How You Can Benefit from Trader Psychology

After many years as a trader and an observer of trader behavior in the futures markets, I am convinced that a trader must know which behaviors must be changed to achieve consistent success. A trader must also know which new behaviors must be learned to replace dysfunctional or negative behaviors.

Knowledge from the Experts

While I could easily bend your ear with lists of suggestions and observations, I think that the better approach is to share with you the knowledge I have acquired through the analysis of a series of interviews with individuals who are respected for their achievements in the stock and futures industries. In futures trading, as in most endeavors, nothing succeeds like success. The key is to isolate what constitutes success and to learn from the triumphs of others as well as from one's own achievements.

The key is to isolate what constitutes success and to learn from the triumphs of others as well as from one's own achievements.

The Trader's Worst Enemy

The idea for this book originated many years ago but was not developed until recently because of my belief that traders would eventually find their own way and improve their ability to profit consistently from the markets. Time has proven me wrong. Time has shown me that for one reason or another, traders and investors continue to trip on their own emotions and fail as a result of their own shortcomings. Sad but true, the trader7s worst enemy is, has always been and probably always will be his or her own self. I have observed hundreds, perhaps thousands, of occasions when traders have taken effective trading systems, outstanding recommendations, highly successful advice and otherwise solid analytical information, and used them not only ineffectively but to distinct disadvantage. If this had occurred infrequently or accidentally, I could write off my observations to chance. However, the pervasiveness and repetitiveness of such behavior in virtually every individual at one time or another has lead me to conclude that as an experienced trader I must try to rectify the situation or at the very least improve it.

... traders and investors continue to trip on their own emotions and fail as a result of their own shortcomings.

A New Focus

Before writing this book, I focused on recognizing, analyzing, eliminating and replacing behaviors that limit performance in the market. Though I have received many letters and telephone calls through the years praising my efforts and thanking me for results achieved due to my information, it is still not enough.

At this juncture, the best approach is a positive one that focuses on recognizing and accentuating behaviors that have facilitated the success of others. Why not study successful market analysts and traders to determine precisely what they have done, either externally through behavior or internally through thought processes or attitudes, to succeed at speculation and investing, two of the most difficult undertakings that traders and investors can attempt?

The Interviews

Who should I interview? I avoided interviewing market professionals who have already been featured in books such as Jack Schwager's Market Wizards. Rather, I searched for individuals whose experiences, understandings and insights can be used effectively by futures and stock traders inasmuch as their perspectives are somewhat different, given their varied positions in the futures industry. Furthermore, I chose individuals who I have known personally either as colleagues or as business associates.

George A ngell

George Angell is highly skilled in technical analysis. His extensive experience as a floor trader, day trader and spread trader offers valuable insights to newcomers and seasoned traders alike. George's personal experiences during his years of trading can serve all of us well.

Gerald Appel

Gerald Appel is known as [he father of moving average convergence divergence (MACD), an indicator he developed for the purpose of trading stock index futures. He is an accomplished professional trader who has achieved both the respect and recognition of his peers as a highly disciplined and innovative trader. He brings to Market Masters his skill, insights and observations.

Bruce Rabcock

As "watchdog" of the futures advisor)' industry, Bruce has seen all too many traders, systems, advisers and hotlines come and go. Bruce is an active trader and devoted researcher. As long as 1 have known Bruce (at least ten years now), he has been direct, analytical and deeply dedicated to his work as well as his trading. His observations and insights are offered herein with the hope that you will find them as valuable as I have.

George Lane

George is the father of stochastics. He is indeed the foremost authority on stochastics and a keen observer of futures trading and futures traders. I have known and respected

George for more than 20 years. Few individuals can match his level of expertise or, for that matter, his iconoclastic, "shoot from the hip" style. He is indeed the granddaddy of futures trading with much to offer.

Conrad Leslie

Conrad Leslie and I go back many years as players in the same difficult game. Yet Conrad has experienced much more than I have in terms o( fundamental research. His role as an authority on crop forecasting has not prevented him from growing both philosophically as well as technically. Conrad can teach us a great deal—all we need do is to listen and act accordingly.

Robert Prechter

I interviewed Robert Prechter of the Elliott Wave Theorist, a man I have known for many years and one for whom I have great respect as an individual doggedly dedicated to his analytical methodology. For years, 1 have felt that Bob's knowledge of trader psychology is perhaps equal to, if not greater than, his vast achievements as a market technician. I had been convinced that the Elliott Wave, Bob's lifework, is primarily an emotionally inspired pattern, and his interview confirmed my belief. My questions to Bob therefore focused precisely on his understandings of market psychology with only passing mention of his preeminence as an Elliott Wave analyst.

Welles Wilder

Welles Wilder is known throughout the world for his development of numerous trading methods, as well as the relative strength indicator (RSI), which has become synonymous with Wilder's name. In the early 1980s, Welles and I, along with a group of other traders and analysts, toured the Far East presenting a series of futures trading seminars. I recognized Welles's true talent as a trader, and I admired his ability to remain detached, calculatedly analytical and exceptionally realistic about the markets.

Larry Williams

Larry Williams has found himself in the midst of numerous controversies through the years, many of which have centered around his aggressive promotion of trading systems and seminars. Quite candidly, as Larry will be the first to admit, he is a hero to many and a villain to others. I will always remember Larry's aplomb and confidence as he methodically parlayed $10,000 to well over $2 million in the Robbins World Cup of Futures Trading Championship, only then to give back about SI million before the contest ended.

Larry has been a great contributor to futures and stock trading not only in terms of techniques and methodologies but as a/i individual whose approach to futures trading must serve as a model to all traders aspiring to succeed.

The Elements of Success

I am fortunate, indeed gratified, that these individuals agreed to be part of Market Masters. I know that their contributions will be appreciated by every reader.

My hope is that the analyses that follow each interview, as well as the overall analysis of the interviews collectively, will help pinpoint specific areas of commonality among the experts interviewed so that you can extract and eventually develop within yourself the personal skills that have facilitated the success of these well-known individuals. You will note that the people interviewed for this book have distinctly different backgrounds and substantially diverse points of view about most matters, yet they share in common elements that I feel are inherent to successful traders and analysts.

Offered herein are the quintessential elements of success as a trader or as an investor, and I urge you to explore, understand and integrate them into your trading approach so that they may facilitate and enhance your success as they have done for so many other traders and investors.

Methodology, Assumptions and Techniques

My interview techniques were simple. To obtain the greatest amount of useful information from each individual, my questions were as general and open-ended as possible. In some instances questions related to the individual's methods or achievements and therefore were more specific. The general list of questions were as follows:

♦ What precipitated your desire to trade, and when?

♦ What qualities do you feel contributed most to your success as a trader?

♦ Do you use specific techniques for coping with losses?

♦ Estimate what percentage of a trader's success is a direct result of a good system as opposed to trading skills. What would be the split?

♦ What is the greatest lesson you learned in your life as a trader?

♦ Do you feel your success was inspired by any famous traders? If so, who, and how so?

♦ Are you in touch with any specific experiences that either facilitated or inhibited your trading success?

♦ Do you have any favorite techniques for emotionally dealing with periods of drawdown?

♦ What advice would you give to new traders interested in using some of your techniques?

Some questions were altered to accommodate specific interests of the individuals being interviewed; however, for the most part, this is the core of questions presented. A complete list of questions is included with each interview.

My Goals

My goals in each interview were as follows:

♦ To extract as much information as possible on the subjects covered.

♦ To obtain answers that were as specific as possible in relation to each question.

♦ To engage each expert in a thought process that would yield responses meaningful to my readers.

♦ To provide responses that would lend themselves to an overall analysis to ascertain any common elements or lack thereof among our different experts.

Assumptions

Although I entered into the interviews with certain basic assumptions regarding what I might find, I allowed for the option of changing them if I should discover that my original assumptions were incorrect. Some of my more significant assumptions follow:

♦ Common elements among the experts would exist not only in the areas of emotional response to the markets but in areas of discipline and experience as well.

♦ The experts would agree generally as to the importance of psychological issues in forming successful trader behavior.

♦ Most experts would attribute their success to the same basic qualities.

♦ The experts would share similar learning experiences in the markets that helped shape their successes.

Format

To evaluate the interviews objectively, each interview chapter has the following format:

♦ An entire chapter is devoted to each interview.

♦ Each chapter begins with a brief biography of the individual, as given to us during the interview.

♦ Each response is evaluated in terms of common elements in the following general areas.

Similarity of experiences. Were any experiences important in shaping attitudes, behaviors and expectations? If so, how were they similar? If not, how were they different? What can be concluded about the experiences that shape winning behaviors?

Similarities and/or differences in attitudes and opinions. How do the attitudes and opinions of each individual compare to one another? Are there common elements?

Methods of dealing with emotion. What methods does the individual use in dealing with emotional responses to various market conditions and events? How are these similar to or different from those of other experts interviewed?

Recommendations to other traders. What general recommendations are given to other traders by our experts to help them achieve and maintain trading success?

Importance of a trading system. How important does the expert feel a trading system is in the overall attainment of success as a trader?

Evaluation

After the presentation and discussion of the interviews, you will find an evaluation of the important common elements and differences to determine what can be learned from the experts' experiences. You will also find specific suggestions in every major area of investor and trader behavior.

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