotions and psychological beliefs. The 21 Irrefutable Truths of Trading introduces these values and beliefs, then explains how traders can and must work to understand and harness these beliefs, and gain the psychological edge necessary to win in today's all-or-nothing trading battlefield. Divided into two parts--the first focusing on common strengths and weaknesses, the second on ways to enhance the strengths and control the weaknesses while trading--The 21 Irrefutable Truths of Trading introduces: Techniques to develop certainty, intuition, and discipline. Technical analysis and trading methodologies to trade more effectively. How to properly align trading with the movement of the market.

eBook Publisher: McGraw-Hill Companies, Published: 2002
Fictionwise Release Date: July 2002


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Every year thousands of very successful individuals make a decision to start investing in stocks, or trading: commodities, currencies, or stocks. All traders are on a constant quest for knowledge that will help them increase their profitability. Most individuals decide to start investing or trading for a variety of logical and emotional reasons, many of which have not been adequately addressed. The goal of this book is to help you make your quest easier and less painful. Let me begin by asking you a key question: What do you really want to accomplish as a trader or investor? The market will give you incredible pleasure if you approach it correctly. However, if you approach trading and the market from the wrong direction, you'll receive incredible pain!

There are two primary ingredients for success in any endeavor: mastery of your physical environment, and mastery of your internal mental environment. When it comes to markets, the physical environment consists of numbers -- namely, prices. The cold, hard truth is that prices can do absolutely anything tomorrow -- it is impossible to predict with certainty where they will be. The best you can do is determine what prices will probably occur tomorrow. To do so, you need to have a trading methodology that gives you an edge.

Unfortunately, before you can ever hope to truly have an edge, you must first master your internal environment. Your internal environment consists of your beliefs, values, and rules. It is how you perceive the external market. Think about the times you achieved a new goal in the past. After achieving it, were you the same person you were when you initially started? Have you thought about what type of person you must become to be a successful trader or investor?

This book is intended to give you as many advantages as possible to help you dramatically increase the amount of your profits and speed at which you generate them. While the language in this book is geared toward traders in the commodity, currency, and derivative markets, the information is just as valid for long-term stock investors.

As a group, new traders consist largely of very successful people. Doctors, attorneys, airline pilots, and entrepreneurs comprise the four largest groups who decide every year to try their hand at trading. Of course, outside of these four primary groups new commodity traders have a vast and varied background. This categorization is less true for stock traders.

Traders have lost billions of dollars in the pursuit of profits. They have spent millions of dollars to purchase computer trading programs, attend seminars, and read trading books. Sadly, the average new trader will lose most if not all of his or her trading capital within four to eight months of opening a trading account.

The fact that a constant supply of new individuals decides to start trading is evident by the low renewal rate for the two major trading magazines in the United States. It is also obvious by the same ads being run in these magazines consistently targeting new traders. You can open any financial newspaper to find a plethora of ads that target new traders. Then there is the educational trading seminar industry, which generates millions of dollars every year: the more popular seminars targeting the new trader are always sold out.

The allure of trading is indeed very powerful. Where else can an individual investor turn $10,000 into $1 million within a year? Where else can an individual earn a 500 percent return? Everywhere new traders turn they see or hear about the fabulous returns earned by some traders. Every new trader can tell you how George Soros made over $1 billion within a few days when the British pound depreciated. Every new trader wants a piece of that action.

After all, everyone will tell the new trader that statistically 90 percent of all traders lose their trading capital within 12 months, but 10 percent increase their capital. The implication, to the beginning trader, is that 10 percent of the traders are wildly successful. Most new traders never suspect that the assumptions they are making from this statistic are flawed. Since most individuals who become new traders are already in the upper 10 percent of their chosen profession, they naturally assume that they will get into that upper 10 percent of successful traders. The fly in the ointment is that the 9-to-1 (lose-to-succeed) ratio often bandied about is based on the total universe of traders trading in a 12-month period. It is a ratio based not on new traders, but on all traders. The unfortunate truth is that it takes 100 new traders to produce one or two new traders who are net profitable after 12 months. The average life expectancy of a new trader before losing 65 to 95 percent of the money they opened their account with is four to six months!

When an individual makes the decision to start trading commodities, he or she is faced with a multitude of choices, similar to when the individual started his or her professional career. The huge difference is that most people build their professional careers in a structured learning environment -- typically in a university or business setting. Almost without exception they enter that "10 percent winners' circle" in their respective careers slowly. In trading there is no structured learning environment, there are no professors or business clients to guide the trader in how to think, behave, and trade. Most beginning traders will attend a seminar or two, read a few books, buy a computer-based trading program, and get a data feed. They then open a trading account with $5000 to $20,000, fully expecting to earn triple-digit returns.

Inherent in new traders' decisions is the belief that trading is easy once they possess the "holy grail." As their accounts start to change either up or down, the traders will start to form psychological opinions that ultimately cause their demise and loss of trading funds. This happens whether the trader is initially profitable or starts losing from the very beginning.

The trader's success is ultimately determined by his or her psychological perceptions and beliefs. Most if not all new traders really believe that there is a "holy grail" -- in the form of a computer-based trading program that all successful traders use with some minor variations. New traders are convinced that if they have the same computer trading program, the same sources of information, and the same data feed as a "trading wizard," they too will be wildly successful. Most new traders believe that success in trading can be bought by installing a trading program or reading a few technical books.

In their work lives, if these new traders were asked whether reading a book could lead to professional success, they would have a hearty laugh! Whether they are doctors, business owners, or service professionals, they all know that the only way to become a success is through years of commitment. Why, then, do most new traders think the learning process can be short-circuited?

Most new traders honestly believe that they can take the same skills they developed to get to the top in their chosen profession and apply them to trading. These skills are typically hard work, study, persistence, and experience.

How do you as a new trader avoid making some of these mistakes in the first place? The easy answer is to realize that your trading success will be ultimately determined by your psychological perceptions, beliefs, and attitudes. The trading game is played out in the six inches of space between your ears! Just as in golf! You need to make sure the beliefs that you develop about trading are based on logical and correct assumptions.

In any profession, from doctor to football player, there are certain truths that dramatically increase the speed of success. A football player lifts weights and physically pushes his body to its limits so that he can be a strong performer. However, a physically powerful football player is worthless if he lacks a valid strategy and, as you will see, certain key beliefs and values. Similarly, a trader must expand his or her knowledge of trading strategies and must also possess certain key beliefs and values.

There are certain universal truths about trading that all successful traders hold dear to their hearts. These universal truths constitute the actual "holy grail." Once discovered, the truths are self-evident, yet they are very hard to unearth without a lot of hard work.

What are these universal truths? And why until now has no one mentioned them in a seminar or publication? The universal laws of trading are the virtues, vices, and strategies described in this book.

Who am I to state that there is a holy grail that everyone else has overlooked? How can I say that there are certain fundamental, irrefutable truths of trading? After all, many sophisticated traders have written books and taught a wide variety of trading methodologies. Why have they all missed what is so obvious?

The answer is straightforward. As far as I can tell, no one is willing to publicly admit that there are certain immutable truths about trading. These truths consist of certain internal beliefs and values that demand work and time to develop. They cannot be bought today, studied tonight, and applied tomorrow in the next trading session.

Immutable truths apply in every arena of life. In nature, fish cannot fly, and eagles cannot swim, yet both require oxygen to live. Skyscrapers must be built from steel and concrete, not wood, and must rise from a solid foundation. Rockets can escape to space only by obeying the laws of physics. So it follows that there are certain immutable trading truths that all successful traders adhere to.

Most new traders believe that success is achievable if they have enough money, determination, or creativity. Human nature wants to believe that anything is possible. New traders want to believe that they belong in the 10 percent winners' circle, and that they will enter that circle quickly and easily. Human nature also wants to believe that these immutable truths of trading are easy to set in motion, that they are mechanical, and that a computer can implement them.

If new traders stay at trading long enough, they will slowly start to accept that there are certain truths that must at all costs be obeyed. Once a trader accepts this fact, a lot of the stress, uncertainty, and frustration leaves. The challenge is that most new traders never get to that point. They quit before ever discovering that they lost their money because they were violating some if not all of the irrefutable truths. Once they open their minds to the truths in trading, it's easy for traders to see what they are.

I started trading stocks in 1976, physical gold in 1982, and U.S. Treasury bonds in 1993. Trading has been an obsession of mine for more than two decades. What I have found is that all outstanding traders -- be it in commodities, stocks, diamonds, or horses -- have accepted certain immutable facts about what and how they trade! There are certain virtues that they have all worked to strengthen, and certain vices they have labored to annihilate.

After years of being obsessed about what makes a great trader, I can tell you unequivocally that all great traders obey the "natural laws" of trading. None of these truths has anything to do with the methodology traders use, what markets they trade, or how they trade. None of the truths can be programmed into a computer; however, they can be programmed into the mind.

Every individual who has become truly excellent in a chosen profession or career has done so by increasing desirable personality characteristics and decreasing or getting rid of less desirable characteristics.

Every individual who has become excellent in a chosen profession or career has done so by strengthening personal virtues and controlling vices. In today's world it may seem a little strange to talk about virtues and vices. Make no mistake. It is the same foundation that all successful individuals use to excel in their professional careers.

This book is my attempt to help shorten the amount of time it takes a trader to become profitable. It is my way of returning to the market some of the joy, passion, and fulfillment that I have obtained by being a trader.

Every trader has strengths and weaknesses. As long as you stick to your own style, you get the good and the bad in your own approach. When you try to incorporate someone else's style, you often wind up with the worst of both styles. I've done that a lot.

-- Michael Marcus

New traders believe that all it takes to succeed in trading is a "holy grail" trading system. Nearly all beginners are convinced that the only thing separating them from unlimited wealth is a trading system that the "professionals" use. If they could only have tomorrow's Wall Street Journal today, they would be rich. Barring that, most new traders would gladly sell their birthright if they could have the computer trading program used by any of the "professional" stock or commodity trading wizards.

After all, wouldn't you love to have the same computer trading program as George Soros or Warren Buffett? Without hesitation, new traders go out and buy the newest, fastest, super-duper computer available. They then spend a great deal of effort deciding what computer trading program to purchase. In reality, there are only two types of programs available: a black box that tells you to buy the S&P Index at a certain price, or a program that allows you to write your own program to analyze the market.

Some new traders also attend seminars to learn the latest trading technique or system. Other traders decide that they don't want to work with a computer and its related programs, and instead look to a particular newsletter, fax, or e-mail, for the inside scoop. So they decide to take the trades recommended to them.

Keep in mind that the vast majority of traders (new and old) are very intelligent, and have achieved a high degree of success in their chosen professions. Because of the frantic rush not to miss the next huge move in corn futures, or the next Microsoft, most traders never stop to question the underlying premise that all of this activity is based on.

The fact that there are traders (in stocks, commodities, and currencies) who consistently remain profitable over time is undeniable. The fact that they earn huge sums of money is equally well known. It is also true that most (but not all) traders use computer programs to crunch the data, and that these computer programs are considered top secret.

These facts lead just about everyone to assume that top traders are successful because they have a program to correctly analyze and predict the market action. Everyone is focusing on the computer power, the computer program, and the quality of the data feed or news that these successful traders possess. No one is asking what came first: the individual's ability as a trader or the program?

The holy grail cannot be bought! Insofar as most traders are concerned, it does not really exist. Allow me to put this perception to rest at last -- to toss it in a casket and tightly nail the lid shut. Suppose by some miracle you woke up and discovered that the great trader's fairy in the sky had installed the same trading program as used by Paul Tudor Jones in your computer, while you were sleeping. Even so, you would never, ever make the same type of return as P. T. Jones!

There is no newsletter, fax, or e-mail service that will make you millions. There is no computer program that will open secret doors. Forget about the overnight e-mail advisory line or the Internet chat room. Neither will make you rich. Forget it!

I am sorry to burst a bubble cherished by so many novice traders. After talking to hundreds of traders, and reviewing thousands of accounts, I can tell you that there simply isn't a holy grail as perceived by the novice trader.

Let me ask you several questions.

1. For a few thousand dollars you can buy many programs that promise to reliably make you several hundred percent. Why, then, is such a program for sale? Why doesn't the programmer start a hedge fund or become a commodity trading adviser (CTA) and earn many millions more?

2. Why doesn't a newsletter service allow you to see its past recommendations?

3. Why is it that most newsletter writers offer only generic-type entries? For example, they say that support for gold is at 300. They don't say buy gold at 300.5 and place a sell stop at 270.5. Why is that?

4. Why is it that the best hedge funds, mutual funds, commodity traders, and CTAs all use different trading methodologies?

5. Why was it possible for Bernard Baruch to amass millions (and keep them) back when the word "computer" didn't even exist?

6. Why is it that everyone seems to talk about Jessie Livermore as one of the great all-time traders, when in reality he committed suicide and was dead broke? (This last question is a pet peeve of mine; however, it is important.)

Sorry, folks. There is no easy way to make millions from thousands, without a lot of very hard work. As P. T. Barnum said, "There is a sucker born every minute." Substitute loser and you have the trading scene pretty accurately portrayed.

About now you are probably saying, "Well, wait a minute. What about that 10 percent of traders who make it?" Good question; let me address it. It seems that just about everyone recites the statistic that 90 percent of all traders lose, and 10 percent win. Just about all novice traders hear this and think, "Well, if 90 percent of all traders lose, then 10 percent win all the money the other 90 percent lost. Since I am smarter than most, I too will get into that 10 percent winners' circle, and get rich."

Implied in this reasoning is that 90 percent of all new traders lose, and 10 percent of all new traders win. Again I have to get my trusty pin out, and pop yet another bubble. The statistical 90 percent is on all traders in a year. Hence 10 percent of all traders make money. Now let us think for a second. Only 10 percent of all traders make money, and more experience is likely to improve their chances of success. By definition, a novice trader is inexperienced. Therefore, far more than 90 percent of new traders must lose their trading funds.

In a three-month period (September to December 1998), I talked to more than 500 new traders (people whose accounts were less than a year old), and with three exceptions they all had lost, or were in the process of losing, their trading capital! The brokerage house I worked for on average opens 50 accounts a day, with $5000 being the minimum account size allowed. This equals $50 million in annual losses among individuals who as a group were smart and successful in their chosen professions!

As a group they either were following an advisory service or "black box" trading system or had attempted to write their own trading system on a technical analysis trading program. They were all losing money. I really hope I have your attention by now. Did you know that when you open an account at a large trading firm, the salesperson who sets up the account gets credit only for the amount of money you opened the account with? Furthermore, did you know that the salesperson can usually get credit only for the next 30 days for any additional funds deposited with the brokerage house? Can you guess why? Let me give you a hint. What do you suppose is the average length of time before an account is closed?

In order to maintain a new account, the average novice trader will need to add more money within 60 days. Most traders will stop trading within four to six months after opening the account. That is how long it takes them to lose their money. The real believers in a computer-based holy grail will stop trading, do some more research, buy another program, or switch newsletters, and then re-fund their account.

Are you starting to get the message that you cannot buy a holy grail trading system, be it computer or advisory based? Are you starting to wonder why you bought this book? This is good! There is some good news, but you must really understand that you cannot buy a way to make millions. There is no way to become a great trader without a lot of work.

My goal is to show you the way. I cannot make you a great trader; only you can do that. There is a holy grail and you already have it! It is inside you, and what is preventing you from getting there are your perceptions, beliefs, and a lot of promotional/advertising garbage that only confuses and perplexes you.

The holy grail is this: Great traders are great not because of some computer program they use but because they have the ability to control their reality. The computer provides the information; it does not supply the thinking.

"Information is not a substitute for thinking!"

Great traders understand how critically their profitability depends upon their ability to strengthen their virtues and annihilate their vices. Ask any great trader how important emotional control or discipline is to financial success. You will get a very similar response. A great trader today would have been a great trader in tulips 600 years ago and would excel at trading in asteroid minerals 1000 years hence. This is because even though the technological tools available to great traders may vary, their ability to master their own internal beliefs and values remains constant.

All great traders have grasped these truths, and without a doubt would gladly give up their computer trading programs rather than give up their mental perceptions, beliefs, or values. This is why you as a trader would not even come close to obtaining the same returns as Paul T. Jones using the same computer program. You do not have the same mental perceptions, beliefs, values, or rules as he does.

The truth about the holy grail is that it is impossible to purchase, that it is not something you can program into a computer, and that all great traders (living and dead) have (or had) possession of it. This is because they all had very similar beliefs about the importance of mastering their virtues and eliminating their vices. The holy grail is nothing other than the self-examined life lived according to 21 irrefutable truths.

Copyright © 2000 by The McGraw-Hill Companies, Inc.


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