Last Updated on February 10, 2024 by Maria

Perhaps the single most important aspect of any trading
methodology, whether for the long-term, intermediate-term,
short-term or day-trade, is the psychology of the trader. My
work with trader psychology dates back to the first trade I
ever made in 1968. Having been trained as a clinical psychologist,
and having practiced as such for quite a few years,
I am familiar with the limitations of the trader and the
psychological roadblocks that traders constantly throw in
their own paths. My book, The Investor’s Quotient, continues
to be a bestseller, which indicates that traders realize their
limitations and seek to know more about how to overcome them.
While some people will disagree with me, I feel that this
chapter is possibly the most important one in the entire
book. White you may be tempted to skip this chapter, I
sincerely believe that to do so would be the worst mistake you
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132 * Market Masters
could make. Although it is impossible to completely cover
this topic in one chapter, I will do my best to acquaint you
with the pitfalls that await you as a futures trader. You
would do well to consider my comments in relation to what
the market masters have told us.
Formany years, futures trading has been considered !he
most speculative of speculative trading activities. I believe
that this is a market myth that has been perpetuated by those
who are unable to trade profitably or who are afraid to do so.
The fact of the matter is, the futures trader is in an advantageous
position. The accomplished futures trader understands
the limitations of what can be achieved as a speculator.
The futures trader is like a sharpshooter. The futures
trader is interested in finding the correct target, taking aim
at it, pulling the trigger and bagging the prey. As mercenary
as this may sound, this is what futures trading is all about.
The effective futures trader keeps his or her powder dry,
aims only at the most promising targets and arms only at
targets that are likely to be hit. This is yet another point that
was emphasized repeatedly by the masters.
The futures trader is interested in
finding the correct target, taking aim
at it, pulling the trigger and bagging
the prey.
Qualities of a Successful Futures Trader
The futures trader must be consistent, efficient, adaptable
and persistent. Because futures trading is unique among
the many different avenues that are open to traders, it has its
12 / The Psychology of Trading * 133
unique brand of psychology. In this chapter, I will acquaint
you with the major issues that the futures trader faces and,
moreover, suggest methods that you can use to overcome
your limitations and maximize your strong points
Trading Discipline
One aspect of universal agreement among the masters is
the importance of discipline. This is probably the most wornout
term in futures trading. Saying the word is one thing;
truly understanding its definition on an operational or
behavioral level is another.
Discipline is not just the ability to develop a trading plan
and to stay with it; it is also the ability to know when your
plan is not working and therefore when to abandon it.
Discipline is the ability to give your futures trading
positions sufficient time to work in your favor or, for that
matter, sufficient time to work against you.
Discipline is the ability to trade again once you’ve taken
a loss, to ignore extraneous information and to avoid inputs
that are not related to the system you are using.
Discipline is the ability to maintain reasonable position
size and to avoid the motion that leads to overtrading.
Discipline is the persistence required to maintain your
trading systems and to calculate consistently the necessary
timing indicators during the day, either manually or by
computer.
Discipline, above all, is the ability to come back to the
trading arena every day, regardless of whether you won,
lost or broke even the day before.
As you can see, discipline consists of many different
things. Discipline is not any one particular skill.
Discipline’s Component Behaviors
Perhaps the best way to understand trading discipline is
to examine some of its component behaviors.
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Be Persistent
As I’ve said earlier, this is perhaps the single most
important quality a trader can possess. Futures trading
requires the ability to continue trading even when results
have not been good. Due to the nature of markets and
trading systems, good times frequently follow bad times,
and bad times frequently follow good times, Some of a trader’s
greatest successes occur following a string of losses. This is why
traders must be persistent in applying their trading methods
and continue using them for a reasonable period of time,
Consider the lessons learned from Larry Williams, George
Lane and Conrad Leslie.
Futures trading requires the ability to
continue trading even when results
have not been good.
Individuals who quit too soon w i l l not be in the markets
when their systems begin to work; those who quit too late
will run out of trading capital. Therefore, although persistence
is important, it is also important to know when to quit
and not play any longer using the existing system.
How do you develop persistence? While the answer
appears simple, the implementation is not. You develop
persistence by being persistent. While this may sound like a
circular answer, it truly is not. The only way to be persistent is
to force yourself initially to do everything that must be done
according to the dictates of your system or method.
If you’re having difficulty, try this. Make a commitment
to a trading system or method. Follow through with that
approach for a specific amount of time; take every trade
according to the rules or, if the system is subjective, attempt
to trade the system with as much consistency as possible. If
12 / The Psychology of Trad ing * 135
you are consistent in applying your rules, in most cases you
will have profits to show for your efforts. Even if your
trading is not successful, you will have learned a great deal.
You will have learned that you can follow a system or
method, that you can trade in a disciplined fashion and,
moreover, that the only way to do so is to be persistent by
following as many of the trades and rules as possible.
Compare the above scenarios to the ignorance and confusion
that come from haphazardly trading or inconsistently
applying trading rules. Think back to your experiences
as a trader. Remember your worst losing trades. You
will find that losses that were taken according to a system or
method are easier to accept psychologically, whereas those that
were not accepted according to the rules often turned into terrible
monsters, ultimately costing you much, much more than they
should have financially as well as psychologically. To master the
skill of persistence, you need to practice it. Make the commitment,
and you will see some wonderful results, even
over the short term.
Accept Losses
Another important quality that the market masters emphasized
is the ability to accept losses and to take them
promptly. Perhaps the single greatest downfall of all traders
is the inability to take a loss when it should be taken. Losses
have a nasty habit of becoming worse rather than better.
Unless they are taken when they should be, the results will
not be to your liking.
Although it is easier on one hand for the day trader to
take a loss than it is for the position trader (since a loss must
be accepted by the end of the trading day), it is still the
downfall of many futures traders who are unwilling to
accept the loss when it is a reasonable one. The good futures
trader must have the ability to take a toss when the lime to
take that loss is right. What’s right is dictated by the particular
trading system or risk management technique you are
using. From my experience and observations, perhaps 75
136 * Market Masters
percent or more of all large losses are due to not taking tosses when
they are small or relatively small or when they should be taken.
The good futures trader must have the
ability to take a Loss when the time to
take that loss is right.
I can certainly speak from experience when I say that my
largest loss resulted from the fact that refused to take the loss
when the time was right. I allowed a $500 loss to turn into a
$5,000 loss. Fortunately, that was the first and last time I was
guilty of that serious a transgression. Unfortunately, many
traders refuse to take losses when the rime is right. The
futures trader has two opportunities to take a loss. The first
opportunity is at the stop loss point as determined by a system or
at the predetermined dollar risk stop. The second point is at the end
of the day.
Here are some suggestions as to how you can improve
your ability to take losses when they should be taken:
• Formulate your stop loss rules specifically whether
they relate to systems or dollar risk amount, and type or
write your rules in large print. Place the hard copy close
to your quotation equipment, the computer that you use
for trading or the telephone from which you place your
orders. If you do not use a computer or quotation system
for your trades, keep your rules handy on an index card,
and refer to them frequently during the day.
• Make the commitment to accept completely your next
ten losses as dictated by your system. Once you have
done this, the behavior will become habitual, and losses
will be easier to accept.
• If you trade with a full-service broker or a trading
partner, make your broker or partner aware of where
12 / The Psychology of Trading * 137
your stop loss will be and have him or her remind you
that you must exit your position accordingly. You may
also give your broker or partner the authority to do so for
you, if your relationship is close enough to allow for such
a procedure.
• Place your stop loss as soon as your entry order has
been filled This procedure is much simpler although
one that I do not necessarily recommend at all rimes
because of the nature of futures trading.
Avoid Overtrading
Too many futures traders feel that they must trade every
day. Let’s face it, some traders are addicted to trading. A day
without a trade for them is like a day without a meal. The fact
is that some days offer few if any trading opportunities. The
futures trader who wishes to preserve capital and avoid losses as
well as unnecessary commission charges should understand that
futures trading is not an everyday event. There will be days
when no trades are indicated. This is for the best.
… futures trading is not an
everyday event.
One of the telltale signs of the futures trader about to go
astray is the searching-for-a-good-trade syndrome. Have you
ever found yourself sitting at the computer or quotation
screen, bored because there were no trades that day? Have
you ever found your fingers idly rambling over the keyboard
as you searched chart after chart for markets to trade?
This is the first sign of trouble. If you ever find yourself in this
position, do yourself a favor and stop looking. Good futures
trading opportunities do not occur every day.
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Set standards as to which markets you will trade. If there
are no trades in these markets, do not allow yourself to
endlessly search for trades in obscure or thinly traded
markets. This may work occasionally, but the odds of success
are slim. The successful futures trader will specialize
only in a handful of markets and will do well at these. Do not
attempt to spread yourself too thin by looking for trading
opportunities where they do not exist. This brings me to my
next point.
Specialize
Successful futures trading is a time-consuming undertaking
that requires close attention. Many of the market
masters whom I interviewed .specialized in certain markets
or groups of markets. In most cases, successful trading
requires diligence, follow-through and persistence. Because
most trading techniques require close attention, traders
should not be involved in too many markets at one time. I
suggest that five to seven markets are sufficient for most
traders. In fact, for new traders, I recommend specializing in
one or two markets and attending to them thoroughly to
develop your skills and increase your overall profits.
What should the new futures trader trade? Naturally,
the answer to this question changes as a function of market
conditions. Some markets are better to trade than others, for
example, the currencies, S&P futures and Treasury bonds.
However, other markets, such as silver, soybeans, the petroleum
complex markets and other currencies, also make
good futures trading vehicles under certain market conditions.
Pay attention to any market that becomes active and
volatile. For the newcomer I recommend a very limited
portfolio of markets until techniques have been mastered
and self-confidence has been achieved.
Begin with Sufficient Capital
Perhaps one of the worst blunders that any trader could
commit, whether trading from the day time frame or from
12 / The Psycology of Trading * 139
a position trade perspective, is to trade with insufficient
capital. Virtually all the market masters agreed on this point.
The argument may be made that the futures trader does not
need to have substantial capital in his or her account since
trades are closed Out at the end of the day and therefore the
necessity for sufficient margin to maintain positions is eliminated.
While this may be true, those with limited funds
cannot play the game as long as those with larger funds. In
any venture it is important to start with sufficient capital so
that the trader will not feel pressured to perform and can
allow the particular trading system or methods sufficient
opportunity to ride through periods of poor performance.
The trader with limited capital will be a nervous trader
who looks to minimise losses beyond the point of realistic
trading. Frequently, the anxious trader is knocked out of the
game after a series of losses, before his or her trading
methods have had the opportunity to perform. Consequently,
capitalize your trading account sufficiently, or
decide ahead of time that you will trade only a very limited
portfolio consistent with your available capital. Do not start
with an undercapitalized account. To begin trading with
sufficient capital, the aspiring trader will have to be realistic
and, above all, patient enough to gather the speculative
capital that will be needed.
Use News to Your Advantage
Many a trader has learned the hard way that following
the news frequently leads to losses. However, I have discovered
ways in which the trader can use the fundamental news
or developing international, domestic or political news to
his or her advantage. Do not be a follower of the news; ratter
“fade” the news. Use the news to exit positions that you
probably established before the news became public knowledge.
I firmly believe in the old market dictum: Buy on rumor,
sell on news. On an intra-day basis, markets are very
sensitive to news well before the news is known by most
traders. Insiders buy and sell on expectation, sometimes
140 * Market Masters
based on rumor, frequently based on fact. They establish
positions before the general public is aware of the news;
once the news has become public knowledge, they take
ad vantage of the surge or the drop in prices to exit positions.
Buy on rumor, sell on news.
Therefore, to use the news to your advantage, you must
be a contrarian. This is especially true from the futures
trading perspective. While there is nothing wrong with
following intra-day trends, frequently these trends react
strongly to news developments. If you are following a valid
trading system or method, you will most often be on the
correct side of the market when such news develops. Take
advantage of price surges or declines to exit your position.
This requires self-control and the ability to see the news as
your opportunity to get out, not as your opportunity to hold
on for even more profit!
Take Advantage of Brief Price Surges
To trade profitably, you must also learn to take advantage
of brief flurries in prices. At times, markets will drop or
rally quickly, seemingly in response to no news. What may
be happening is a rumor on the trading floor, a large buyer
or buy order, or large seller or sell order of which you are
unaware. Such brief price surges or drops are opportunities
for you to exit positions consistent with the price move.
Regardless of the source, consider all price rallies or
declines that occur quickly within the day’s trading session
as an opportunity for you either to exit your current position
at a profit or to establish a new position using support and
resistance methods that were outlined previously. It is important
to develop this quality as a futures trader since it is
entirely consistent with the futures trading objective.
12 / The Psychology of Trading * 141
Too many futures traders assume that bulges or sharp
declines in price within the day are basically meaningless.
Believe me, they’re not. They are tailor-made for the futures
trader. The futures trader who is committed to taking a
profit out of the market every day must take advantage of
these price moves. If you decide not to do so, you must either
raise or lower your stop loss (depending on your position),
or you must use an appropriate mental slop loss that is
adjusted to the change in price. Simply, this means: Use a
trailing stop loss in the event that the price move is negated
shortly after it begins. In this way, you will have given
yourself an opportunity to lock in a larger profit that you
might not otherwise have had.
Stick to Your Gouts
Above all, remember that as a futures trader you have one
major goal: to make money. To do so, you must be particularly
aware of your net profits at all times. My advice, which is
based on many years of futures trading, is to set yourself
specific standards and conditions under which you will
begin to liquidate positions. My advice is to do so while the
trend is still in your favor. You may either begin to close out
your positions at that time or you may use a follow-up stop
loss procedure to “lock in” existing profits.
… as a futures trader you have one
major goal: to make money.
To achieve your goals, you need to internalize them and
keep them foremost in your mind at all times. What is right
and proper for the position trader or for the short-term
trader is not necessarily good for the futures trader. If you
find yourself wanting to ride profits or losses overnight, you
142 * Market Masters
are not being true to your goal as a futures trader. If you wish
to day trade and position trade as well, I urge you to do so
in different accounts to avoid confusion. Keep your goal in
mind, and you will be less likely to stray from it.
Use Market Sentiment To Find Short-Term and
Day-Trading Opportunities
I have already discussed the importance of going against
the majority opinion to find profitable futures trading opportunities.
I believe that this is one of the most important
qualities a futures trader can possess. While therein certainly a
great deal of money to be made in futures trading with the
existing trend, it is also important to know when the existing
trend has reached a possible turning point. One of the best ways,
if not the best way of doing this, is through the use of market
sentiment. Although I discussed the particulars of applying
market sentiment for the purposes of futures trading, I want
to stress its importance. The futures trader must also be a
contrarian. This does not mean that you must buck the trend,
but it does mean that you must always be aware of whether
sentiment is very high or very low. This will give you important
clues as to whether you should be quick to take profits,
whether you can allow profits to run and whether you
should look for trading opportunities on the opposite side of
the existing trend.
My Conclusions about Trader Psychology
While there are many other qualities that a successful
futures trader must either possess or acquire, these are the
most significant ones. If you strive to develop these qualities,
your odds of success as a futures trader will certainly be better. I
have learned, after many years of trading, that the major
difference between those who are successful traders and those
who are not is found in their psychological makeup and in the skills
they have acquired as traders rather than in the trading systems
they use.
12 / The Psychology of Trading * 143
While it is certainly helpful to have an effective trading
system, even the best trading system in the hands of an
undisciplined trader is nothing more than a destructive tool.
Consequently, you must develop your skills as a futures
trader along the guidelines provided in this chapter.
Occasionally, traders have idiosyncratic difficulties in
the markets that must be addressed on an individual basis.
If this is the case, identify your particular problem as succinctly
as you can. If you cannot formulate a good method
for minimizing the problem that this behavior causes, contact
a professional for assistance. If you are not successful in
your search for help, please drop me a line, I may have some
helpful suggestions for you.
Finally, I urge you to carefully study the words of the
market masters. Take their observations and experiences
seriously. Learn from their examples and insights. Your
time will be well spent.