l office job and a trading floor.
Working on a trading floor is intimidating at first. As the months go by, you
become immune to the money changing hands. It is all just numbers on a
screen. I once walked in at 6 am to find that a Russian client was on a
margin call for $10m. I quickly calculated that it would take me 133 years
on my current salary to make $10m. By 7 am he had wired the funds over.
This was a private trader. I was in awe. Inspired.
There is a unique atmosphere present on a trading floor. When it is busy, it
is nothing short of a gigantic melting pot of human emotions. I once saw a
colleague of mine kick his PC so hard – repeatedly – that IT engineers had
to come and replace it.
It is hard to fathom that the financial markets are a complex mechanism if
you just look at what is happening on a trading floor. It reminds you more
of a local market stall on a busy Saturday morning in any given town
anywhere in the world, where one stall owner is trying to out-voice the
next.
When you witness the raw, uncensored emotions that unfold before your
eyes on the trading floor, it is difficult to see how that fits into a finely tuned
global economic environment that makes up the very fabric of our modern
society and civilisation.
Impulse buying, panic selling, holding on to losses, refusing to admit
defeat, greed, stupidity, stubbornness, despair, tears, abject depression,
exhilaration and excitement are all on display here, and all in quick
succession of each other.
I worked for Financial Spreads for a year, and was then asked to leave. The
same day I was headhunted to City Index, which was owned by ICAP – the
biggest US government bond broker in the world.
City Index had about 25,000 clients, of which 3,000 were active most days.
These clients would trade currencies, commodities, stock indices, individual
stocks, options, bonds and anything in between. I must have witnessed tens
of millions of trades in my career, executed by thousands of people. Very
few, if any, of them stood out, and if they stood out it was for all the wrong
reasons. For every success story, I can tell you ten horror stories.
NO MEMORY OF THE GREAT
TRADERS
I recently spoke to a friend of mine, who is the CEO of a trading company
in London. I asked him if there were traders who had stood out during his
30 years working on trading floors. He said that over the years he had
witnessed many bizarre things, but in terms of good traders, he had seen
very few.
Here is a man who has spent his entire adult life on trading floors, yet he is
incapable of remembering people who did well. We are talking about a
percentage of successful traders so infinitesimally small that it makes you
wonder why anyone would want to trade in the first place, or if anyone
could ever get good at this profession. The conversation with him went as
follows.
Tom: You have worked in the contract for difference (CFD) industry for 30 years. You must
have seen some good traders along the way. Can you tell me about them?
CEO: I wish I could. I have seen many people make a lot of money, but very few managed to
keep the money. I started in the industry at a time when CFD trading was not a mainstream
tool. It was mostly very wealthy people or people who worked in the industry that had CFD
accounts. These clients back then often traded as part of an old boys’ club kind of network. It
meant they mostly traded specific shares and some commodities. Back then trading was
nowhere near as prolific as it is today.
Tom: Were they good traders?
CEO: No, I would not say they were. We had clients who were well-known personalities in
the City, and their personal trading was often atrocious, even though they were hedge fund
traders or fund managers. It was almost as if they lost their discipline when trading their own
money. I am certain they would not be allowed to trade for their clients in the manner they
traded for themselves.
Today we have far more smaller traders, but the pattern is remarkably similar between a small
trader and a large trader. Almost all clients have more winning trades than losing trades. As
such you could argue that they are good traders.
However, they tend to lose more, much more, on their losing trades than they win on their
winning trades. The ratio is that for every pound they win, they lose about £1.66.
Tom: How does a CFD broker make money out of that?
CEO: Well, believe it or not, we want our clients to win. I have a network of contacts in the
CFD industry. I regularly meet with CEOs of competing companies. Although we are
competitors, and we would do anything to outmanoeuvre a competitor, we do have one shared
wish. We wish our clients would trade better.
We try our best to help them. We give them every tool under the sun. We give them favourable
spreads, and we give them news services. We give them sophisticated charting packages. We
give them data. We give them analytical tools to measure their performance.
In short, we do absolutely everything we can to ensure they have all the tools they need to
make money. And then we let them trade. The problem is that most smaller accounts tend to
lose within a short space of time.
Trust me when I say I wish it was different. I don’t know what more we as brokers can do for
our clients. We prefer clients to make money because there is clear evidence that those who
trade and win, carry on trading. That is better for business.
The truth of the matter is that you can clearly see the difference between a consistently
profitable trader and a normal trader. Their approach is very different.
Tom: How can you tell whether someone knows what they are doing?
CEO: There are a multitude of parameters that we may look at. If I have to narrow it down to
the five most important factors, it would be these:
1. Account size.
2. Trade frequency.
3. Ratio of time spent holding winning trades versus losing trades.
4. Adding to winning or adding to losing trades.
5. Trading with a stop-loss.
Someone who opens an accoun


l whether someone knows what they are doing?
CEO: There are a multitude of parameters that we may look at. If I have to narrow it down to
the five most important factors, it would be these:
1. Account size.
2. Trade frequency.
3. Ratio of time spent holding winning trades versus losing trades.
4. Adding to winning or adding to losing trades.
5. Trading with a stop-loss.
Someone who opens an account with anything less than £100 will, with a very high degree of
certainty, lose that money, sadly. Someone who trades everything and anything, i.e.,
overtrading, will eventually lose their money.
Anyone who is unable to hold on to their winners, but holds on to their losing trades, will
eventually lose their money.
Anyone who adds to their winning trades will catch our attention (positively), but anyone
adding to their losing trades will, with near certainty, lose their account deposit at some point.
Anyone trading without a stop-loss will follow that path too. We sadly see it all the time.
As you can see, as brokers we do everything we can to help people make money, but people
are people, which means they will find a way to self-sabotage.
CONDITIONS 20 YEARS AGO
I keep an eye on all brokers, to make sure I trade with the best and cheapest.
Why would I pay 1.5 in spread if I can pay 1 in spread? That is simple
economics. I run a business, and I want to spend as little on transaction
costs as possible.
One of my favourite instruments to trade is the German DAX Index. Today
when I trade, I pay a 0.9 point spread in the DAX.
However, when I started trading some 20 years ago, the spread intraday in
the DAX was 6 to 8 points. I remember vividly trading the Dow intraday.
You had to pay an 8-point spread in the Dow for the intraday product.
If you wanted to trade the quarterly contract the spread was 16 points. This
was at a time when the Dow was trading around 10,000. Today I am trading
the Dow with a 1-point spread and the Dow is now trading around 35,000.
You are much better off trading in 2020 than you were trading in 1999. It
was much harder to make money trading back then. The market has to
move significantly less in your favour before you are at breakeven now,
compared to 1999.
Another major advantage that people who start trading today have is the
tools available from the brokers. Look at virtually any trading platform
today, and you will see the length brokers go to in order to help you make
money.
You have access to hundreds of technical studies. You have access to instant
news flow. You have the option to be trained through online material and
webinars. You have access to Level 2 data for stocks all over the world.
You have decent bid-ask spreads. If an institutional trader from 30 years ago
saw the tools that you are trading with today, he or she would be green with
envy.
You have at your disposal every single conceivable analytical tool available
from the vast resource pool of technical indicators. You have Bollinger
Bands, you have Keltner Channels, you have moving averages. You have
tools that I have never even heard of or used myself.
Suffice it to say, every broker in the world has spared no expense in their
effort to provide you with every opportunity to make as much money as you
possibly can out of the markets.
But it matters nothing. Most people will fail. The failure rate is
astronomical in the trading industry. No one is immune to statistics.
NORMAL IS A LOSER
There is something inherently wrong with the approach of people who are
trading. We have to assume that most people in society are normal, well-
adjusted human beings. Their pattern of behaviour, while leaving room for
personality, is most likely very similar.
From cradle to grave, from morning to night, from one year to the next, the
average person is engaged in a remarkably similar pattern: pattern of
thought, pattern of action, pattern of hopes and dreams, fears and
insecurities. We call that person normal.
If normal is the familiar pattern, and if normal is opening an account with a
CFD broker and proceeding to lose the money (sooner or later), then normal
is simply a representative of everyone else. Everyone who is normal will
end up losing.
Is that a push too far? Let us look at the evidence. Let us take a look at the
norm for a typical CFD trader in the retail trading space.
Even though your broker makes all the tools under the sun available to you,
no one is immune to the statistics of the financial markets. Unless you have
gone through some sort of structured training, or you have been schooled by
someone who is walking the path you yourself want to walk, or you give
this endeavour some serious thought, you will most likely fail in the
financial markets.
Look at any broker website in the European Union, and you will see the
failure rate. Brokers are obliged by law to post this on the front page of
their website. Here are some of the biggest and most well-known CFD
brokers in the world, and their failure rates:
BROKER FAILURE RATE
IG Markets 75%
Markets.com 89%
CMC Markets 75%
Saxo Bank 74%
FX PRO 77%
Rates correct as of 7 November 2019.
I know you like to think you are different. However, in the eyes of the
financial markets, you are statistically like everyone else.
You can look at the top ten brokers of the world and the statistics do not
change. You can look at CMC Markets, you can look at IG Markets, you
can look at Gain Capital, or you can look at any one of the top tier or
second tier CFD brokers. No one will have a failure rate less than 70%.
NORMAL IS NOT GOOD ENOUGH
Tools do not make you a top trader. Techniques do not make you a top
trader. If you want to be a good trader, if you want to achieve the level of
success that you know is possible, you immediately need to stop thinking
that the path to riches in trading has anything to do with the tools or
techniques you are using.
Yes, of course you need a strategy. Yes, you need a plan. Yes, you need to
understand the markets. So, what is this book all about,

eBooks\Tom Hougaard - Best Loser Wins.pdf


not make you a top
trader. If you want to be a good trader, if you want to achieve the level of
success that you know is possible, you immediately need to stop thinking
that the path to riches in trading has anything to do with the tools or
techniques you are using.
Yes, of course you need a strategy. Yes, you need a plan. Yes, you need to
understand the markets. So, what is this book all about, if it is not about
tools and strategies?
Well, let me address that question from a different perspective. Let me
address it from the perspective of the people who work in the industry as
brokers and sales traders and as marketing people.
Do they trade?
I would say it is likely they do not. Yet, traders are taking advice, guidance
and training from them; they being guided by people who are no better at
trading than they are.
It reminds me of Fred Schwed’s book, Where Are the Customers’ Yachts?,
in which he says that Wall Street is the only place in the world where people
who arrive to work by train and bus give advice to people who arrive by
limousine and helicopter (slightly paraphrased for a more modern touch).
Traders are being guided by people who can’t trade!
WRONG FOCUS
When you go to trading shows, read trading magazines or look at the online
education materials on broker websites, 100% of the focus is on what I call
How To:
•How do I scalp?
•How do I swing trade?
•How do I day trade?
•How do I trend follow?
•How do I trade the foreign exchange (FX) market?
•How do I use Ichimoku charts?
•How do I trade with moving average convergence divergence
(MACD) or stochastics?
This is perfectly normal. The trade shows and magazines are geared
towards providing the solutions that most people believe they need in order
to make money in the financial markets. The brokers are following the same
path. They provide the information that they think traders need and that
traders think they need.
Newcomers to the industry of trading are often guided by the very people
who are likely to set them off on the wrong path. They are led to believe
that it is all about technique and strategy – no one is preparing them for the
fact that it isn’t strategy that will set them apart from other traders.
It is how traders think about their strategy – and their ability to follow the
strategy – that will set them apart.
Do you not wonder if this is the right path for you? Do you not wonder
about the futility of dedicating all your resources to one pursuit, when
virtually everyone who walked that path before you has failed?
You should. You really should ask yourself what makes you different to the
90% of traders that do not make money. If you are normal – as in you do
what everyone else is doing – then you won’t make it.
NORMAL WON’T CUT IT
The organisers of one of these trade shows invited me to give a talk. This
show was in London, and I was told I could talk about whatever I wanted. I
decided to give a talk about the disastrous failure rate in the trading
industry.
My argument is that if 90% of all CFD accounts lose money, the problem is
a human problem. I feel I am making a reasonable assumption when I say
that everyone opening a CFD account is a normal person with a normal way
of thinking. There must be something inherently wrong in the way normal
people think and act that makes trading so unsuccessful for them.
IT SHOULD BE EASIER THAN EVER
TO MAKE MONEY TRADING
I mentioned previously how small today’s bid-ask spreads are compared to
20 years ago. Therefore, it should be easier than ever for traders to make
money. However, it isn’t.
People are still struggling to make money trading. My main premise of this
book is to get to the bottom of this conundrum. The approach I have taken
is centred around the following facts:
1. It has never been easier to trade. The IT infrastructure is superb for
traders.
2. The spreads have never been lower.
3. The margins have never been more favourable.
4. The tools have never been so readily available.
5. The brokers have never done as much for their clients as they do
now.
6. The stock indices have never been higher, meaning there is
volatility.
To reiterate, I assume that people who open trading accounts are normal,
well-adjusted human beings – without using this as a slight or an insult –
who are perfectly capable of functioning within society.
The questions I want to ask, and answer, are these: what does normal
behaviour look like? How can I avoid being normal when I trade? If we
assume that 80–90% of people trading are normal people, I want to avoid
acting like they do.
ARE YOU NORMAL?
My argument, provocative as it is, asks an essential question: are you
thinking like everyone else is thinking and approaching trading like
everyone else is approaching trading?
If so, you will have a problem.
If you think like everyone else, is it so strange that you get the results that
everyone else gets?
Let us take a look at what normal behaviour is.
Normal behaviour is to engage in a never-ending cycle of education,
looking for the next new edge. I knew from the moment I read Liar’s Poker
that I wanted to be a trader, but I never had any formal training in how a
good trader behaves. Why should I? I was always told that a good trader
buys low and sells high. But every time I bought low, it always went lower
and lower. So what kind of advice was that?
And yet this is the advice we listen to when we start. This is the benchmark,
and if this is the benchmark, then it is a miracle that it is only 90% that are
losing. It should be 100%, because buying low and selling high is a sure
recipe for ruin.
People will attend weekend courses hoping to learn secrets. People will
study and learn to use tools such as candlestick analysis, stochastics,
Relative Strength Index (RSI), MACD and moving averages. The list goes
on and on. All of this is normal behaviour in a nutshell.
EVEN THE BIBLE IS WRONG
Even the bible of technical analysis doesn’t do much to help a person on
their way, once the initial learning curve


attend weekend courses hoping to learn secrets. People will
study and learn to use tools such as candlestick analysis, stochastics,
Relative Strength Index (RSI), MACD and moving averages. The list goes
on and on. All of this is normal behaviour in a nutshell.
EVEN THE BIBLE IS WRONG
Even the bible of technical analysis doesn’t do much to help a person on
their way, once the initial learning curve is over.
The bible of technical analysis was authored by Robert D. Edwards and
John Magee. The book is called Technical Analysis of Stock Trends, and it
has sold millions of copies since its first printing in 1948.
What most readers don’t realise, however, is that Edwards and Magee were
not the real creators of modern technical analysis. Rather, it was a little-
known technical analyst named Richard W. Schabacker.
A brilliant market technician, Schabacker codified almost everything there
was to know about technical analysis up to his time – which included such
pioneering work as the Dow theory of Charles Dow.
Between 1930 and 1937, Schabacker taught several courses to serious Wall
Street traders and investors. Unfortunately, he died in 1938 when he was
not even 40 years old.
Shortly before his death, Schabacker gave a mimeographed copy of his
lessons to his brother-in-law, Robert D. Edwards, who rewrote
Schabacker’s lessons with the help of his collaborator, John F. Magee, an
MIT-trained engineer.
As a result, it was not Schabacker who received credit for the original
compilation of technical analysis, but Edwards and Magee, whose work
became a perennial bestseller.
Let me be clear: reading a book like Technical Analysis of Stock Trends is a
must, but please don’t think that it will make you a professional, profitable
trader, any more than reading a manual on tennis will enable you to
compete with Rafa Nadal.
I see newcomers make classic mistakes after reading books on technical
analysis. They will study indicators such as RSI and stochastics, and they
will excitedly declare that a market is ‘overbought’ or ‘oversold’.
What they don’t realise is that ‘overbought’ is an emotional expression for a
psychological conceptualisation of ‘expensive’. The people reading a
stochastics chart are led to believe – through a mathematical manipulation
of data – that the market is now expensive, and it should be shorted.
The same can be said for ‘oversold’. It is another way for the mind to tell
you that the market is cheap, and that there is value associated with it.
I’ll give you an example. Yesterday was a particularly bearish day in the
Dow Jones Index and the German DAX 40 Index. I was short all day and I
had one of my better days, all verified and documented on my Telegram
channel. It was 1 October 2019.
Towards the end of the day, when the Dow Index was falling even lower, a
student of mine contacted me and asked me a very alarming question. The
conversation was in Danish, and I have translated it here.
“Tom, have you seen the stochastics indicator? It is deeply in ‘oversold’
territory. Do you think it is a good idea to buy now, ahead of the close?”
I reply: “Hmm, I am short… maybe you should ask someone else.”
He goes on to express his absolute shock that I am short, and a little later he
goes on to state that he has bought the Dow at 25,590.
Of course, when there is a buyer, there is a seller. However, I am not
convinced that buying the Dow Jones Index ten minutes before the close, on
a day where it has fallen 400 points, is a good idea.
It reminds me of the kind of thinking I would have done 20 years ago. Not
today though. If I buy the Dow on a weak day, just before the close, it is to
close a short position. I value my sleep too much to carry a position
overnight.
I said to him: “You had all day to find a short entry. What are you hoping to
achieve by being a buyer now? Are you thinking that because it has fallen
400 points, now it is cheap, and maybe just before the close, you may see
some buying of these cheap stocks?”
I used to think like that too. That was when I was not profitable.
The Dow didn’t rally into the close. There was no bounce. I am sure my
student didn’t lose a lot. It wasn’t so much his wallet I was concerned about
– it was his way of thinking.
That is what this book is about. It is about making you think the right way
about the market. That is where the 80–90% of losing traders tend to go
wrong.
CLOSE THE SCHOOL
If trading was a school, it would be closed. No school or university could
function if 90% of its students failed their exams.
We are all pretty much normal people. We fit in and function well within
the fabric of modern society. If every person engaged in trading is a normal
human being – and I assume they are, meaning they are well-functioning,
intelligent, considerate, hard-working – then why is there a 90% failure rate
in our industry?
That doesn’t make any sense at all. Usually when people work hard at
something they will succeed, or they will see some degree of success. That
doesn’t appear to be the case with trading. Other professions do not have a
90% failure rate.
If you go to the dentist, and you are told there is a 90% chance he will not
be able to fix your teeth, you are out of there like a shot. Yet, those are the
odds that face a private trader. But it doesn’t have to be like that.
As traders, we tend to engage in a never-ending, predictable cycle. We trade
well for a while. We are happy. Our discipline weakens. We lose money. We
strengthen our resolve, and we get more education. We do well for a while.
We lose money. We stop – sometimes for a while, sometimes permanently.
Sound familiar?
The sad part about this cycle is that everybody has good spells in trading.
Everybody has periods when they make money. Everybody has their
moments. I am sure you have too.
So what happens? What happens is that 99% of people do not know how to
lose. The emotions they experience when they lose cause them to act in a
manner which is not in their own best interest.
Emotions are


ently.
Sound familiar?
The sad part about this cycle is that everybody has good spells in trading.
Everybody has periods when they make money. Everybody has their
moments. I am sure you have too.
So what happens? What happens is that 99% of people do not know how to
lose. The emotions they experience when they lose cause them to act in a
manner which is not in their own best interest.
Emotions are response driven. Say you hear a funny joke, and you laugh out
loud. That is an emotion. When you hear the joke the next time, you don’t
laugh. Your mind has become habituated to the joke.
When you fall in love with a beautiful man or woman you experience
strong emotions, and your inner life is in beautiful turmoil. When you see
that person, you just want to express your love for him or her, and be united
with them, gaze into their eyes.
As time goes by, your loving turmoil is replaced with a sense of calm. You
love being around them, but the feelings of passion are less pronounced
than they were in the beginning. You have become habituated to the other
person.
A free solo climber, climbing intimidating rock surfaces without ropes, is
faced with severe consequences if they lose their grip. They acclimatise
their minds through years of practice, so that their amygdala – the
emotional response centre of the mind – is not firing on all cylinders when
they are climbing. They are calm.
An elite solider is scared to death the first time he is in a combat situation.
That is why his first combat situation will be a simulation. And the next
one. And the next one. And little by little, his fear is trained out of him,
through the use of repetition, breathing awareness and habituation.
For every hour you spend on technical analysis, you must set aside at least
25% of that time for what I call internal analysis. You need to know what
your weaknesses are. You need to know what your strengths are. You need
to know what you are good at, and you need to know what you are not good
at.
If you don’t spend time trying to improve these things, how will you get
better? Very few people, if any, will engage in that level of introspection in
order to gain the results they want. If making money trading is your goal,
and 99% of people lose, and 99% of people think analysis and strategies are
the key to trading profits, you can be 100% sure that strategies and analysis
are not the key to trading profits.
43 MILLION TRADES ANALYSED
There is a piece of research that makes for very interesting reading. It was
the brainchild of an analyst called David Rodriguez, and it is brilliant.
Rodriguez worked for a major FX broker, and he attempted to find out why
there was such a high failure rate amongst its clients trading currencies. The
broker had some 25,000 people who traded FX daily.
Rodriguez investigated all the trades executed over a 15-month period. The
number of trades was truly staggering. The 25,000 people executed close to
43 million trades. From a statistical point of view, that created a statistically
significant and immensely interesting sample space to investigate.
Specifically, Rodriguez and his colleagues looked at the number of winning
trades. I would like to give you an opportunity now to think about how
many trades were winning trades and how many trades were losing trades.
You can represent it as a percentage of the overall 43 million trades.
If you feel it has any influence on the answer you want to give, I can tell
you that most of the trades were executed in Euro Dollar, Sterling Dollar,
Dollar Swiss and Dollar Yen.
However, the vast majority of the trades were executed in Euro Dollar,
where the spread is very tight. Unfortunately, that doesn’t seem to make
much of a difference to the outcome.
62% of all the trades by the broker’s clients ended in a profit. That is a little
more than six out of ten trades. That’s a good hit rate. A trader with a hit
rate of six out of ten should be able to make money from trading.
Of course, it does depend greatly on how much he wins when he wins and
how much he loses when he loses. Therein lies the problem for the 25,000
people.
They were very successful in terms of hit rate. Yet when you look at how
much they made on average per trade and how much they lost on average
per trade, you soon realise that they had a major problem. When they won,
they made about 43 pips. When they lost, they lost about 78 pips.
There’s nothing wrong with having a system where you lose more on your
losing trades than you win on your winning trades. However, it does require
that you have a sufficiently high hit rate in order to absorb the losing trades.
A colleague of mine, a professional trader from South Africa who trades at
a hedge fund, has a hit rate of about 25%. I tell his story in greater detail
later in the book, but let me explain the term hit rate in the context of his
hedge fund.
When his hedge fund loses on a trade, they lose 1X. When they win, they
win as high as 25X. It stands to reason that my friend is immensely
profitable even though he doesn’t have a convincing hit rate, at least not
from a traditional perspective.
What I find particularly interesting is how much bad advice there is in the
trading industry. You will often hear traders talk about risk-to-reward ratio,
which in itself is fairly innocent, unless the trader takes it literally and
applies it on a trade-by-trade basis.
When I call out trades in my live TraderTom Telegram group, I will always
announce a stop-loss. Always! However, I often get asked if I have a target
in mind. The answer is quite often a little sarcastic: “No, my crystal ball is
out for repairs,” or if I am particularly grumpy and tired, I will be rude and
say, “Sorry amigo, but do I look like a fortune teller to you?”
Yes, I know – that isn’t very polite. I’m sorry. Ignoring my blatant inability
to be polite when I am faced with the same question for the 450th time,
there is a deeper meaning to me not calling targets on my trades. It has a lot
to do wit


y crystal ball is
out for repairs,” or if I am particularly grumpy and tired, I will be rude and
say, “Sorry amigo, but do I look like a fortune teller to you?”
Yes, I know – that isn’t very polite. I’m sorry. Ignoring my blatant inability
to be polite when I am faced with the same question for the 450th time,
there is a deeper meaning to me not calling targets on my trades. It has a lot
to do with risk versus reward.
RISK VERSUS REWARD
I personally find the whole risk-to-reward concept enormously flawed, but
since I am the only one who ever talks about it, I accept that I am probably
wrong. Still, hear me out.
How on earth do I know what my reward will be? I literally do not know.
Even if I pretended to know – say, by using a measured move calculation or
a Fibonacci extension – I know myself well enough to know that I will have
added to my trade along the way. When it got to my target, I would not
close it, because that is my philosophy.
I would kick myself if I closed a trade at my target, and then it went even
further. I would rather give away some of my open profits than miss out on
potentially even more profits.
Now I am probably making a big fuss out of nothing, but targets are not for
me. I want to see what the market will give me. I am prepared to accept that
this may mean I will give away some of my open profits. I have lost count
of the number of times I have had a 100-point winner in the Dow, which
then turned into a zero.
A week before writing this (all documented of course) I had one such
winner, which turned into a big fat zero. Some less-than-happy traders
confronted me in my live trading room as to why I had not taken my profits.
It is difficult to explain, but it is all to do with pain.
It gives me much less pain to kiss a 100-point winner goodbye than it does
to take my 100 points, only to see the market moving even more in my
favour.
It is because of this philosophy that I am at times able to make 400–500-
point gains, as I did today. It is one or the other. I don’t think you can have
the best of both worlds!
INTERVIEW WITH CNN
In an interview with CNN some years ago, I was asked about the traits of
winning traders. In this very candid interview, I highlighted a few points
that I felt differentiated the winning traders from the losing traders. It was
based upon my experiences from observing millions of trades by retail
traders, while I was on the brokerage trading floor. Here are the main
differences I identified:
1. TRYING TO FIND THE LOW
When the market is trending lower, whether intraday or over a longer time
frame, there seems to be a tendency for retail traders to attempt to find the
low of the move.
Whether that is out of a desire to buy cheap, or because they use ineffective
tools, I simply don’t know. What I do know is that this trait is immensely
damaging to anyone’s trading account.
Winning traders seem to be much more trusting of the prevailing trend. This
attitude adjustment may seem trivial, but it literally makes the difference
between the winning trader and the losing trader.
Over time the losing trader will repeat his distrust in the prevailing trend
and will take positions against it. He will do so because from an emotional
standpoint it appears as if he is buying a market that is cheap or selling
short a market that is expensive.
This is emotionally satisfying, like buying toilet paper at a 50% discount
from the local supermarket, but the financial markets are not supermarkets.
There is no ‘cheap’. There is no ‘expensive’. There is just the prevailing
price.
The winning trader, however, is not emotionally attached to an idea of
‘cheap’ or ‘expensive’. He is focused on this moment right now, and in this
moment right now the market is trending, and he trusts this trend and can
unemotionally join this trend without internal discomfort.
2. TRYING TO FIND THE HIGH
The opposite also holds true. When the market is trending higher, traders
tend to want to find a place to sell short. Although it must be said that
people are generally better at jumping on board a market that has already
risen than they are at jumping on board with a short position in a market
that has already fallen significantly.
If the market has moved higher by a significant amount, especially in the
very short term, retail traders tend to want to fade the rising prices, i.e., they
look to establish short positions. Again, this is probably the result of a
distorted view of things being cheap and things being expensive.
3. THINKING EVERY SMALL COUNTER-MOVE AGAINST
A TREND IS THE START OF A NEW TREND
I have sat on a trading floor through the darkest days of the financial
markets. For example, 15 September 2008, when Lehman Brothers was
declared bankrupt, the Dow Jones Index fell 4.5%.
Throughout that trading day, there were two attempts to rally. Both failed. It
was tragic to see how many clients tried to buy the low of the day, only to
see the Dow move lower and lower.
Whenever there was a single green candle on the 5-minute chart that day,
we saw the buy order flow into our position monitors on the trading floor. It
seemed as if the clients were possessed by the notion that a low was near,
and that they had to be the one buying it.
The low didn’t come that day. Nor the next day.
This is a common trait amongst traders. They think that every single little
counter reaction against the trend is the beginning of a new trend. More
fortunes have been lost trying to catch the lows in a falling market than in
all wars put together (okay, this is an unsubstantiated statement made for
emphasis, but please don’t attempt to catch lows).
It seems obvious to me that newcomers and probably also some seasoned
traders – profitable or unprofitable – believe that successful trading is all
about charts.
This belief is a detriment to their accounts, because no one ever took the
time to tell them otherwise. No one told them, or thought to tell them, or
knew enough to tell them, that actually focusing all your time


t attempt to catch lows).
It seems obvious to me that newcomers and probably also some seasoned
traders – profitable or unprofitable – believe that successful trading is all
about charts.
This belief is a detriment to their accounts, because no one ever took the
time to tell them otherwise. No one told them, or thought to tell them, or
knew enough to tell them, that actually focusing all your time on your
charts is a mistaken strategy. We’ll look at this further in the next chapter.
EVERYONE IS A CHART EXPERT
I ONCE DECLARED IN an article that you can learn the basics of technical analysis
over a weekend. I may have exaggerated a little – but only a little.
I know without an inkling of doubt that a chart expert does not equate to a
trading expert. I have seen so many of my trading friends build impressive
libraries of technical indicators and acquire knowledge about both known
and obscure technical indicators. But it didn’t translate into making more
money. When it comes to charts, less can be more.
Charts can be as simple or as complicated as you want. There seems to be a
tendency amongst traders to make charting more complicated than it really
needs to be. I have seen many new traders plaster their charts with so many
tools that they can barely see the price chart itself.
It surprises many people, especially newcomers, when they see my chart
screens. There is not a single indicator on them. Not a single one. I might be
old fashioned, but I don’t need these extra tools.
My job as a trader is to find low-risk trading setups. My approach to trading
is not centred around any other tool than price itself. All indicators – more
or less – are built from time and price. Therefore, the indicator is a
distortion of the reality I am seeing right in front of me.
The markets can be range bound, or the markets can trend. Some indicators
work well in ranging markets. These usually perform terribly in trending
markets. Other indicators work well in trending markets, but are dreadful to
use in range-bound markets.
As a famous trader friend of mine, Tepid2, once said on the now-defunct
trader feed Avid Trader: “Indicators – they all work some of the time, but
none of them work all of the time.”
I think that many of the 90% of people that lose money trading may very
well have excellent chart reading abilities. They can read charts very well,
and they understand patterns too.
However, I happen to think there is much more to trading than knowing a
head and shoulder formation, a bar chart pattern or a Fibonacci ratio.
I have seen outstanding traders juggle millions of pounds worth of stock
index futures contracts using nothing but a simple ten-minute chart. In fact,
I do that myself every single trading day.
I truly believe that what separates the 1% from the 99% is how they think
when they are in a trade, how they handle their emotions when they trade.
That is not to say that there is no merit to learning the craft of chart reading.
I know from my own experience that chart reading is an absolute must for
my decision making, but that is only a small part of the whole trading
picture.
The proliferation of gurus selling trading courses is evidence there is a
demand to learn the art and craft of trading. I suspect the ‘shortcut’ of a
weekend course is a much more appealing proposition than spending that
time reading books.
If a guru holding a weekend course on trading claims that you will be
qualified to trade “like the millionaire professionals” by the Sunday night,
then the unsuspecting will select that option. It is perfectly natural to expect
a human being to drift down the path of least resistance.
Learning any new skill takes time. So when you see an advert saying “learn
a new language in 30 days”, you might not believe it consciously, but
subconsciously you want to believe it, because people love shortcuts.
Similarly, a diet book that promises you will lose 5kg in a year is unlikely
to sell as well as one promising you will lose 5kg in two weeks.
My philosophy to life is different from so many other people’s. This is the
reason I have what so many people dream of. I will choose the path of most
resistance, because I know I need to stay clear of the opinion of the 99%.
If you think I am conceited, then you are thoroughly mistaken. I have no
inflated view of myself. Quite the contrary. I decide carefully what I want,
and then I work towards it. This book reflects that ethos.
You truly can be a master trader. You truly can live in the house you desire,
with the cars you desire in the drive. BUT you must believe me when I say
that in order to get what you want, you need to think like the 1%. In fact,
you don’t even need to think like the 1%. You just need to not think like the
99%.
The following trade is a good example of how mindset trumps technical
analysis any day of the week. In this example I short the German DAX 30
Index.
I get stopped out for a loss. I kick myself, because my stop-loss gets
exceeded by a point or so, only to reverse back in my favour. My stop was
too tight. Rather than lose my composure, I dismiss it.
Let me pause for a second. Do you know why some athletes let out a shout
of frustration when they are not performing well? I thought about it for a
while, after I saw Serena Williams shout when she lost an important point
in a Wimbledon tennis final.
I think they let out a cry because it is a way to reset the mind, to come back
into balance and get into the zone again. The act of letting out a cry helps
them get rid of the frustration and find their inner peace and balance again.
I re-enter a short position at 14,479.80. The screenshot below is from the
time of the trade.
    AmountOpen PriceCurrent PriceOpen P/L
Germany 30Sell 200
12479.812478.5
€ 260.00
Wall Street 30Sell 200 27044 27046 −$500.00
The chart at the time of the trade looks as shown in Figure 1.
Figure 1
Source: eSignal (esignal.com)
The DAX had gapped up. Did you know that only 48% of all gaps get filled
on the same trad


hort position at 14,479.80. The screenshot below is from the
time of the trade.
    AmountOpen PriceCurrent PriceOpen P/L
Germany 30Sell 200
12479.812478.5
€ 260.00
Wall Street 30Sell 200 27044 27046 −$500.00
The chart at the time of the trade looks as shown in Figure 1.
Figure 1
Source: eSignal (esignal.com)
The DAX had gapped up. Did you know that only 48% of all gaps get filled
on the same trading day?
By the third trading day after the gap, 76% of gaps were filled. Why am I
telling you this? Don’t believe trading books stating that all gaps get filled.
They do not!
I short the DAX because the second bar on the chart is an inside bar – from
the first ten-minute bar at the open. The third bar closes below the lowest
point of the inside bar. Now I have a sell signal, because the first bar’s high
is at the same price as a prior high – a double top. I have a stop-loss in
place. I have done my job as a trader. I have identified a low-risk entry
point, and I have placed my stop-loss.
At this point in time, I am at the mercy of the markets. Maybe this will be a
great trade. Maybe it won’t. Who knows? No one knows. Before I carry on,
I would like to ask YOU a question. It is a question for you to ponder upon.
Say you believe in the whole risk-to-reward argument, and you decide that
you have a 40-point profit target. You decide upon a 40-point profit target
because you risked 20 points. So, you argue that risk-to-reward is 2:1, two
units of profit for one unit of risk, which sounds good.
It all sounds great, and there is virtually no textbook on trading that would
argue against it. But I am arguing against it. I want to ask you some simple
questions.
If you make 40 points on this short position, and the market continues in
your favour, how will you feel? How will you feel if a few hours later you
see the market down a further 100 points from your exit?
I think the risk-to-reward concept has been designed by an academic who
does not understand risk and the mind’s association with risk. I think this
academic has created a method to keep his mind at peace, in order to avoid
pain.
Fifty minutes later the DAX is filling the gap. This is shown in Figure 2.
The position is in profit.
Figure 2

Source: eSignal (esignal.com)
A colleague of mine has followed my trade. The chart is looking good for
us. We are in a conversation about the trade. It goes like this:
Friend: I am tempted to take my profit. Do you have a target for this trade?
Tom: Amigo, I don’t trade with targets. Let’s see what the market will give us. Stop-loss is at
breakeven. We can’t lose.
Friend: Yes, I know. But yesterday was a poor day of trading. I lost 150 points. I read the
market poorly. I had an idea, and the idea didn’t work out. Either way, I lost 150 points. If I
close my DAX position right now, I can make up for the lost trade this morning, and I can
recover a lot of the points lost yesterday.
What do you think?
Tom: I think you are trading yesterday’s experience. You haven’t wiped the mind-slate clean.
You are not present. You are focused on the past. You are trying to get back to an emotional
equilibrium. You are in a state of imbalance because you are unable to shake the loss from
yesterday. As a result, you are not judging the trade on its own merit, but on the merit of a past
trade. You are not seeing the world as it is. You are seeing it as you are.
I understand it is a soothing thought to close the trade. However, we are not trading to break
even. We are trading to make money.
Can you appreciate that trading is a mind game? It is a game of nerves. My
friend was understandably shaken from his loss yesterday. He carried the
loss over to the next day. It affected his decision making.
Back in 2007 I was invited to the Wimbledon tennis final. My friend was a
big name in the media industry, and none other than Ralph Lauren had
invited her to the tennis final – with a guest. So, there I was in the VIP tent,
and I got to sit next to Luke Donald, who at the time was one of the best
golfers in the world.
He is a softly spoken man, and very polite. We got talking about Tiger
Woods, and I asked him a pretty to-the-point question about competing with
Tiger.
“Is Tiger Woods a better golfer than you?”
I found his answer so incredibly insightful that I never forgot it. He said:
I don’t think Tiger is a better golfer than me, if you measure it in how
well we putt, or how far we hit the ball, but Tiger Woods does have an
amazing ability to forget his mistakes and move on.
For example, we can be on the 15th and both make a bad putt. By the
time we get to tee up on the 16th, it is as if Tiger has wiped his mind of
whatever happened on the 15th, and he is totally in the moment.
I, on the other hand, will still deal with the mistake I made on the 15th,
and it will affect my performance on the 16th.
That is a truly insightful perspective of what really separates the very best
in a chosen field. It is the mind, and what it processes at any given moment
in time. Is it working with you or against you?
COGNITIVE DISSONANCE
My friend is having a ping-pong dialogue in his head, arguing for and
against taking profits. I am no stranger to that conversation. I may have
many years of trading experience, but I still have those thoughts in my
head. I am just mindful of them when they arrive. When they do, I focus on
the chart and what it is telling me. I don’t look at the profit and loss (P&L).
What my friend is experiencing is known as cognitive dissonance. In the
field of psychology, cognitive dissonance is the mental discomfort –
psychological stress – experienced by an individual who simultaneously
holds two contradictory beliefs or ideas in their head.
This discomfort is triggered by a situation in which a person’s belief clashes
with new evidence contradicting that belief. When confronted with facts
that contradict beliefs, ideals, and values, people will try to find a way to
resolve the contradiction to reduce their discomfort.
The best way for


rienced by an individual who simultaneously
holds two contradictory beliefs or ideas in their head.
This discomfort is triggered by a situation in which a person’s belief clashes
with new evidence contradicting that belief. When confronted with facts
that contradict beliefs, ideals, and values, people will try to find a way to
resolve the contradiction to reduce their discomfort.
The best way for your rational mind to resolve the discomfort of a
profitable position is to close it. The best way for the rational mind to
resolve the discomfort of a losing position is to let it run.
In his 1957 book, A Theory of Cognitive Dissonance, author Leon Festinger
proposed that human beings strive for internal psychological consistency to
function mentally in the real world. He says that a person who experiences
internal inconsistency tends to become psychologically uncomfortable and
is motivated to reduce the cognitive dissonance.
One way to achieve the goal of reducing the discomfort is by making
changes to justify the stressful behaviour, either by adding new
unsubstantiated or irrelevant information to the cognition, or by avoiding
circumstances and contradictory information likely to increase the
magnitude of the cognitive dissonance.
In my friend’s case, he is conflicted. He is associating pain with the
performance of yesterday. He has an opportunity to eradicate the pain by
closing his profitable position right now. The way he justifies this reasoning
is by ignoring the information the market is giving him about his position.
The market participants agree that the market should be sold short, but
instead of acknowledging this, he is ignoring it.
From a logical point of view, this all makes sense. From an emotional point
of view, this is an inconsistent approach to trading. Our trades from
yesterday have no bearing on the markets today.
It is a new day. It is a new set of circumstances. Yet to most people’s minds,
the two trading days are connected. To our minds we are continuing today
what we did yesterday. “Why wouldn’t we be?” we tell ourselves.
Are you telling me that you can ‘reset’ your emotions every morning? Are
you telling me that you can go to bed at night after a blazing row with your
loved ones, and wake up reset and emotionally in equilibrium?
I doubt it; at least, not without a conscious effort. It is for this reason that I
warm up ahead of the trading day by going through a process. We cover that
later in the book. It is, after all, what the book is about. It is a recipe book
for methods to avoid the pitfalls that the 90% experience.
Now, what is the source of my friend’s turmoil? It is fear. Pure and simple.
He is afraid he will lose what he has made on paper. He is desperate to get
back to an emotional state where he is at peace. He is no longer trading the
charts. He is no longer trading the markets. He is trading his own mental
wellbeing.
FEAR
My friend is fearful. He is afraid that the money he lost yesterday will not
be offset by the good trade he has going now. He is afraid that the profits he
is currently experiencing will diminish, or in the worst case disappear.
He acknowledges that he can’t lose on the trade. The stop-loss is now at
breakeven. Unfortunately, that gives him little comfort.
I once saw a quote that made me smile: everything you ever wanted lives
on the other side of fear. Yet fear is a necessity in our lives. The human
brain is a product of millions of years of evolution, and we are hardwired
with instincts that helped our ancestors to survive. We need fear to ensure
survival in certain situations, but many of the fears that we carry are not
appropriate for our trading.
Our minds have a primary function, which is to protect us against pain. If
you introduce big drastic changes in your life, you are likely going to come
face to face with that pain. A clever way to build staying power during
change is to introduce that change slowly.
Say you set yourself the ambitious target of running a marathon. You
achieve this goal by building up your body and mind for the task. Trading
big size is exactly the same process. You need to give your mind time to
learn to handle the mental anguish that comes from losing when the stakes
are bigger.
There is no point in comparing yourself with others. Sure, take inspiration
from others; but know this is a personal journey, and your job is to achieve
an equilibrium mindset, no matter what size you are trading.
PHILIPPE PETIT
I saw a documentary about Philippe Petit a long time ago. Petit was a
French artist who strapped a wire between the two World Trade Center
buildings and then walked across it – several times.
What struck me about the incredible feat was the preparation.
It took Philippe some seven years of physical and mental training to
accomplish the feat. Did you think he just set off and hoped for the best?
No. In fact his original training height was quite modest compared to the
altitudes he would eventually reach.
Philippe Petit is a fascinating character; he is someone who has had to deal
with fear at a level beyond that which the rest of us have. I have learned a
lot about fear and identifying my own shortcomings by studying his
approach to his craft.
VISUALISATION
“Before my high-wire walk across the Seine to the second story of the
Eiffel Tower, the seven-hundred-yard-long inclined cable looked so steep,
the shadow of fear so real, I worried. Had there been an error in rigging
calculations?”
How does Petit overcome these doubts?
With a simple visualisation exercise.
“On the spot I vanquished my anxiety by imagining the best outcome: my
victorious last step above a cheering crowd of 250,000.”
Added to this, Petit exaggerates his fears. Rather than try to muscle through
or outwit fear, he suggests taming it by building it up so that when you are
finally faced with your fear, you will be disappointed by how mundane the
threat really is:
A clever tool in the arsenal to destroy fear: if a nightmare taps you on
the shou


st outcome: my
victorious last step above a cheering crowd of 250,000.”
Added to this, Petit exaggerates his fears. Rather than try to muscle through
or outwit fear, he suggests taming it by building it up so that when you are
finally faced with your fear, you will be disappointed by how mundane the
threat really is:
A clever tool in the arsenal to destroy fear: if a nightmare taps you on
the shoulder, do not turn around immediately expecting to be scared.
Pause and expect more, exaggerate.
Be ready to be very afraid, to scream in terror. The more delirious your
expectation, the safer you will be when you see that reality is much
less horrifying than what you had envisioned. Now turn around. See?
It was not that bad – and you’re already smiling.
He goes on to say that he has fears like everyone else. In particular, he talks
about his dislike of spiders:
On the ground I profess to know no fear, but I lie. I will confess, with
self-mockery, to arachnophobia and cynophobia [fear of dogs].
Because I see fear as an absence of knowledge, it would be simple for
me to conquer such silly terrors.
“I am too busy these days,” I’ll say, “but when I decide it’s time to get
rid of my aversion to animals with too many legs (or not enough legs
—snakes are not my friends, either), I know exactly how to proceed.”
I will read science reports, watch documentaries, visit the zoo. I will
interview spider-wranglers (is there such a profession?) to discover
how these creatures evolved, how they hunt, mate, sleep, and, most
importantly, what frightens the hairy, scary beast. Then, like James
Bond, I won’t have any problem having a tarantula dance on my
forearm.
Petit’s walk remains one of the most fabled – and stunning – acts of public
art ever. He says there was no why behind the act. To quote his own words:
To me, it is really simple. Life should be lived on the edge of life. You
have to exercise rebellion, to refuse to tape yourself to rules, to refuse
your own success, to refuse to repeat yourself, to see every day, every
year, every idea as a true challenge, and then you are going to live your
life on a tightrope.
THE EGO, AND WONDERFUL
FAILURE
I am not a fan of clichés. They display a lack of original thought. I am quite
cynical towards those who peddle clichés. It doesn’t sit well with me to hear
people say that I should run my profits and cut my losses. Yes, but how do I
deal with the fear of running my profits?
It doesn’t sit well with me when a female friend tells me she is in an
abusive relationship, and another friend chirps in and dismissively states
that the solution is to “just leave the bastard.” It is a platitude. It is factually
true, but it is nonsense, nevertheless.
When a solution is obvious, the problem is rarely the only problem. You
might as well tell an alcoholic to just stop drinking. There is a reason he is
drinking, and there is a reason he is struggling to stop.
Does failure exist? I come from a home where you rarely received praise
for your achievements. They were expected. The failures, on the other hand,
were pointed out – and not in a constructive manner.
I had to retrain my mind to stop being afraid of making mistakes. I used to
have a favourite saying as a child: “It is not my fault”. Today the buck stops
with me every time. It is always my fault. I am good at making mistakes, so
that I can learn from them.
Failure is a friend in life – if you tell your mind that it is okay to fail. I
participate in a radio programme about trading and investments. The focal
point of the show is the competition between two other traders and me.
The competition is always fierce, and every week we are questioned about
the content of our portfolios. My trading style is quite black and white. If I
think the market is headed lower, I will buy some put options or some bear
certificates, and vice-versa if I am bullish.
I learned a long time ago that the best way to shut down a journalist is to be
100% honest. So, when the radio host baits me by saying “Uhm Tom, you
got that one wrong, huh?”, the worst thing I can do is to start defending
myself. If I start making excuses or argue a defensive stance, I simply pour
petrol on that fire.
It is such a great metaphor for life. Own up to your errors and be done with
it. So, when the radio host is trying to engage in a line of questioning aimed
at getting me to defend myself, I always double down in the opposite
direction by saying something like, “Oh my lord, I don’t think I could have
been more wrong, even if I tried,” or “Oh boy, even a five-year-old could
have done better than me.”
TRADING MIND UPSIDE-DOWN
From my research into the behaviour of our clients during my years at City
Index, I concluded that the overwhelming majority had an unhealthy mental
thought pattern. They would feel fear at times where there was no reason to
be fearful. This would manifest during times in which their positions were
making money.
However I manipulate the argument, it is still a fear of losing. In this case it
is the fear of losing the profits accrued on paper.
When the clients were in losing positions, they would be reluctant to realise
the loss. It was as if they had the attitude that as long as the position was
open, it might still come good. As I see it, they opted to replace fear with
hope. They hoped the losing position would come back to breakeven.
Going back to the DAX example, my friend hung on to the trade. I did my
best to guide him through the pain. He moved his stop-loss down. It meant
he had some profits to show for it, if the market moved back up again.
In my experience if you can guide a person through a successful trade,
where he or she holds on to the trade, you will begin to create the right kind
of neuro-associations. The trader will experience the thrill of holding on to
a trade. They will experience the joy of locking in more and more profits.
My friend was over the moon with the development of the chart. However,
it was quite clear that he was consta


ence if you can guide a person through a successful trade,
where he or she holds on to the trade, you will begin to create the right kind
of neuro-associations. The trader will experience the thrill of holding on to
a trade. They will experience the joy of locking in more and more profits.
My friend was over the moon with the development of the chart. However,
it was quite clear that he was constantly looking for reasons to take profit.
The thought of leaving money on the table did not sit well with him at all.
To his credit he held on to the trade, spurred on by my conviction that the
market showed nothing but weakness. We were soon rewarded by a sudden
liquidity vacuum. I try not to get excited when the market is giving me a
windfall. However, at times even I will have to fist pump the air, even
though I am alone in my office.
The whole trade sequence is displayed in the time-stamped records in my
Telegram channel under 1 October 2019. See Figure 3.
Figure 3
Source: eSignal (esignal.com)
ELON MUSK
I am not a fan of Tesla. This is due to the fact I shorted it and lost big. Yes, I
know. What a silly argument, considering Teslas are seemingly good cars.
I am a fan of Elon Musk, however. We are bound to make mistakes in life,
but mistakes are like fuel for the rocket of improvement. Talking of rockets,
how do you think people like Elon Musk handle failure?
He is trying to accomplish incredible, life-changing things – things like the
electrification of automobiles and the colonisation of space – and he does it
while the whole world is watching.
For him the possibility of failure is ever present. Not only that, but when he
fails it becomes spectacular headline news. Yet Musk just keeps on going
and going, doing things that are extremely risky but also extremely
important.
How does he handle his fear of failure? Does he even fear failure at all, or is
he somehow hardwired with resilience again this form of anxiety?
Apparently not. Musk has publicly stated he feels fear quite strongly. So
how does he keep going despite this terror?
There are two main elements to Musk’s ability to overcome his fears. The
first is an overwhelming passion for his projects. He admits that SpaceX
was an insane venture, but he had a compelling reason for pushing ahead:
I had concluded that if something didn’t happen to improve rocket
technology, we’d be stuck on earth forever. People sometimes think
technology just automatically gets better every year but actually it
doesn’t. It only gets better if smart people work like crazy to make it
better.
By itself, technology, if people don’t work at it, actually will decline.
Look at, say, ancient Egypt, where they were able to build these
incredible pyramids and then they basically forgot how to build
pyramids… There are many such examples in history... entropy is not
on your side.
Elon Musk was not prepared to sit idly by and watch history repeat itself.
The second element is what Musk calls fatalism. Just focusing on why
you’re taking a scary risk isn’t always enough to overcome hesitation. It
wasn’t for Musk:
Something that can be helpful is fatalism, to some degree. If you just
accept the probabilities, then that diminishes fear. When starting
SpaceX, I thought the odds of success were less than ten percent and I
just accepted that actually probably I would just lose everything. But
that maybe we would make some progress.
He is not the only one to use this approach. Visualising the worst-case
scenario can make us appreciate objectively what we are trying to achieve.
Facing our fears removes their power over us.
Have I digressed too far from the trading journey ahead?
I don’t think so. I draw inspiration from many sources, both in and outside
of the trading world: Kobe Bryant, Rafa Nadal, Cristiano Ronaldo, Sergio
Ramos and Charlie Munger, to name a few.
Very different people, yet all obsessed with the journey, the enrichment of
their lives and the perfection of their craft. Studying their approach to their
work suggests they found the thing they would love to do even if they
didn’t get paid for it. I am sure they are businessmen too, and I am sure they
keep an eye on the dollars coming in. However, it feels like they perform
their craft for the love of it.
DO YOU WANT IT BAD?
How bad do you want it? Is this journey for you? I don’t know. Only you
can answer that. Permit me to ask you a question: what is the alternative?
You are reading these pages because you want to trade well. Perhaps you
have been in my live trading room, and you have seen what my trading
philosophy is doing for me. You want to learn more. I applaud that.
Perhaps it is time to acknowledge trading for what it is? It is a great way to
expose all your flaws. It is a great way to highlight your strengths. Through
my trading and my research, I have uncovered weaknesses in my character.
For me, the side benefit of earning a living from trading the financial
markets is the character traits it instils in me. I am more patient than ever. I
am much more focused and disciplined than I was before.
Failure is one of our greatest learning tools.
TIMES OF DOUBT
Do you really want to trade profitably? I have had to answer that a few
times in my career. I have had to make some sacrifices along the way. I
have been called out once by a coach who felt my effort was insincere.
I recently found myself having dinner with a friend. I have known him for
15 years. I met him when I gave a speech somewhere in the North of
England. My friend had asked if he could consult with me while I was in
Manchester to give a talk about trading, and naturally I agreed.
As we ate, he became very animated. At one point he knocked over a glass
of water while expressing his frustration with his trading. It was difficult to
really pinpoint what the problem was in his trading, because he never made
any specific reference to a problem.
It was clear to me that he really was in distress and wanted help, but I was
unable to figure out in what capac


and naturally I agreed.
As we ate, he became very animated. At one point he knocked over a glass
of water while expressing his frustration with his trading. It was difficult to
really pinpoint what the problem was in his trading, because he never made
any specific reference to a problem.
It was clear to me that he really was in distress and wanted help, but I was
unable to figure out in what capacity my help should come. So, I offered
him help in the one area that I felt was appropriate. I offered to go over his
trading statements. As I see it, that is the only way I can really help
someone. It is a lot of work, but at least I am getting a sense of who he is as
a trader.
As we said our goodbyes, he told me he would send over his statements. I
confirmed, and said I would look forward to hearing from him. As I write
this, he has not emailed me. He has not written to me on message apps.
Silence. Not a word.
If I am offered help in an area where I desperately want to excel, and the
help comes from a friend who is an expert in the area, I will respond as
soon as I can, if not immediately. As of some four to five days later, I
haven’t heard a peep.
How badly do you think he wants this? How desperate do you think he is? I
question how much he really wants this. I have observed this pattern on
several occasions. The student claims to be really keen, but in reality it is
mere words.
It reminds me of a conversation that the famous trader Ed Seykota had with
another brilliant trader and friend. The friend told Ed that he intended to
coach a losing trader into a winning trader by teaching him some important
pointers that were missing from his trading.
Ed Seykota paused for a second, and then said that the friend would fail to
teach the student anything. He said that a losing trader is not going to wish
to transform himself. That is the sort of thing that only winning traders do.
We can all ask for guidance from someone who is better than us. As the
saying goes, you only get better by playing a better opponent. I have guided
many that were already well on their way to trading with confidence. I
merely refined and suggested.
Whether I will hear from my friend or not remains unknown. What is
known is that many people open trading accounts in the hope of making
money. Their effort is disproportional to their expectations, and their results
are aligned with their effort. They simply don’t work hard enough.
Before I move on to the next topic, I want to warn you: I am a trader who
uses charts, but that doesn’t mean that I believe charts are responsible for
my profitable trading. I once read that technical analysts are afraid of
heights. That is another way of saying that they are unable to let their
winners run, because they keep seeing overhead resistance.
I have called the next chapter ‘The Curse of Patterns’, because I believe
fully that as much as patterns help us, they also make our trading lives
difficult. In the search for patterns, we see things that are simply not there.
THE CURSE OF PATTERNS
IF YOU STRIP away the time and price axis of a chart, you will likely be unable to
differentiate between a five-minute chart and an hourly chart.
In a sense, that is good news. It means we can perfect our craft and then
find a time frame that suits our trading temper. The trader with the ability to
focus for long stretches of time will find the one-minute chart and the five-
minute chart provide ample opportunity to make money.
The trader with time constraints will probably favour a longer time frame
such as the hourly chart or the four-hour chart. It means he or she doesn’t
have to check the chart so frequently.
Charts are far superior to fundamental analysis when it comes to entry
points and exit points, and I can use the same tools, irrespective of what
time frame I am trading on.
Am I opposed to fundamental macroanalysis? I would be a fool if I
dismissed the fundamentals. The two should not be in opposing camps.
They should walk hand in hand, as they complement each other and make
up for each other’s flaws.
Now, I would not go so far as to say that chart analysis is the Holy Grail.
Yes, I have made a lot of money from trading charts, but it was not my
ability to read a chart that made me a wealthy trader.
I don’t believe that there is a Holy Grail when it comes to trading, and I
certainly don’t believe that chart analysis is the Holy Grail.
PATTERNICITY
Apophenia is a Latin word that, translated into English, means patternicity.
This is a behaviour centred around seeing things that aren’t there; the
tendency to perceive meaningful patterns and connections amongst
unrelated events. Patternicity is often a harmless diversion. However, it can
be used to support a belief that is otherwise lacking in evidence, like a
conspiracy theory.
Our minds tend to seek out the information that confirms the bias that we
have already decided upon. Therefore, to be completely objective in chart
analysis is virtually impossible.
My early mentor Bryce Gilmore once commented on this fact. He said to
me, “Tom, you only see in the markets and on charts what you have trained
your eyes to see.”
Another perspective of such wisdom was expressed by Anaïs Nin. She said,
“We don’t see things as they are, we see them as we are.”
“What is the relevance to trading?” I hear you say. I had a friend a long time
ago who had made a lot of money trading. Nick was a great trader, right up
until 2004.
He started reading and believing some writers and contributors on Zero
Hedge and he turned bearish on the stock market. He kept shorting. But the
market kept going up. He just could not accept that there was no more
downside after the bear market of 2000–2003. He didn’t see the market as it
was. He saw it as he was. He was negative. He had read that the bear
market would continue. He stopped trading what he saw, and he let his
opinion cloud his objectivity.
Nick no longer trades.
I didn’t want to write a book on charts. There are so many books on
te


pt going up. He just could not accept that there was no more
downside after the bear market of 2000–2003. He didn’t see the market as it
was. He saw it as he was. He was negative. He had read that the bear
market would continue. He stopped trading what he saw, and he let his
opinion cloud his objectivity.
Nick no longer trades.
I didn’t want to write a book on charts. There are so many books on
technical analysis, written by people who I doubt trade full time. I think
they tell themselves that because they have a trading account and because
they trade from time to time, they are qualified to write books on trading.
Although I trade full time, I really don’t think I could add anything new to
the world of charting. Charting didn’t make me money. Indicators never
made me money. Ratios and bands never filled my bank account.
As I am about to post some charts, I want to point out to you that it is to
prove a point, rather than to educate you on the merits of technical analysis.
THE TREND LINE FANATICAL
In the early stages of our chart journey, we come across trend lines. Trend
lines are easy to use, and they give the appearance of a great trading
strategy, especially when we do it after the fact.
Figure 4 shows a naked chart. The diligent chartist begins to draw trend
lines. He or she has the full overview of the day.
Figure 4
Source: eSignal (esignal.com)
Remember, the brain will have as its prime objective – I repeat, PRIME
OBJECTIVE – to avoid you experiencing pain. A losing trade equals pain.
So, the brain sends a signal to the eyes to ignore the setups that do not
work. This selection bias creates a distorted image of the validity of trend
lines.
You can replace trend lines with any other analytical tool from your
charting package, and the bias will remain in place: Fibonacci, Bollinger
Bands, Keltner Channels, etc.
Your eyes will only see what they want to see. At best they may see the
losing trades, but they glance over them, diminishing their significance.
The result is predictable. The researcher will end up with a chart that looks
like the one in Figure 5. It has a lot of trend line setups that all result in
great trades.
Figure 5
Source: eSignal (esignal.com)
There are no losing trades. Every single trade results in meaningful profits.
Such is the power of our subconscious.
Cynical traders (people like me) will notice things other traders miss – not
because others don’t have the ability to see them, but because they don’t
want to. See Figure 6.
Figure 6
Source: eSignal (esignal.com)
If you are in a research position, and you draw enough of these trend lines
after the fact, you’re most likely going to conclude that trend lines are
nothing short of a fantastic tool, perhaps the Holy Grail.
There is nothing wrong with trend lines, but they will not make you rich.
What will make you rich is how you think when you trade. If you think like
everyone else, then your results will be like everyone else’s.
Don’t you want to make money? Don’t you want to separate yourself from
the herd? Then realise that trading profitably has nothing to do with the
instrument you use.
In order to prove to you how pointless it is to research tools, I would like to
introduce you to two of the world’s most esteemed traders, Larry Pesavento
and Larry Williams.
LARRY PESAVENTO VERSUS LARRY
WILLIAMS
The two Larrys are both in their senior years. They are both Americans, and
incidentally they are friends. Both of them have enjoyed trading careers
spanning decades. Both of them have made their living from trading.
Larry Pesavento is famous for his use of patterns and Fibonacci ratios.
Larry Williams is famous for his pattern recognition setups. Both have
written several books on their chosen tools.
In a workshop I organised back in 2005, Larry Williams – who was one of
the speakers – showed statistics from the S&P 500 Index, which depicted
all the major retracements on an hourly chart spanning a decade.
As you can imagine, there was virtually every single conceivable
percentage retracement on display. What did not stand out, though, was
61.8% or 38.2% – the two prominent Fibonacci ratios. Sure, they were
there, but they were surrounded by masses of other percentages.
Yes, it turns out the magical growth sequence of Fibonacci does not, after
all, rule the market. So how come it works for Larry Pesavento? The answer
is simple: it doesn’t have to work all the time to make it a profitable
strategy.
In Oslo, Norway, in 2016 I gave a talk on Fibonacci ratios. For the talk I
had researched all occurrences in which the German DAX Index retraced
78.6% – the square root of 0.618 – and I proved that although the 78.6%
retracement had a hit rate of 20%, it could still be a useful strategy. You had
to risk very little and go for big pay-outs for it to work.
S&P 500 & FIBONACCI
The S&P 500 enjoyed an 11% rally during the summer months of 2021. The
index rallied from 4,050 to 4,550. Along the way, as you can see on the next
chart, there were three significant retracements. The role of the Fibonacci
sequence is to enable us to buy into retracements at favourable retracement
ratios, such as 38.2% retracement, 61.8% retracement, or even 78.6%
retracement. See Figure 7.
Figure 7
Source: eSignal (esignal.com)
What I am going to show you now is a simple demonstration of the power
of hype and selection bias. See Figure 8.
Figure 8
Source: eSignal (esignal.com)
Fibonacci ratios are one of the best-known tools in the trading arena. There
is not a single one of these three major retracements in the S&P 500 Index
that is identified by either 38.2%, 61,8% or even 78.6% ratios.
In fact, two ratios seem to come up more frequently: 43% retracement and
74% retracement. I put that down to randomness. Yes, such is the power of
our belief system.
We want to believe there is a magical growth sequence to the way the
financial markets expand and contract. We want to believe that there is a
universal order to the markets, dictated by a higher deity who c


1,8% or even 78.6% ratios.
In fact, two ratios seem to come up more frequently: 43% retracement and
74% retracement. I put that down to randomness. Yes, such is the power of
our belief system.
We want to believe there is a magical growth sequence to the way the
financial markets expand and contract. We want to believe that there is a
universal order to the markets, dictated by a higher deity who created the
universe using the mathematical sequence of what we know as Fibonacci.
And it works just often enough to keep the believers believing. This is the
danger of charts. When we research, we are looking for something to get us
in on the long side, so we never miss a rally; or we look for something to
make us sell short, so we never miss a short sell. We enter with a bias.
This is apophenia in play. Beware!
DIVORCE RATES IN SPAIN
The definition of ignorance is a lack of knowledge or information. You can
be a smart individual but be ignorant in some areas. For example, I am
rather ignorant when it comes to, say, soulmates and flat Earth theory. You
could argue that I am ignorant because I am not interested, or I don’t
believe in it.
Fair point. Specifically, on the point of finding your soulmate – the one-
and-only whom you will spend eternity with, the person who is perfect for
you in every shape or form – well, I don’t believe they are real.
You see, as ignorant as I am in the ways of love, I can read statistics, and on
that basis, I am supposed to conclude that soulmates have better chances of
finding each other in certain countries? I don’t think so!
For example, there are certainly not many self-confessed soulmates in Spain
or Luxembourg. Did you know that there is a 65% divorce rate in Spain and
an 87% divorce rate in Luxembourg?
There’s only a 42% divorce rate in the UK. Does that mean that you have a
higher chance of finding your soulmate if you live on the British Isles than
in Spain?
Plenty of people believe that the sun’s heavenly position relative to
randomly defined stellar constellations at the time of my birth somehow
affects my personality.
There are also people who believe that the markets are an equation to be
solved, a code to be cracked. All of those people are delusional, or to put it
more politely, they are ignorant.
THE FRAUD OF THE CANDLESTICK
GURU
In order to avoid a lawsuit, I have blanked out the name of the central
character in the following story. When candlestick charts became a hot topic
in the 1990s, one person – who had been instrumental in the propagation of
their use – was sitting in a restaurant somewhere in the world with another
high-profile trader and me.
The central character had at the time published books on the use of
candlestick charts. As we sat in the restaurant, I asked him if he believed
that some of these patterns had to be identified by different names, when
they were practically identical.
For example, I argued, the Harami pattern and the Harami Cross pattern are
to all intents and purposes identical, except the Harami Cross pattern has no
body, while the Harami pattern has one. However, they are both inside bar
patterns.
It seemed to me like a deliberate attempt to inflate the number of patterns,
for purely commercial reasons rather than for legitimate trading reasons.
Many of the patterns are near identical but have different names.
I asked him if he had a favourite pattern he used, or a selection of preferred
patterns he stuck to, and if so, what time frame he traded them on.
He answered that he wasn’t trading the patterns. Not only that, but he also
conceded that he didn’t trade at all.
I don’t know how you feel about that, but it doesn’t sit very well with me. I
immediately cut all ties with the gentleman. I felt as if his only mission was
to invent as many patterns as he possibly could, in order to fill pages in
books and courses, and create alerts on his trading software.
Am I arguing that candlestick charts are worthless? No. I just don’t believe
that there is statistical relevance to all the patterns.
I am not alone. A handful of academic research articles suggest the same.
Here is the conclusion from one such article, ‘A Statistical Analysis of the
Predictive Power of Japanese Candlesticks’, written by Mohamed
Jamaloodeen, Adrian Heinz and Lissa Pollacia, and published in the
Journal of International & Interdisciplinary Business Research in June
2018:
Japanese Candlesticks is a technique for plotting past price action of a
specific underlying such as a stock, index or commodity using open,
high, low and close prices. These candlesticks create patterns believed
to forecast future price movement. Although the candles’ popularity
has increased rapidly over the last decade, there is still little statistical
evidence about their effectiveness over a large number of occurrences.
In this work, we analyze the predictive power of the Shooting Star and
Hammer patterns using over six decades of historical data of the S&P
500 Index. In our studies, we found out that historically these patterns
have offered little forecasting reliability when using closing prices.
In another work by Piyapas Tharavanij, Vasan Siraprapasiri and Kittichai
Rajchamaha, the researchers conclude the following:
This article investigates the profitability of candlestick patterns. The
holding periods are one, three, five, and ten days. This study tests the
predictive power of bullish and bearish candlestick reversal patterns
both without technical filtering and with technical filtering (stochastics
[%D], Relative Strength Index [RSI], Money Flow Index [MFI]) by
applying the skewness adjusted t test and the binomial test.
The statistical analysis finds little use of both bullish and bearish
candlestick reversal patterns since the mean returns of most patterns
are not statistically different from zero.
Even the ones with statistically significant returns do have high risks in
terms of standard deviations. The binomial test results also indicate
that candlestick patterns ca


ness adjusted t test and the binomial test.
The statistical analysis finds little use of both bullish and bearish
candlestick reversal patterns since the mean returns of most patterns
are not statistically different from zero.
Even the ones with statistically significant returns do have high risks in
terms of standard deviations. The binomial test results also indicate
that candlestick patterns cannot reliably predict market directions. In
addition, this article finds that filtering by %D, RSI, or MFI generally
does not increase profitability nor prediction accuracy of candlestick
patterns.
TRADERS BEWARE
Brokers and educators have put the cart before the horse. They make us
think that learning as many patterns as we possibly can will increase our
chances of trading success. This is simply not true. The more patterns we
know, the more we are inclined to talk ourselves out of good positions.
There is nothing wrong with technical analysis and patterns, and candle
formation and indicators and ratios and bands. Yes, I don’t believe in many
of them, because they are subjective and don’t hold up under real scrutiny.
But then again, trading is so subjective anyway that we don’t need to be
right very much to make a good living from trading.
AN OLD FOX TELLS
My friend Trevor Neil ran a hedge fund that had a 25% hit rate on their
trades. I want to tell you his story here to give you some deeper insight into
how some of the best professional traders work and think. I hope you will
find it illuminating.
It should also serve as a reminder that there are many ways to make money
in the market. Your job is not to follow someone, but to find a way that you
like, that resonates with you and who you are and what you like to do.
The story starts with me asking Trevor a question. I knew that he had been
associated with Tom DeMark and his Sequential indicator. Tom DeMark is
something of a legend within the technical analysis world.
I happen to have met DeMark myself at a Bloomberg lunch many years
ago. He seemed like a nice guy, although I had very little to ask him, as I
was unfamiliar with his work. You see, his work was only available to those
who had a Bloomberg terminal.
The Bloomberg terminal at that time was some $25,000 a year. Today,
though, Tom DeMark’s work is available on many trading platforms, in
case you are interested.
I asked Trevor about the Sequential indicator, and his eyes lit up. He told
me a story about how he and his friend had decided that there was an edge
to be gained from trading the Sequential indicator on a very short-term time
frame.
They moved to South Africa and started trading South African shares on a
one-minute chart. I have never heard of a professional outfit, with
significant funds under management, trade on such a short time frame.
However, that is not what impressed me most about the story. What
impressed me most was how they managed to make money on what other
traders would consider an abysmal hit rate.
Most people believe that you have to deploy a trading strategy that has a hit
rate better than 50%. Trevor told me that their results varied. There were
times when they were hot, and there were times when they were not.
When they were hot, the hit rate would push 40%. When they were not, the
hit rate was down in the mid-20s.
Overall, though, they had in their hands a tool that generated about 25–30
winning trades out of every 100 trades placed. They were wildly successful.
They traded the fund for a handful of years, then they returned the capital to
the investors. They had made their money, and as neither of them were
spring chickens, they decided enough was enough. It was time to go home
and spend quality time with their families. Had they been younger, they
probably would have continued.
Now I don’t know about you, but I like the story. It reaffirms the idea that I
have about trading. How you think when you trade is much more important
than whether your strategy has a hit rate in the 50s or in the 70s or in the
90s.
While the story is not conclusive evidence that anyone can make money
trading, as long as they have the proper money management rules and the
required patience, it is a brilliant anecdote of two traders being able to make
money even though – from a conventional point of view – their strategy on
paper should not have generated a profit.
So, what was the secret?
Well, the answer is simple. Although they lost 75 out of 100 trades, those 25
winning trades more than surpassed in profits what the 75 trades generated
in losses. Trevor told me that they expected to make 25 times in profit what
the risk was. He also told me that when they executed a trade, they expected
it to work immediately. So, I grilled him a little bit on that point.
“What do you mean you expected it to work immediately?” I said. He said
he meant exactly that: when they executed a trade, they expected the trade
to begin to work immediately. If they had bought at 50, they would not
want it to go to 48. If it went to 48, they would stop themselves out.
It meant they had plenty of small losses. Their back-testing had shown that
if the strategy was to be traded correctly, it would work immediately. If it
didn’t work immediately, the strategy called for the position to be closed.
BELIEVE AND ACT
When you can act and perform without any fear of consequences and
repercussions, you are trading from an ideal state. When you consider how
many people lose money overall in trading, you logically have to conclude
that achieving this state is not an easy undertaking. It would be foolish to
think that this state of mind comes easily or even naturally. It doesn’t.
I once sat and traded for a few months with a guy from Germany. He
possessed an almost superhuman ability to do nothing. His patience was
unrivalled. While we traded together I made it a sport to be as patient as he
was.
It was fun and, dare I say, somewhat painful. I missed many a good trade,
but the ones I took outweighed all the others.
You mus


f mind comes easily or even naturally. It doesn’t.
I once sat and traded for a few months with a guy from Germany. He
possessed an almost superhuman ability to do nothing. His patience was
unrivalled. While we traded together I made it a sport to be as patient as he
was.
It was fun and, dare I say, somewhat painful. I missed many a good trade,
but the ones I took outweighed all the others.
You must be patient with yourself. You must be able to let your knowledge
settle and mature within you. If you trade small size now, but you want to
trade bigger size in the future, then that journey will most likely be anything
but linear.
It will be a journey of progress and setbacks. It will be a journey of progress
and status quo. I can guarantee you that. You have to grow into the trader
you dream of becoming.
You must be patient with your trade entries. You must be patient with
yourself. If you can bring those two qualities to the table, then the rest will
solve itself in time. You will grow your trade size at a pace where your
mind will not be alarmed or fearful.
I discuss this in much greater detail towards the end of the book. Otherwise,
I am just like the well-meaning friend who says to my alcoholic friend,
“Well, just stop drinking.”
Sure, if only it were that easy. Likewise, me saying to you “Just have more
patience” is about as helpful as a hog roast at a vegan convention.
One macro trader I deeply admire is Greg Coffey, an outstanding London
hedge fund trader. In a piece in a newspaper one client described him as
“humble and arrogant in equal measures – the perfect trader”.
The piece went on to describe that Coffey had an absolute conviction on his
trades, to the point of being arrogant, but he was equally quick to be humble
when the trades didn’t work out well.
Remember this saying:
It is not what you know that kills you. It is what you think you know, but
which just isn’t so, that kills you.
THE NATURE OF THE GAME
The game never changes, and it never will. Algorithms won’t change the
game. Laws won’t change the game. Because this is an inner game, and you
need to spend time – maybe not as much time as you do on charts, but a
huge amount of time – contemplating what human qualities you are
bringing to the game of trading.
Moving in the right direction comes from knowledge of yourself and an
understanding of the markets. The game never changes. The players change,
of course. We all grow old and die, and we are replaced with fresh blood.
Sadly, people don’t change, unless they make an out-of-the-ordinary effort
to do so.
We have a reptile mind, which is not fond of change. “Hey, if it ain’t broke,
why do you want to fix it?” Well, because it is broken. I am not making
money how I know I can, so I want to change that. If that means I have to
learn to live under a different paradigm, and have a different perspective on
fear and hope, so be it.
THE ROLE OF CHARTS
You can’t create a master painting with just one colour. You don’t create a
Michelin-star meal with just one ingredient. And you most certainly do not
create a viable business as a trader by only focusing on charts.
The role of the chart is to give you a visual representation of the thoughts of
other market participants. It enables me to be much more specific in my
entry and exit criteria than, say, a fundamental trader.
However, it is easy to get seduced by the randomness of charts. Over time,
though, it is not your chart reading skills that will decide the number of
zeros on your trading account.
Controlling your mind is no easy task. Your reflex mind will jump to
conclusions before your conscious, reflective mind has had a moment to
really consider your response.
The sole purpose of this book is to provide you with the right tools to
program your mind to be a trader – a profitable one.
Our minds are feeble creatures, if left unchecked. Whenever I give a talk
about the role of psychology in trading, I always show people the logo of
Federal Express, and then I ask them: “Where is the arrow?”
In case you didn’t know already, take a look at the FedEx logo – there is an
arrow hidden between the ‘E’ and the ‘x’.
The coordination between the eyes and the mind is fascinating. The eyes
can see one thing, while the reactive impulse mind tells us that we are
seeing something else.
It is only through observance and training that we become mindful of our
tendency to believe what we immediately think we see.
Consider the following image. Which square on this chequerboard is darker,
A or B?
You might be surprised to learn that both squares are exactly the same shade
of grey, though it is very likely that your mind told you that square A is
darker. Published by MIT professor Edward H. Adelson in 1995, this optical
illusion perfectly demonstrates how the mind can misinterpret information
passed to it by the eyes.
Another example you may have encountered before is a little harder to
demonstrate in this book, but I will explain how it played out in the speech I
gave – which gave me the impetus to write this book. It is a mind-flexibility
exercise.
I showed the audience a simple image: a red square. I asked them to call out
the colour of the image. “Red!” they shouted in unison.
Simple enough, right? I then removed the red square and revealed a yellow
one. Same result: “Yellow!”
I swapped in a green square. “Green!” they cried.
Red. Yellow. Green. So far, so good.
The audience didn’t even need to think about it; that is how dominant the
automatic response system is.
Then we moved onto the trickier bit. I showed the audience an image of the
word red written in blue ink, and asked what colour that image was.
A lot of them called out “Red!”
I showed them yellow written in red ink. Some called out “Red!” but I heard
far more shouts of “Yellow!”
We repeated this process with a series of colour names written in ink of a
different colour. Over time, the audience responses became more
consistently accurate. Through a humorous exercise I established that our