Methods Employed By Exceptional Players

1. FIRST THINGS FIRST
First, be sure that you really want to trade. As both Krausz and Faulkner confirmed,
based on their experience in working with traders, it is common for people who think they want to trade to discover that they really don’t.

2. EXAMINE YOUR MOTIVES
Think about why you really want to trade. If you want to trade for the excitement, you might be better off riding a roller coaster or taking up hang gliding. In my own case, I found that the underlying motive for trading was serenity or peace of mind-hardly the emotional state typi-cal of trading. Another personal motive for trading was that I loved puzzle solving-and the markets provided the ultimate puzzle. How-ever, while I enjoyed the cerebral aspects of market analysis, I didn’t particularly like the visceral characteristics of trading itself. The con-trast between my motives and the activity resulted in very obvious con-flicts. You need to examine your own motives very carefully for any such conflicts. The market is a stem master. You need to do almost everything right to win. If parts of you are pulling in opposite direc-tions, the game is lost before you start.

How did I resolve my own conflict? I decided to focus completely on mechanical trading approaches in order to eliminate the emotionality in trading. Equally important, focusing on the design of mechanical systems directed my energies to the part of trading I did enjoy-the puzzle-solving aspects. Although I had devoted some energy to mechanical systems for these reasons for a number of years, I eventu-ally came to the realization that I wanted to move in this direction exclusively. (This is not intended as an advocacy for mechanical sys-tems over human-decision-oriented approaches. I am only providing a personal example. The appropriate answer for another trader could well be very different.)

3. MATCH THE TRADING METHOD TO YOUR PERSONALITY
It is critical to choose a method that is consistent with your own person-ality and comfort level. If you can’t stand to give back significant prof-its, then a long-term trend-following approach-even a very good one-will be a disaster, because you will never be able to follow it. If you don’t want to watch the quote screen all day (or can’t), don’t try a day-trading method. If you can’t stand the emotional strain of making trading decisions, then try to develop a mechanical system for trading the markets. The approach you use must be right for you; it must feel comfortable. The importance of this cannot be overemphasized. Remember Randy McKay’s assertion:

“Virtually every successful trader I know ultimately ended up with a trading style suited to his per-sonality.” Incidentally, the mismatch of trading style and personality is one of the key reasons why purchased trading systems rarely make profits for those who buy them, even if the system is a good one. While the odds of getting a winning system are small-certainly less than 50/50-the odds of getting a system that fits your personality are smaller still. I’U leave it to your imagination to decide on the odds of buying a prof-itable/moderate risk system and using it effectively.

4. IT IS ABSOLUTELY NECESSARY TO HAVE AN EDGE
You can’t win without an edge, even with the world’s greatest discipline and money management skills. If you could, then it would be possible to win at roulette (over the long run) using perfect discipline and risk con-trol. Of course, that is an impossible task because of the laws of probabil-ity. If you don’t have an edge, all that money management and discipline will do for you is to guarantee that you will gradually bleed to death. Inci-dentally, if you don’t know what your edge is, you don’t have one.

5. DERIVE A METHOD
To have an edge, you must have a method. The type of method is irrele-vant. Some of the supertraders are pure fundamentalists; some are pure technicians; and some are hybrids. Even within each group, there are tremendous variations. For example, within the group of technicians, there are tape readers (or their modem-day equivalent-screen watch-ers), chartists, mechanical system traders, EIliott Wave analysts, Gann analysts, and so on. The type of method is not important, but having one is critical-and, of course, the method must have an edge.

6. DEVELOPING A METHOD IS HARD WORK
Shortcuts rarely lead to trading success. Developing your own approach requires research, observation, and thought. Expect the process to take lots of time and hard work. Expect many dead ends and multiple fail-ures before you find a successful trading approach that is right for you. Remember that you are playing against tens of thousands of profession-als. Why should you be any better? If it were that easy, there would be a lot more millionaire traders.

7. SKILL VERSUS HARD WORK
Is trading success dependent on innate skills? Or is hard work suffi-cient? There is no question in my mmd that many of the supertraders have a special talent for trading. Marathon running provides an appro-priate analogy. Virtually anyone can run a marathon, given sufficient commitment and hard work. Yet, regardless of the effort and desire, only a small fraction of the population will ever be able to run a 2:12 marathon. Similarly, anyone can learn to play a musical instrument. But again, regardless of work and dedication, only a handful of individuals possess the natural talent to become concert soloists. The general rule is that exceptional performance requires both natural talent and hard work to realize its potential. If the innate skill is lacking, hard work may pro-vide proficiency, but not excellence.
In my opinion, the same principles apply to trading. Virtually any-one can become a net profitable trader, but only a few have the inborn talent to become supertraders. For this reason, it may be possible to teach trading success, but only up to a point. Be realistic in your goals.

8. GOOD TRADING SHOULD BE EFFORTLESS
Wait a minute. Didn’t I just list hard work as an ingredient to successful trading? How can good trading require hard work and yet be effortless?
There is no contradiction. Hard work refers to the preparatory pro-cess-the research and observation necessary to become a good trader-not to the trading itself. In this respect, hard work is associated with such qualities as vision, creativity, persistence, drive, desire, and commitment. Hard work certainly does not mean that the process of trading itself should be filled with exertion. It certainly does not imply struggling with or fighting against the markets. On the contrary, the more effortless and natural the trading process, the better the chances for success. As the anonymous trader in Zen and the Art of Trading put it, “In trading, just as in archery, whenever there is effort, force, strain-ing, struggling, or trying, it’s wrong. You’re out of sync; you’re out of harmony with the market. The perfect trade is one that requires no effort.”

Visualize a world-class distance runner, clicking off mile after mile at a five-minute pace. Now picture an out-of-shape, 250-pound couch potato trying to run a mile at a ten-minute pace. The professional run-ner glides along gracefully-almost effortlessly-despite the long dis-tance and fast pace. The out-of-shape runner, however, is likely to struggle, huffing and puffing like a Yugo going up a 1 percent grade. Who is putting in more work and effort? Who is more successful? Of course, the world-class runner puts in his hard work during training, and this prior effort and commitment are essential to his success.

9. MONEY MANAGEMENT AND RISK CONTROL
Almost every person I interviewed felt that money management was even more important than the trading method. Many potentially suc-cessful systems or trading approaches have led to disaster because the trader applying the strategy lacked a method of controlling risk. You don’t have to be a mathematician or understand portfolio theory to manage risk. Risk control can be as easy as the following three-step approach:

1. Never risk more than 1 to 2 percent of your capital on any trade. (Depending on your approach, a modestly higher number might still be reasonable. However, I would strongly advise against anything over 5 percent.)

2. Predetermine your exit point before you get into a trade. Many of the traders I interviewed cited exactly this rule.

3. If you lose a certain predetermined amount of your starting capi-tal (e.g., 10 percent to 20 percent), take a breather, analyze what went wrong, and wait until you feel confident and have a high-probability idea before you begin trading again. For traders with large accounts, trading very small is a reasonable alternative to a complete trading hia-tus. The strategy of cutting trading size down sharply during losing streaks is one mentioned by many of the traders interviewed.

10. THE TRADING PLAN
Trying to win in the markets without a trading plan is like trying to build a house without blueprints-costly (and avoidable) mistakes are virtually inevitable. A trading plan simply requires combining a per-sonal trading method with specific money management and trade entry rules. Krausz considers the absence of a trading plan the root of all the principal difficulties traders encounter in the markets. Driehaus stresses that a trading plan should reflect a personal core philosophy. He explains that without a core philosophy, you are not going to be able to hold on to your positions or stick with your trading plan during really difficult times.

11. DISCIPLINE
Discipline was probably the most frequent word used by the excep-tional traders that I interviewed. Often, it was mentioned in an almost apologetic tone: “I know you’ve heard this a million times before, but believe me, it’s really important.”
There are two basic reasons why discipline is critical. First, it is a prerequisite for maintaining effective risk control. Second, you need discipline to apply your method without second-guessing and choosing which trades to take. I guarantee that you will almost always pick the wrong ones. Why? Because you will tend to pick the comfortable trades, and as Eckhardt explained, “What feels good is often the wrong thing to do.” As a final word on this subject, remember that you are never immune to bad trading habits-the best you can do is to keep them latent. As soon as you get lazy or sloppy, they will return.

12. UNDERSTAND THAT YOU ARE RESPONSIBLE
Whether you win or lose, you are responsible for your own results. Even if you lost on your broker’s tip, an advisory service recommenda-tion, or a bad signal from the system you bought, you are responsible because you made the decision to listen and act. I have never met a suc-cessful trader who blamed others for his losses.

13. THE NEED FOR INDEPENDENCE
You need to do your own thinking. Don’t get caught up in mass hyste-ria. As Ed Seykota pointed out, by the time a story is making the cover of the national periodicals, the trend is probably near an end. Independence also means making your own trading decisions. Never listen to other opinions. Even if it occasionally helps on a trade or two, listening to others invariably seems to end up costing you money-not to mention confusing your own market view. As Michael Marcus stated in Market Wizards, “You need to follow your own light. If you combine two traders, you will get the worst of each.”

A related personal anecdote concerns another trader I interviewed in Market Wizards. Although he could trade better than I if he were blindfolded and placed in a trunk at the bottom of a pool, he still was interested in my view of the markets. One day he called and asked, “What do you think of the yen?” The yen was one of the few markets about which I had a strong opinion at the time. It had formed a particular chart pattern that made me very bearish. “I think the yen is going straight down, and I’m short,” I replied.

He preceded to give me fifty-one reasons why the yen was oversold and due for a rally. After he hung up, I thought: “I’m leaving on a busi-ness trip tomorrow. My trading has not been going very well during the last few weeks. The short yen trade is one of the only positions in my account. Do I really want to fade one of the world’s best traders given these considerations?” I decided to close out the trade.
By the time I returned from my trip several days later, the yen had fallen 150 points. As luck would have it, that afternoon the same trader called. When the conversation rolled around to the yen, I couldn’t resist asking, “By the way, are you still long the yen?” “Oh no,” he replied, “I’m short.”

The point is not that this trader was trying to mislead me. On the contrary, he firmly believed each market opinion at the time he expressed it. However, his timing was good enough so that he probably made money on both sides of the trade. In contrast, I ended up with nothing, even though I had the original move pegged exactly right. The moral is that even advice from a much better trader can lead to detri-mental results.

14. CONFIDENCE
An unwavering confidence in their ability to continue to win in the markets was a nearly universal characteristic among the traders I inter-viewed. Dr. Van Tharp, a psychologist who has done a great deal of research on traders and was interviewed in Market Wizards, claims that one of the basic traits of winning traders is that they believe “they’ve won the game before the start.”

15. LOSING IS PART OF THE GAME
The great traders fully realize that losing is an intrinsic element in the game of trading. This attitude seems linked to confidence. Because exceptional traders are confident that they will win over the long run, individual losing trades no longer seem horrible; they simply appear inevitable-which is what they are. As Linda Raschke explained, “It never bothered me to lose, because I always knew that I would make it right back.”

There is no more certain recipe for losing than having a fear of los-ing. If you can’t stand taking losses, you will either end up taking large losses or missing great trading opportunities-either flaw is sufficient to sink any chance for success.

16. LACK OF CONFIDENCE AND TIME-OUTS
Trade only when you feel confident and optimistic. I have often heard traders say: “I just can’t seem to do anything right.” Or, “I bet I get stopped out right near the low again.” If you find yourself thinking in such negative terms, it is a sure sign that it is time to take a break from trading. Get back into trading slowly. Think of trading as a cold ocean. Test the water before plunging in.

17. THE URGE TO SEEK ADVICE
The urge to seek advice betrays a lack of confidence. As Linda Raschke said, “If you ever find yourself tempted to seek out someone else’s opinion on a trade, that’s usually a sure sign that you should get out of your position.”

18. THE VIRTUE OF PATIENCE
Waiting for the right opportunity increases the probability of success. You don’t always have to be in the market. As Edwin Lefevre put it in his classic Reminiscences of a Stock Operator, “There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time.”
One of the more colorful descriptions of patience in trading was offered by Jim Rogers in Market Wizards: “I just wait until there is money lying in the comer, and all I have to do is go over there and pick it up.” In other words, until he is so sure of a trade that it seems as easy as picking money off the floor, he does nothing.

Mark Weinstein (also interviewed in Market Wizards) provided the following apt analogy: “Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week, waiting for Just the right moment. It will wait for a baby antelope, and not Just any baby antelope, but preferably one that is also sick or lame. Only then, when there is no chance it can lose its prey, does it attack. That, to me, is the epitome of professional trading.”
As a final bit of advice on the subject of patience, guard particularly against being overeager to trade in order to win back prior losses. Vengeance trading is a sure recipe for failure.

19. THE IMPORTANCE OF SITTING
Patience is important not only in waiting for the right trades, but also in staying with trades that are working. The failure to adequately profit from correct trades is a key profit-limiting factor. Quoting again from Lefevre in Reminiscences, “It never was my thinking that made big money for me. It was always my sitting. Got that? My sitting tight!” Also, recall Eckhardt’s comment on the subject: “One common adage … that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits.”

20. DEVELOPING A LOW-RISK IDEA
One of the exercises Dr. Van Tharp uses in his seminars is having the participants take the time to write down their ideas on low-risk trades.
The merit of a low-risk idea is that it combines two essential elements:
patience (because only a small portion of ideas will qualify) and risk control (inherent in the definition). Taking the time to think through low-risk strategies is a useful exercise for all traders. The specific ideas will vary greatly from trader to trader, depending on the markets traded and methodologies used. At the seminar I attended, the participants came up with a long list of descriptions of low-risk ideas. As one exam-ple: a trade in which the market movement required to provide convinc-ing proof that you are wrong is small. Although it had nothing to do with trading, my personal favorite of the low-risk ideas mentioned was: “Open a doughnut shop next door to a police station.”

21. THE IMPORTANCE OF VARYING BET SIZE
All traders who win consistently over the long mn have an edge. How-ever, that edge may vary significantly from trade to trade. It can be mathematically demonstrated that in any wager game with varying probabilities, winnings are maximized by adjusting the bet size in accordance with the perceived chance for a successful outcome. Opti-mal blackjack betting strategy provides a perfect illustration of this con-cept (see Hull chapter).

If the trader has some idea as to which trades have a greater edge- say, for example, based on a higher confidence level (assuming that is a reliable indicator)-then it makes sense to be more aggressive in these situations. As Druckenmiller expresses it, “The way to build [superior] long-term returns is through preservation of capital and home runs…. When you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig.” For a number of Market Wiz-ards, keen judgment as to when to really step on the accelerator and the courage to do so have been instrumental to their achieving exceptional (as opposed to merely good) returns.
Some of the traders interviewed mentioned that they varied their trading size in accordance with how they were doing. For example, McKay indicated that it was not uncommon for him to vary his position size by as much as a factor of one hundred to one. He finds this approach helps him reduce risk during losing periods while enhancing profits during the winning periods.

22. SCALING IN AND OUT OF TRADES
You don’t have to get in or out of a position all at once. Scaling in and out of positions provides the flexibility of fine-tuning trades and broad-ens the set of alternative choices. Most traders sacrifice this flexibility without a second thought because of the innate human desire to be completely right. (By definition, a scaling approach means that some portions of a trade will be entered or exited at worse prices than other portions.) As one example of the potential benefits of scaling, Lip-schutz noted that it has enabled him to stay with long-term winners much longer than he has seen most traders stay with their positions.

23. BEING RIGHT IS MORE IMPORTANT THAN BEING A GENIUS
I think one reason why so many people try to pick tops and bottoms is that they want to prove to the world how smart they are. Think about winning rather than being a hero. Forget trying to judge trading success by how close you can come to picking major tops and bottoms, but rather by how well you can pick individual trades with merit based on favorable risk/return situations and a good percentage of winners. Go for consistency on a trade-to-trade basis, not perfect trades.

24. DON’T WORRY ABOUT LOOKING STUPID
Last week you told everyone at the office, “My analysis has just given me a great buy signal in the S&P. The market is going to a new high.” Now as you examine the market action since then, something appears to be wrong. Instead of rallying, the market is breaking down. Your gut tells you that the market is vulnerable. Whether you realize it or not, your announced prognostications are going to color your objectivity. Why? Because you don’t want to look stupid after telling the world that the market was going to a new high. Consequently, you are likely to view the market’s action in the most favorable light possible. “The mar-ket isn’t breaking down, it’s just a pullback to knock out the weak longs.” As a result of this type of rationalization, you end up holding a losing position far too long. There is an easy solution to this problem:
Don’t talk about your position.

What if your job requires talking about your market opinions (as mine does)? Here the rule is: Whenever you start worrying about con-tradicting your previous opinion, view that concern as reinforcement to reverse your market stance. As a personal example, m early 1991 I came to the conclusion that the dollar had formed a major bottom. I specifically remember one talk in which an audience member asked me about my outlook for currencies. I responded by boldly predicting that the dollar would head higher for years. Several months later, when the dollar surrendered the entire gain it had realized following the news of the August 1991 Soviet coup before the coup’s failure was confirmed, I sensed that something was wrong. I recalled my many predictions over the preceding months in which I had stated that the dollar would go up for years. The discomfort and embarrassment I felt about these previous forecasts told me it was time to change my opinion.

In my earlier years in the business, I invariably tried to rationalize my original market opinion in such situations. I was burned enough times that I eventually learned a lesson. In the above example, the aban-donment of my original projection was fortunate, because the dollar collapsed in the ensuing months.

25. SOMETIMES ACTION IS MORE IMPORTANT THAN PRUDENCE
Waiting for a price correction to enter the market may sound prudent, but it is often the wrong thing to do. When your analysis, methodology, or gut tells you to get into a trade at the market instead of waiting for a correction-do so. Caution against the influence of knowing that you could have gotten in at a better price in recent sessions, particularly in those situations when the market witnesses a sudden, large move (often due to an important surprise news item). If you don’t feel the market is going to correct, that consideration is irrelevant. These types of trades often work because they are so hard to do. As a perfect example, recall the willingness of the trader in Lipschutz’s group to aggressively sell the dollar into a collapsing market following the G-7 meeting. Another example of this principle is Driehaus’s willingness to buy a stock heav-ily after it is already up very sharply on a bullish earnings report if he feels the new information implies the stock will go still higher.

26. CATCHING PART OF THE MOVE IS JUST FINE
Just because you missed the first major portion of a new trend, don’t let that keep you from trading with that trend (as long as you can define a reasonable stop-loss point). Recall McKay’s observation that the easiest part of a trend is the middle portion, which implies always missing part of the trend prior to entry.

27. MAXIMIZE GAINS, NOT THE NUMBER OF WINS
Eckhardt explains that human nature does not operate to maximize gain but rather the chance of a gain. The problem with this is that it implies a lack of focus on the magnitudes of gains (and losses)-a flaw that leads to nonoptimal performance results. Eckhardt bluntly concludes: “The success rate of trades is the least important performance statistic and may even be inversely related to performance.” Yass echoes a similar theme: “The basic concept that applies to both poker and option trading is that the primary object is not winning the most hands, but rather maximizing your gains.”

28. LEARN TO BE DISLOYAL
Loyalty may be a virtue in family, friends, and pets, but it is a fatal flaw for a trader. Never have loyalty to a position. The novice trader will have lots of loyalty to his original position. He will ignore signs that he is on the wrong side of the market, riding his trade into a large loss while hoping for the best. The more experienced trader, having learned the importance of money management, will exit quickly once it is apparent he has made a bad trade. However, the truly skilled trader will be able to do a ISO-degree turn, reversing his position at a loss if mar-ket behavior points to such a course of action. Recall Dmckenmiller’s ill-timed reversal from short to long on the very day before the October 19, 1987 crash. His ability to quickly recognize his error and, more important, to unhesitatingly act on that realization by reversing back to short at a large loss helped transform a potentially disastrous month into a net profitable one.

29. PULL OUT PARTIAL PROFITS
Pull a portion of winnings out of the market to prevent trading disci-pline from deteriorating into complacency. It is far too easy to rational-ize overtrading and procrastination in liquidating losing trades by say-ing, “It’s only profits.” Profits withdrawn from an account are much more likely to be viewed as real money.

30. HOPE IS A FOUR-LETTER WORD
Hope is a dirty word for a trader, not only in regards to procrastinating in a losing position, hoping the market will come back, but also in terms of hoping for a reaction that will allow for a better entry in a missed trade. If such trades are good, the hoped-for reaction will not materialize until it is too late. Often the only way to enter such trades is to do so as soon as a reasonable stop-loss point can be identified.

31. DON’T DO THE COMFORTABLE THING
Eckhardt offers the rather provocative proposition that the human ten-dency to select comfortable choices will lead most people to experience worse than random results. In effect, he is saying that natural human traits lead to such poor trading decisions that most people would be bet-ter off flipping coins or throwing darts. Some of the examples Eckhardt cites of the comfortable choices people tend to make that run counter to sound trading principles include: gambling with losses, locking in sure winners, selling on strength and buying on weakness, and designing (or buying) trading systems that have been overfitted to past price behav-ior. The implied message to the trader is: Do what is right, not what feels comfortable.

32. YOU CAN’T WIN IF YOU HAVE TO WIN
There is an old Wall Street adage: “Scared money never wins.” The rea-son is quite simple: If you are risking money you can’t afford to lose, all the emotional pitfalls of trading will be magnified. Druckenmiller’s “bet-ting the ranch” on one trade, in a last-ditch effort to save his firm, is a perfect example of the above aphorism. Even though he came within one week of picking the absolute bottom in the T-bill market, he still lost all his money. The need to win fosters trading errors (e.g., excessive lever-age and a lack of planning in the example just cited). The market seldom tolerates the carelessness associated with trades bom of desperation.

33. THINK TWICE WHEN THE MARKET LETS YOU OFF THE HOOK EASILY
Don’t be too eager to get out of a position you have been worried at>out if the market allows you to exit at a much better price than anticipated. If you had been worried about an adverse overnight (or over-the-weekend) price move because of a news event or a technical price failure on the pre-vious close, it is likely that many other traders shared this concern. The fact that the market does not follow through much on these fears strongly suggests that there must be some very powerful underlying forces in favor of the direction of the original position. This concept, which was first pro-posed by Marty Schwartz in Market Wizards, was illustrated in this vol-ume by the manner in which Lipschutz exited the one trade he admitted had scared him. In that instance, he held an enormous short dollar position in the midst of a strongly rallying market and had to wait for the Tokyo opening to find sufficient liquidity to exit his position. When the dollar opened weaker than expected in Tokyo, he didn’t just dump his position m relief; rather, his trader’s instincts told him to delay liquidation-a deci-sion that resulted in a far better exit price.

34. A MIND IS A TERRIBLE THING TO CLOSE
Open-mindedness seems to be a common trait among those who excel at trading. For example, Blake’s entry into trading was actually an attempt to demonstrate to a friend that prices were random. When he realized he was wrong, he became a trader. Driehaus says that the mind is like a parachute; it’s good only when it’s open.

35. THE MARKETS ARE AN EXPENSIVE PLACE TOLOOKFOR EXCITEMENT
Excitement has a lot to do with the image of trading but nothing to do with success in trading (except in an inverse sense). In Market Wizards, Larry Hite described his conversation with a friend who couldn’t under-stand his absolute adherence to a computerized trading system. His friend asked, “Larry, how can you trade the way you do. Isn’t it bor-ing?” Larry replied, “I don’t trade for excitement; I trade to win.” This passage came to mind when Faulkner described the trader who blew out because he found it too boring to be trading in the way that pro-duced profits.

36. THE CALM STATE OF A TRADER
If there is an emotional state associated with successful trading, it is the antithesis of excitement. Based on his observations, Faulkner stated that exceptional traders are able to remain calm and detached regardless of what the markets are doing. He describes Peter Steidlmayer’s response to a position that is going against him as being typified by the thought, “Hmmm, look at that.” Basso also talks directly about the benefits of a detached perspective in trading: “If instead of saying, ‘I’m going to do this trade,’ you say, ‘I’m going to watch myself do this trade,’ alt of a sudden you find that the process is a lot easier.”

37. IDENTIFY AND ELIMINATE STRESS
Stress in trading is a sign that something is wrong. If you feel stress, think about the cause, and then act to eliminate the problem. For exam-ple, let’s say you determine that the greatest source of stress is indeci-sion in getting out of a losing position. One way to solve this problem is simply to enter a protective stop order every time you put on a position.

I will give you a personal example. One of the elements of my job is providing trading recommendations to brokers in my company. This task is very similar to trading, and, having done both, I believe it’s actu-ally more difficult than trading. At one point, after years of net prof-itable recommendations, I hit a bad streak. I just couldn’t do anything right. When I was right about the direction of the market, my buy rec-ommendation was just a bit too low (or my sell price too high). When I got in and the direction was right, I got stopped out-frequently within a few ticks of the extreme of the reaction.

I responded by developing a range of computerized trading pro-grams and technical indicators, thereby widely diversifying the trading advice I provided to the firm. I still made my day-to-day subjective calls on the market, but everything was no longer riding on the accu-racy of these recommendations. By widely diversifying the trading-related advice and information, and transferring much of this load to mechanical approaches, I was able to greatly diminish a source of per-sona] siress-and improve the quality of the research product in the process.

38. PAY ATTENTION TO INTUITION
As I see it, intuition is simply experience that resides in the subcon-scious mind. The objectivity of the market analysis done by the con-scious mind can be compromised by all sorts of extraneous considera-tions (e.g., one’s current market position, a resistance to change a previ-ous forecast). The subconscious, however, is not inhibited by such con-straints. Unfortunately, we can’t readily tap into our subconscious thoughts. However, when they come through as intuition, the trader needs to pay attention. As the anonymous trader in Zen and the Art of Trading expressed it, “The trick is to differentiate between what you want to happen and what you know will happen.”

39. LIFE’S MISSION AND LOVE OF THE ENDEAVOR
In talking to the traders interviewed in this book, I had the definite sense that many of them felt that trading was what they were meant to do-in essence, their mission in life. Recall Charles Faulkner’s quote of John Grinder’s description of mission: “What do you love so much that you would pay to do it?” Throughout my interviews, I was struck by the exuberance and love the Market Wizards had for trading. Many used gamelike analogies to describe trading. This type of love for the endeavor may indeed be an essential element for success.

40. THE ELEMENTS OF ACHIEVEMENT
Faulkner’s list of the six key steps to achievement based on Gary Faris’s study of successfully rehabilitated athletes appears to apply equally well to the goal of achieving trading success. These strategies include the following:
1. using both ‘Toward” and “Away From” motivation;
2. having a goal of full capability plus, with anything less being unacceptable;
3. breaking down potentially overwhelming goals into chunks, with satisfaction garnered from the completion of each individ-ual step;
4. keeping full concentration on the present moment-that is, the single task at hand rather than the long-term goal;
5. being personally involved in achieving goals (as opposed to depending on others); and
6. making self-to-self comparisons to measure progress.

41. PRICES ARE NONRANDOM = THE MARKETS CAN BE BEAT
In reference to academicians who believe market prices are random, Trout says, ‘That’s probably why they’re professors and why I’m mak-ing money doing what I’m doing.” The debate over whether prices are random is not yet over. However, my experience with the interviews conducted for this book and its predecessor leaves me with little doubt that the random walk theory is wrong. It is not the magnitude of the winnings registered by the Market Wizards but the consistency of these winnings in some cases that underpin my belief. As a particularly com-pelling example, consider Blake’s 25:1 ratio of winning to losing months and his average annual return of 45 percent compared with a worst drawdown of only 5 percent. It is hard to imagine that results this lopsided could occur purely by chance-perhaps in a universe filled with traders, but not in their more finite numbers. Certainly, winning at the markets is not easy-and, m fact, it is getting more difficult as pro-fessionals account for a constantly growing proportion of the activity- but it can be done!

42. KEEP TRADING IN PERSPECTIVE
There is more to life than trading.