Editor's note: When Jeff Cooper wrote his book about trading, it forced him to really think about what he was doing as a trader to make money. Here are the five basic traits he came up with.
Example isn't another way to teach; it is the only way.
-- Albert Einstein
Truth is what stands the test of experience.
-- Albert Einstein
Early in the film
, Woody Allen quips, "Those who can't do, teach; and those who can't teach, teach gym." Having read hundreds of books on the stock market and subscribed to numerous newsletters over the years, I can tell you Woody wasn't kidding around.
One thing is for sure, anyone who tries to sell you on the idea that they can always tell you what the market is going to do next is wrong. The majority of those selling advice on Wall Street, most of those trying to teach us, don't trade for a living. Researchers? As Albert Einstein said, "If we knew what it was we were doing, it would not be called research, would it?"
Half of those selling market timing have never made a major call. They never stick their necks out because they are too busy talking out of both sides of their mouths. The other half adhere to the marketing maxim "predict" and predict often.
So, in 1995, when I was asked to write a book about trading, I was amused and intrigued. On the one hand, I was concerned that I might jinx my own performance by revealing my tricks of the trade (you know what they say, loose lips sink ships), and on the other hand, I wondered if I was up to the task. Was I equipped to teach how I traded? I knew how to make money trading, but the offer to write the book made me examine whether I had a cohesive methodology and trading philosophy that I could clearly communicate. I accepted the challenge.
After the book
Hit and Run Trading
was published, I was often asked why I would reveal my secrets. Why give away what had taken me years to learn? Basically, here is my answer: It seemed like a good idea at the time, and I suppose everyone wants to leave their mark.
What I did not realize then, and what few believe now, is that, although unintended, writing the book proved to be a totally selfish experience. I gained in my understanding of trading and myself much more than I gave. Why? Because the undertaking forced me to define concisely what I really did to make money. It forced me to flesh out the subconscious skeleton on which I traded, creating a recognizable cohesive whole.
Track Your Progress/Keep a Journal
What I did not realize when I started writing about trading -- first with the book, then later with learning lessons and writing a daily column on the Internet -- is that the process would hold up a mirror to reflect not only my own trading but, just as importantly, would become a prism, refracting my own psychology. I have stacks upon stacks of spiral notebooks in which I jot my thoughts and reactions. I highly recommend every trader keep a journal or diary. For me, the regimen of putting the pieces together every day requires me not just to dissect my own trading but to examine my behavior and emotions. The magic of lists. Making your thoughts indelible in a journal is part of a process of self-discovery.
Without committing your trading expectations to paper, the market doesn't speak to you. It's not a matter of making predictions, but of making anticipations. Without a way to measure and reflect upon what price behavior you expected, all price action will just roll off your back like water off a duck.
In my experience, keeping a journal trains your mind to read the tales of the tape. By writing down what you think is going to happen vs. how a setup actually plays out, we learn. It is this continual process of self-confrontation and self-assessment that teaches us to think in terms of edges and probabilities. Goals are good, but it is the path, not the destination, upon which we learn and live.
I love to travel, but hate to arrive.
-- Albert Einstein
Perfection of means and confusion of ends seems to characterizeour age.
-- Albert Einstein
Try taking an index card and covering up the price chart, slowing moving the card forward to uncover the pricing action. Try to anticipate the price action as it unfurls, while moving the card along. It's a good lesson that demonstrates that setups are only setups; anything can happen in the market at any time.
You'll be surprised at how wrong you will be in this little exercise. I was. It's scary. It's a good lesson that teaches you to think in probabilities, not absolutes.
Understand Others Emotions and Conquer Your Own
The past, although it may not repeat exactly, often rhymes.
-- Mark Twain
Patterns do repeat. Why? Because one thing never changes -- human emotions. They are the drivers of the markets.
Because people think in images, behavior patterns in markets tend to repeat, but they don't necessarily repeat identically. Human emotions always go to excess. That is why trading is an art, not a science, and why psychology dominates. It is the art of capitalizing on mass emotions, while conquering our own emotions. Although patterns repeat, the markets are dynamic, not static.
One hedge fund manager with a billion dollars can shred a pattern in a nanosecond. Although patterns exist and tend to be self-fulfilling, timing is everything. The masterful trader always thinks in terms of risk to reward, edges and probabilities. As Mark Twain said, "Experience is a great teacher, but it's not perfect." It only takes one haymaker to leave you vulnerable to a body blow from which your equity curve will have a hard time recovering.
Despite the fact that I believe there is symmetry in the markets and I rely on time and price harmonies, I also believe it's only important what
happening, not what you
should be happening. Moreover, despite what any given indicator, mechanical system or historical comparison might say, in the market, it's only important what is happening
The market is always right. We have to trade what
, not what should be. You must learn to think outside the box in order to think inside the box. You must see inside the box in order to see outside the box. No mechanical system can piece together something that is ruled by human emotions as well as the human mind. The human mind does not think in absolutes: Subtle subjectivities, rather than oblique objectives, make up the collective subconscious that is called: the market.
I remember one well-known T.V. commentator and market pundit who in June 2002 had already called for the elusive bottom seven times since January. When asked if he was
bullish, he responded, "Well, I've been wrong, but for the right reasons." This, mind you, in June, in the middle of a market waterfall!
Speculation is observation. When you abandon opinions, you are open to probabilities. To trade what
, and not what we
, requires us to experience the market as it really is. Again, simple speculation is observation. Not only is understanding unnecessary, but it may get in the way. Shedding preconceptions trains us to think in probabilities; at the same time, it helps us to observe price action pure and experiential.
Great spirits have always found violent opposition from mediocre minds. The latter cannot understand when a person does not thoughtlessly submit to hereditary prejudices, but honestly and courageously uses their intelligence. -- Albert Einstein
I once knew a broker who decided to become a trader. He had a very high opinion of himself and hated to lose. He couldn't stand being wrong. As a wannabe trader, he could not control situations and people in the same way he could as a broker. His trading was mediocre. So, he went back to selling things. The moral of the story is that if you are a control freak or have issues with self-esteem, these inner conflicts will use any arena in which to play themselves out.
The problem is, in the business of trading, you've got to decide if you want to make money or be right. Moreover, it's so easy just to put on another trade. It requires no special skill or intelligence to get into the game, unlike a doctor or lawyer. You put up your money and you take your chances and poof, you call yourself a professional.
It's easy to get into trouble in the market. It's hard to get out. It requires no special skill to get into the game, but a lot of hard work to survive the game. There's just no way around it. Although, as the song goes, Wall Street sometimes appears to offer money for nothing, when the rock-and-roll music of the bull market stops, the only thing that will ensure a trader's survival is dedication to hard work, preparation and the willingness to travel the rocky path of self-discovery.
Ultimately, only the mastery of your own personal psychology, your own self-image and your own set of beliefs will determine whether you achieve the success you desire. The need to trade what you think should be -- rather than what is -- is driven by a need to be right. You are looking for the market to validate your opinions and fulfill a sense of self-worth.
As I said before, being right and making money trading are not one in the same. You can be correct 50% of the time without whatever methodology you use and take a substantial amount of money out of the market -- if you are willing to take small losses and check your ego at the door. That is the essence of what it takes to begin the journey to trading mastery. However, a particular psychology is required in order to take a lot of losses.
The human mind is wired to avoid pain. It will go to great lengths to do so. Society reinforces the idea that winning is paramount. Take, for example, a surgeon who studies and then serves as an intern for years, all with the objective of having every surgery being as close to perfection as possible. And, masterful surgeons will be successful better than 90% of the time. They don't accept losing. They will do everything possible not to lose a patient.
Naturally, that is a wonderful trait.
But take that surgeon out of the operating room and place him in the trading arena with that same mindset and you've got a disaster. The surgeon will work a losing trade as hard as a surgery gone bad. He will try to will the trade back to life, in the same way that he's brought patients back from the brink.
Learn How to Win by Losing
From the time we are toddlers, society instills in us the ethic of winning above all else. So, it is not surprising that many highly successful individuals personalize a loss. In some areas of life, that trait can be beneficial; in the markets, it is the kiss of death. In order to be consistently successful and not blow up in the trading game, you must adopt exactly the opposite profile. In order to be persistently profitable in this game, we must learn to pat ourselves on the back for taking small losses.
When I take a trade, I am more concerned about what can go wrong than what can go right. There is no harm in guessing wrong; the sin is staying wrong. In the business of speculation, we have to put our surgeon's caps on backwards and dull our scalpels, avoiding expectations of perfection. My motto is, worry about your losers and your winners will take care of themselves. Never confuse your position with your best interest: When in doubt, get out.
So, as you can see, I believe that more than strategies or indicators or systems, it is psychology that dominates the market. Understanding that the market is essentially a psychological animal is critical. Fundamental rationalizations are meaningless compared with a true understanding of the psychological nature of what drives Wall Street. As one trading buddy of mine says, "One year
is emperor; the next, it has no clothes."
It is psychology, and the state of mind of the masses, that determines the fundamentals not the other way around. It is psychology that makes the news, not the news that makes sentiment. To my way of thinking, psychology is cyclical in nature. However, price is always the final arbiter, and we depend upon the technicals to corroborate the esoteric.
In the markets, believe what you see, not what you hear. In other words, follow the charts, as they are only wrong twice -- at the very top and at the very bottom.
It is worth repeating that no mechanical system can put together the pieces of something ruled by human emotions as well as the human mind. Mechanical systems don't allow for the flexibility that the human mind has for telling us what is going on right now and how this time may be different. Just ask the boys at Long Term Capital Management. In trading, less
More or Less
The more you try to see, the less you'll see. Don't confuse information with enlightenment.
Although knowledge is power, a little knowledge is a dangerous thing. It is important to remember that you can lead a horse to water, but you can't make it drink. What you see may not be what the next guy understands. And he may be a newbie hedge fund manager, a green hedgy. The penthouses of Wall Street are dominated by low people in high places with O.P.M., other people's money, the opiate of money management.
Too much information, too much analysis, will overwhelm. In trading, less
more. Trying to follow too much is a function of greed and its twin, fear. The fear stems from doubt about having the correct methods. Let me put it this way: Any method is better than no method. The adherence to risk management is more important than trying to identify the Holy Grail of entry strategies.
Fear stems from not knowing what is going to happen next. Well, we're all afraid of the unknown. The job of a good method is to make sure you can function in the dark in order to get from here to there. Once we acknowledge that, as Jesse Livermore said, "The diabolical purpose of the market is to continue higher (or lower), with as few people on board as possible," then having a game plan and being prepared with a defined uncle-point reduces fear.
Wait for Your Pitch and Then Swing for the Fences
It wasn't until I was willing to sublimate my desire to win to the need to survive that I was able to reach any level of consistency in trading. Again, you have to decide if you want action or if you want to make money. If you want action, go to Las Vegas.
People love to gamble. But if you want a career as a trader, you have to approach speculation as a business. Like a master blackjack player, that means identifying when you have an edge and knowing when to make a larger-than-average bet. The card counter or skilled poker player is not in it for the entertainment. It all boils down to one thing: You've got to know when to hold 'em and when to fold 'em. You've got to decide if you want to make money more than you want the gratification and narcissistic approval of being right.
For example, let's look at a major league baseball player with a 300 batting average. He connects only three out of 10 times, but this earns him millions of dollars a year. If he allowed himself to get bent out of shape over the other seven times that he didn't put wood on the ball, he would be in no frame of mind to hit away at his next at-bat. It's what you do with a setup, not what you do with a missed opportunity.
Baseball has many things in common with trading. There is a story about legendary hitter Ted Williams. Apparently, he seldom responded to fan mail, but when he got a letter asking him whom he modeled his hitting after, Babe Ruth or Lou Gehrig, Mr. Williams felt compelled to write back: "Neither."
His hero was Rogers Hornsby, whose strength was the patience to wait for the right ball. Whereas the Babe swung at nearly everything that moved, and though he did hit more home runs than anyone of his era, he also struck out more than anyone. Lou Gehrig was simply able to overpower pitchers with sheer force. But for Ted Williams, Rogers Hornsby was the man. It wasn't so much the stance or the swing, but his willingness to wait for the right pitch that made all the difference.
When I heard this story, it really sent shivers up my spine because I was making the transition from a trading gunslinger who shot at anything and everything that moved, to a trader who waited for them to pitch one right down the middle. I had to change or burn out. I recognized that the essence of a good trader is to wait for your pitch, your ball. Otherwise your performance will be erratic. I finally understood that you can't make the numbers get bigger by trying to overpower the ball.
Of course, the stance is important. For me, that stance is the Hit and Run Methodology. A good coach is important, too. That was one of the things that separated athletes like Tiger Woods, Ali, Pete Sampras and Andre Agassi from the pack: They each had superior coaches.
I was fortunate enough to have my father, who, in teaching me about people, taught me more about the markets than anyone. We spoke of the patience to wait for the right pitch, and then, of course, there is discipline. Discipline in any venture is important, but it becomes paramount when dealing with emotional, illogical, chaotic behavior.
Advice From the Cuckoo's Nest
Trading is a crazy game in which those who succeed big learn to thrive on chaos. You have to learn how to have a little fun with the game and not take yourself too seriously in order to make it. If you don't enjoy what you are doing and aren't having any fun, fuhgeddaboudit, as that is half the battle.
It reminds me of the last scene in
, where Woody Allen is reminiscing about running into his old sweetheart. "It's like the old joke," he says. "This guy goes to a psychiatrist and says, 'Doc, my brother is crazy. He thinks he's a chicken.' The doctor says, 'Why don't you put him away?' To which the guy replies, 'I would, but I need the eggs.' "
Speculation for a living is about as absurd and irrational a game as there is, but we keep going through it because, well, we need the eggs.
Jeff Cooper is the creator of the Hit and Run Methodology and the author of the best-selling books
Hit and Run Trading (The Short-Term Stock Traders' Bible),
Hit and Run II (Capturing Explosive Short-Term Moves in Stocks), as well as a video course, Jeff Cooper on Dominating the Day Trading Market. He also created the Hit and Run Nightly Reports and co-founded a trading markets Internet site.
Mr. Cooper is also a principal at Mutual MoneyFlow Management, a money management firm that is a registered investment adviser. MMM and its affiliates may, from time to time, have long or short positions in and/or buy or sell the securities or derivatives thereof, of companies mentioned in Mr. Cooper's columns. In such event, appropriate disclosure will be made. None of the information contained in Mr. Cooper's columns constitutes a recommendation by Mr. Cooper that any particular security, portfolio of securities, transaction or investment or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. While Mr. Cooper cannot provide personalized investment advice or recommendations, he welcomes your feedback at
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