How I Made $1,900, Trading Commodities. Chicago Mercantile Exchange Trader Larry Levin

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2 How I Made $1,900, Trading Commodities by Chicago Mercantile Exchange Trader Larry Levin

3 DEDICATION This book is dedicated to all of my amazing students

4 DAYTRADING involves high risks, and YOU can LOSE a lot of money. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, because the trades actually have not been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general also are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those talked about in our site. The information contained herein is specifically for the limited personal use of the individual who purchased this course. Any reproduction, dissemination or retransmission of the information contained in this course is strictly prohibited without the express written permission of Secrets of Traders LLC. 1999, 2006 Secrets of Traders LLC All rights reserved.

5 Introduction Do you think you re learning the right way to trade the futures markets? I ve got some news that might surprise you: You re most likely learning it wrong. I ve found that most people are taught the wrong way to trade. However, it s important that you understand it s not your fault that you re learning to trade the wrong way. Most people learn from unqualified sources. And I will prove it to you. In fact, I m a firm believer in proof. If I could give you some advice it would be this: Don t let someone teach you about trading the futures markets unless they can prove that they re qualified to do it. How do you know when someone is qualified to teach you how to trade? In my opinion, they re only qualified if they ve actually done it themselves, successfully. What difference does it make if they wrote a book or came up with a trading system, yet have never made real money trading the markets? Unfortunately, that s what happens all too often in the futures industry; there a lot of unqualified people teaching trading ideas, and most of them have never made any real trading profits. And again, if they aren t profitable traders, how are they going to make you profitable? My name is Larry Levin, and I m a floor trader at the Chicago Mercantile Exchange (CME). In fact, that s where I ve spent the last 18 years of my life actually the only place I ve ever worked. For the last four years I ve been one of the largest traders in the S&P market as far as overall volume. You may have seen me on CNBC, Bloomberg TV, or Rob TV, being interviewed on the trading floor about my opinion on market direction. I have been the Trader of the Month in Futures Magazine. I was the feature interview in the January 2007 issue of Stocks & Commodities Magazine. My trading ideas have been published in newspapers throughout the country. 1

6 But none of that means anything. Here s what does mean something: In the last four years I ve generated just under two million dollars in trading profits at the Chicago Mercantile Exchange. And to prove it, I post my personal trading statements on my website for anyone to see (see Appendix for some samples). Just go to re right there on the homepage. I m not telling you this to impress you, but to impress upon you the fact that I m the real thing, and I practice on a daily basis what I teach, every day. I m the only educator that I know of who posts his own personal trading statements. Unfortunately, that s not true for most people who teach trading methods and techniques. Most of them have never traded successfully in their lives, and make their money simply selling products to others who genuinely want to learn how to trade. Very few make money actually trading for a living. That s why they re not the best people to teach you to trade. To teach someone to be a successful trader, it helps to be one yourself. I have that important track record, and I can use it to help you on the road to trading success. 2

7 Chapter 1 HOW I BECAME A SUCCESSFUL TRADER Every day people ask me the same questions: How did you become such a successful trader? What is the secret to your success? When I tell them the answer, they re usually surprised and a little confused. This is because the secret to my success is not a magic, complex technique or anything like that. Don t get me wrong, it isn t as simple as saying I want to be a profitable trader and make a lot of money. That would have made things a lot easier! So what is the secret to my becoming a successful trader? I Saw Myself as a Successful Trader Long Before I Became a Successful Trader! That s the main reason I was able to get through the less than stellar times during my trading career. To be honest, I wasn t always a successful trader. In fact, early my career, I was a very unsuccessful trader. I actually busted out, or in other words, lost all the money in my trading account four separate times before I finally became successful. I even lost as much as $62,000 in a single trading day (luckily, that only happened once)! Here s the key that kept me coming back and eventually led to my overall success in the trading world: During all the bad and unsuccessful times, I always exercised the same attitude, regardless of how badly things were going. No matter what, I believed I would eventually become a successful trader. This was especially important to get me through the times when I was not making any money and every day was a struggle. I ve always been a firm believer in visualization techniques and seeing yourself in your imagination as the kind of person you want to become. 3

8 Early in my trading career, that s exactly what I did; I visualized myself becoming the trader I wanted to become. Even when I was losing money and trying (without success) on a daily basis to become a profitable trader, I would consistently use my imagination to see myself as successful. It s not as easy as simply saying I want to be a successful trader, but it s not that difficult either. It takes a few simple steps and a lot of consistency. The best part? It works! In this book, I ll actually share the steps I took to becoming a better trader. And you ll see, as I did, that if you use the techniques I spell out in the book, and see yourself as a successful trader even before you become one, it will go a long way in shaping you into the kind of trader you want to be. At least that s how it worked for me! 4

9 Chapter 2 SETTING AND ACCOMPLISHING REALISTIC GOALS I realized early in my trading career that one of the most common characteristics in nearly all successful traders is that they re extremely goal oriented. In fact, I m not sure if you realize this or not, but people perform best when they have a goal clearly in mind. When we do this, our subconscious minds work hard at achieving those goals automatically, without our having to use willpower. This is something you ll discover when you begin to learn more about Psycho-Cybernetics. However, there s one major catch to all of this. Whatever your goal, it must have three important characteristics: 1. Your goal must be realistic. This means that it has to be something that is within your capabilities. Sure, it may be possible to make a million dollars your first year trading, but this is not realistic because it probably is not within your (or most people s) capabilities. 2. Your goal must be attainable. This is similar to being realistic. Again, your goal must be within your capabilities. Say you re trying to average $200 a day with your electronic trading. You have a much better chance of being able to reach that goal versus that of making a million dollars this year. Don t get me wrong. If you re doing well with your current goal, there s no reason why you can t increase it. But you must remember to start with an attainable goal that you can build on- -begin with a small goal and move up from there. 3. Your goal must be measurable. I see people making mistakes with this all the time. Everyone wants to get rich or make a fortune in the market. But that isn t really a goal. A goal must 5

10 be measurable. You must know when you re far away, close, and when you ve actually achieved your particular goal. If it s not measurable, then you won t know when you ve achieved it, or even worse, you won t know how close you are to achieving it. When I first started trading, I spent a lot of time talking to different traders about how they were able to make money in the markets. It seemed the more I talked to different traders, the more their answers all began to sound the same. Realistic, measurable goal setting is extremely important to being successful. If you re simply trying to make money every day, without a goal in mind, this will surely set you on the road to failure. The most successful traders will stress how important goal setting was to their success. But you need to take it a step further. Not only do you need realistic, measurable goals, but you also need to visualize yourself reaching those goals on a daily basis. I remember some advice I received from a very successful trader who has since passed away: Just as important as setting specific goals, you must visualize yourself successfully reaching those goals each and every day. If you cannot see yourself in your mind s eye as a success, there is no chance you will become successful. It just won t happen! We ll talk more about seeing yourself as a success a little later. But I hope you understand how important it is to have specific goals in mind so you can see how your progress is going and quickly determine if things need to be reevaluated and changed. I will tell you from experience that when I m trading well and making money, it s definitely because I m completely focused on my specific goals. On the other hand, when I m trading poorly, it s because I ve lost sight of my goals and am no longer seeing them as clearly as I should. And it shows in my trading results. The more you practice realistic goal setting, the easier it will become to do on a consistent basis. As a side note, I know someone who teaches people to day trade on the trading floor. One of the lessons he teaches his students is 6

11 to make $250 a day for 20 straight days in a row. You might say $250 is not a lot of money to make in a single day in S&P futures, but the point is for these students to learn to have realistic, attainable goals that are reachable. Once they ve reached these goals, they can strive to have somewhat larger ones. Just like anything, you want to start small and slowly expand your goals. By the way, most of this mentor s students are successful at getting through the 20 days of making $250 each day. Once they ve reached that goal, they re ready to move up to a slightly larger goal, as long as it remains measurable and realistic. Similar to anything else in life, it gets easier with repetition. 7

12 Chapter 3 SELF-EVALUATION AFTER A LOSS You re going along, trading, and making a profit. You ve set your goals, and you re on the way to achieving them. This stuff is really pretty easy, right? Then comes that losing trade the wake-up call. Now what? After a losing trade, it s very important to do a self-evaluation before your next trade. In my opinion, you must be completely honest with yourself. There are two reasons for losing trades: 1) You followed your rules, but the market did not go in your direction. 2) You didn t follow your rules. After a losing trade, you need to decide which of the above reasons caused it. If you followed your rules and the market simply didn t move in your direction, then it s alright to get back in the market when another trading opportunity presents itself. On the other hand, if you lost money on a position because you didn t follow your rules, then you need to take a step back and reevaluate. This is when it s most important for you to be honest with yourself. You need to make a commitment to learn from the mistake and get back on the right track to following your trading rules. This is a difficult thing for a trader to do. Most people have a hard time admitting they re wrong. But the best, most profitable traders are able to do it. And if you want to be a profitable trader, YOU will need to it. As I ve said before, it is definitely OK to be wrong about market direction it s part of trading. But you must also be objective, not only in your trading decisions, but also in your selfevaluations. To repeat, I strongly suggest that, after any losing trade, you get into the habit of self-evaluation. If the cause of the losing trade was that the market simply moved in the wrong direction, then 8

13 move on to the next opportunity. But if the cause of the losing trade was because you broke your rules, then you need to make a promise to yourself that you will improve your objective thinking and act in your own best interest as much as possible. All of this is easier said than done, but it does not change the fact that it needs to be done. You will only become a profitable trader once you have learned to be an objective trader. That comes from trial and error. It starts by being objective. The next step is learning from your mistakes and attempting to improve them. Every successful trader has learned this. First they did it wrong, and then they used the negative feedback to correct their actions. That s the only way to learn to be a disciplined, emotion-free trader. It takes time; it definitely doesn t happen overnight. 9

14 Chapter 4 REMAINING FLEXIBLE Years ago I got some advice from a fellow trader in the S&P pit. He told me never to get married to a trade. In the movie Wall Street, Michael Douglas told Charlie Sheen never to get emotional about a stock. Those statements are much more than just pieces of advice picked up along the way. If you don t remain flexible and stay detached from your trades, you ll never be a profitable trader. Essentially, this idea is simple. No matter how strongly you feel about a trade, you need to be willing to give up on it at a moment s notice. It s very common for a trader to get caught up in a particular trade and put much more weight on that trade than it deserves. For instance, I ve talked to traders who ve experienced this when in a trade, and I ve definitely been there myself. You feel as though you must be right about the trade. Many times when this happens, you may start to feel as if this is the last trade you ll ever do. This causes you to be inflexible about getting out of it. Even if the market is showing you signs that it is not going to continue in your direction, many traders get so attached to their trades that they cannot be flexible enough to act in their own best interests. Inflexibility will kill your trading in a heartbeat. To become a successful trader, you must be willing to change your mind quickly and easily. You certainly cannot be fighting with yourself when you have an open position in the market it s guaranteed to be a disaster. In the world outside of the futures markets, having a large ego can sometimes be helpful. People with large egos have the ability to convince others that they are always right. People with large egos do not need to be as flexible in the real world. But in the trading world, being inflexible and unwilling to admit you are wrong will do nothing but drain your trading account. Of 10

15 course, nobody wants to admit that they are wrong. Who wants to be wrong? I try to think of it differently. I don t see it as being wrong in a losing trade. I shift my thinking and instead think about it this way: If I don t get out of this trade that has very little profit potential, it will eat away at my past and future winning trades. Obviously, I don t want anything to jeopardize my ultimate goal. This helps me be more flexible and not afraid to cover my losing trades, or trades where profit is deteriorating. The less flexible I am about my bad trades, the more they ll eat away at my good trades. I m always trying to protect the winning trades because those are the ones that pay my bills every month. Always remember that the more flexible you can be, the more successful your trading will be. In fact, the amount of money you make trading will be in direct proportion to your flexibility. If that s not reason enough to learn how to become more flexible, then I don t know what is. 11

16 Chapter 5 FLAWLESS EXECUTION Many people get confused and think that flawless execution in the futures market means always selling near the high and buying near the low. It doesn t mean that at all. In my opinion, it would be extremely rare for you to buy at the low and sell at the high in the majority of your trades. In fact, you don t need to buy the low and sell the high at all to make money in this business. Flawless execution means acting on an opportunity (getting either in or out of a trade without hesitation) the moment you recognize it. Sadly, this is a lot easier said than done. But that doesn t mean you can t learn to do it. There are many good trading methods, systems, and techniques out there. Unfortunately, many people using these methods and systems still end up losing money. The reason is very simple: Lack of flawless execution. Again, flawless execution doesn t mean always having the perfect trade. It means being able to act immediately on the opportunities that you see in the market. Most people think of themselves as risk takers, but what they really want are guaranteed outcomes. But the two are totally opposite. You can t be a risk taker and still have guaranteed outcomes. They just don t work together. And that s the very reason many people hesitate when it comes time to put on a trade or cover an open position. They want the guaranteed outcome, but they realize there isn t a guarantee, so they fail to put the trade on and to act in their own best interest. In trading, there are NO guaranteed outcomes. It just doesn t work like that. With every trade, you ll be putting yourself, as well as your money, at risk. That s something you ll have to learn to live with in order prosper in the trading environment. There are no other options. You must learn to feel comfortable 12

17 with taking risks and to forget about guaranteed outcomes. Mark Douglas, author of The Disciplined Trader, makes this comparison between gambling and trading: As a comparison to trading, it is much easier to take risks and participate in a gambling event with a purely random outcome based on statistical probabilities simply because it s random. What I mean is if you risk your money on a gambling event that you know has a random outcome, then there s no rational way you could have predicted what that outcome would be. Therefore, you don t have to take responsibility for the outcome if it isn t positive. Trading is different. The future is not random. Various traders acting on their beliefs about the future determine the movement of the market. Therefore the results of their actions are not random. Douglas goes on to say, This adds an element of responsibility to trading that doesn t exist with a purely random event and that is difficult to avoid. This higher degree of responsibility means that more of your self-esteem is at stake, making it more difficult to participate. Trading gives you all kinds of ways to beat yourself up for all the things you should have or could have considered that would have resulted in a more satisfying outcome. This beating yourself up for what you could have done differently contributes to a lack of flawless execution of your trading methods or technique. It s easy to tell yourself you should have done this or that differently, no matter what the outcome. The problem? It s a fight you can t win. In the trading game, you will not be perfect. So beating yourself up doesn t make sense because you re doing it over something you really can t change. Now don t get me wrong. I m not talking about being upset with yourself for making trading mistakes such as chasing the market, not using a stop order, taking too much risk, etc. I m talking about covering a position and then having the market continue your way after you re already out of the market. It doesn t make sense to be upset about things like that. You don t have to be 13

18 perfect to make money in this market. Always remember that. Basically, the only way you can become proficient at flawless execution is practice, practice, practice. Just as with any skill, it needs to become a habit. The only way for it to become a habit is to do it a lot. This means you have basically two choices. The first is that you can set aside a certain amount of money for your education. Remember, this is an exercise. You really can t worry about losing the money. You must follow your rules faithfully and flawlessly. The more you do, the easier it will be. I suggest trading a smaller market (like the CME E-Mini S&Ps). This way, less of your capital will be at risk. Of course, everyone wants to make money, but you really shouldn t worry about that right now. The money-making is secondary. You need to be thinking strictly about executing your trades immediately when you see an opportunity. That is the only result you are striving for--flawless execution. It doesn t really matter whether the trade is good or bad. This exercise is not going to be easy, so you must be easy on yourself. The more accepting you are of your mistakes, the easier it will be for you to make the next attempt. If you make a mistake, don t beat yourself up. Encourage yourself to try again. I truly believe that is one of the biggest problems with traders. They beat themselves up so much for their mistakes that it s a wonder most don t have bumps and bruises after each trading day. You must take it easy on yourself. Most people are harsher on themselves than they would be on their worst enemies. All this leads to poor trading results. Remember, the more you get upset with yourself for your past mistakes, the more you ll relive those mistakes, and this will show in your trading results--in short, history does indeed repeat itself. The old saying about forgiving yourself for your mistakes and moving on is an important part of learning to trade successfully. 14

19 The second way to learn flawless execution may be a little easier to handle. It can be especially helpful for any new trader who s still somewhat nervous about risking his money in the market. As I said earlier, the only way to learn flawless execution is practice. And, to carry that thought a step further, one of the best ways I know to learn flawless execution without risking real money is to use a practice account. Basically, they all work the same way. You open a simulated account (without real money) and place your trades just as you would with a real account. You get simulated fills (according to where the market is trading) and keep track of your profits and losses. This is by far the best way to learn and practice flawless execution without risking the rent money. For newer traders or those having big problems with execution, simulated brokerage accounts may be just what they need to practice flawless execution. One word of caution: It s OK to use a simulated account for a little while. But the sooner you get your feet wet with real trading, the sooner you can learn the necessary skills. When you re ready to take that plunge, always use the smallest contract size on the smallest electronically traded futures contract you can find. 15

20 Chapter 6 BEING OBJECTIVE Do you believe anything can happen in the market at any time? If you do, good for you--this is what being objective is all about. A profitable trader needs to be thinking constantly that the market can do whatever it wants, whenever it wants. Many people get into trouble by thinking the market cannot or will not do certain things. Many will put mental limits on where they think the market should go, often yielding bad results. I remember a time a few years ago when I was in the S&Ps, and there were about five minutes left until the market closed. One trader told me he thought the market was going to break another 5.00 points in the S&P futures. I said there was no way this was going to happen with only a few minutes left until the market closed. He said that it didn t matter if there was only one minute left; for the S&Ps (or any market) to move, all it had to do was be open. And he was right. In the next four minutes, the market dropped 5.00 points, just as he had predicted. If I hadn t limited my beliefs, I could have made money on that trade. But unfortunately, I was not objective enough to believe the market could really break that far in such a short amount of time. My limited beliefs prevented me from making money that day. But in the end, that situation helped me to be more objective in the future. It was definitely one of the stepping-stones for me toward realizing that anything can happen at any time in the market. All it has to do is be open. If you believe this, then you release yourself from distorting market information. When you distort market information, you re NOT acting in your own best interest. For example, let s say you usually look at a certain indicator to help you find profitable positions. Let s say this indicator got you into a short position a little while ago. You ve been sitting with 16

21 this position, and the indicator is still telling you the market looks as if it should go down. But the problem is that the market isn t going down. And now some of the other tools you use are starting to show that the market is going to start to rally (go up). But your indicator still says down, so you ignore the things that are saying the market is going higher. You have conflicting signals. As I m sure you know, most people will not be objective. They will hope that the down indicator is right and the other stuff is wrong. In fact, they will probably try not to look at the stuff that says the market is going higher, or they will dismiss it as not having as much weight as the indicator because it doesn t conform to their expectations. Normally, if they weren t in a trade, they wouldn t even put on a position with these conflicting signals. But because they re already in the trade, they distort the information right in front of them, hoping and praying that the market moves in their direction profitably. Is that the objective thing to do? No, of course it isn t! The objective thing to do is to get out of the position and reevaluate. Or at the very least, move your stop order very close to where the market is trading to take less risk. That would be acting in your own best interest. But instead, most people ignore the information and hope that the position will work out the way they think it should. This happens because most people are locked into their opinions of the market and have a lot of trouble facing the fact that they could be wrong. As I ve said earlier, it s OK to be wrong about which way the market is going. But it s not OK to be wrong about the market direction and ignore signs that it is time to get out and start over. That lack of objectivity will kill your trading (not to mention your account). To be objective, you can t put your demands and expectations on the market. First, you re cutting yourself off and distorting vital information that the market offers to help you decide which way it is going. Second, as an individual trader, you don t have enough 17

22 power to control the market and to make it live up to your expectations. Thus, you must learn to be objective in your market observations. This doesn t mean that you can t have an opinion about the market. It only means that your opinion just as easily can be wrong as it is right. In other words, you need to be completely ready and comfortable for it to be wrong. You need to release yourself from having to be right about market direction. The more objective you are, the less you will distort the information you receive. Mark Douglas (see Chapter 5) states that there are seven characteristics of an objective person: 1. You feel no pressure to do anything 2. You have no feeling of fear 3. You feel no sense of rejection 4. There is no (absolute) right or wrong 5. You recognize that this is what the market is telling you 6. You can observe the market from the perspective as if you were not in a position 7. You are not focused on money but on the structure of the market Can you see any of the above qualities in yourself? Great! You re on the right track. Again, you need to release yourself from that burning need to be right. If you constantly need to be right, this is not the business for you. To be a successful trader, you will not always be right, but you will always need to be objective. 18

23 Chapter 7 SELF-IMPROVEMENT If you want to develop into a successful trader, you ll need to engage in some self-improvement. If you don t already, it s vital that you realize the market is always right, and you can take money out of the market as long as you don t impose a rigid mental structure on its behavior. In other words, don t allow yourself to get locked into an opinion and refuse to admit that you could be wrong about the market s direction. Every successful trader realizes that he could just as easily be wrong as he could be right. You must let go of the fear of being wrong so you can observe the market from an objective, clear viewpoint. If you can t let go of that fear, it will cause you to make mistakes and poor trading decisions. If you concentrate on fear, it will cause your subconscious to act out that fear and give you the very losses you re trying to avoid. This will most likely happen every time, because that s the way our subconscious works. What you think about is usually what you get. To improve as a trader, you ll also need to establish defined trading rules to guide your trading behavior. You must learn how to adhere to these rules no matter how tempting it will be to break them--and trust me, it will be tempting. Often. The fear of missing out on a trade will make you want to break your rules (especially in the beginning). But you must avoid doing so, no matter how tempting. Your rules are what will keep you acting in your own best interest. Breaking your rules is NOT acting in your best interest. It s that simple. The most important thing about self-improvement is to learn to be objective and to avoid indulging in illusions. If you refuse to acknowledge your mistakes by blaming the market or some other factor, then you re obviously indulging in illusions. If that s the case, improving yourself will be difficult, if not impossible. 19

24 To improve yourself, you must be honest with yourself. Only YOU are responsible for your results. For instance, blaming the market or the floor traders is only going to delay your selfimprovement. The fewer illusions we have, the clearer we can see what is really going on in the market and inside ourselves. The clearer things are, the more we can learn and grow. It will then become much easier to make good market decisions, regardless of the circumstances, as you get in the habit of acting in your own best interest. Just like bad habits, good habits are equally as strong and as powerful. However, it takes time and effort. Nobody likes to admit their mistakes, but this is exactly what we need to do to improve ourselves. If we don t confront our mistakes, we ll simply keep repeating them as they become stronger and stronger habits. We obviously want to avoid that situation. Taking responsibility for our actions is the first step toward selfimprovement. We need to realize that the results we get are because of the decisions we made. No one else is responsible for our actions. Blaming others only slows the learning process. If you trade poorly and lose money, it is because of your actions. But on the other hand, if you trade well and make money, it is also (thankfully) because of your actions. You will improve yourself a lot when you simply admit that you are the only one responsible for your results. You must confront the conditions that exist in reality (not the illusions). Identify what you need to learn or change to be more effective, and then initiate the daily task of improving yourself. It s not as hard as you think and, most importantly, learning to improve yourself is always acting in your own best interest. 20

25 Chapter 8 THE WORST MISTAKE YOU CAN MAKE OK, you have your trading rules. You have every intention of sticking to them. But then there s that one time. I ve lost count of how many traders I ve seen this happen to. To be honest, it has probably happened to almost every trader out there at some time or another. Unfortunately, for many traders, it could be the beginning of the end. As we all know, to be successful at trading, we need to have certain sets of rules to follow every day. These rules are extremely important because they give structure to our trading and help us decide what to do and, more importantly, what not to do. If you have good solid trading rules and follow them consistently, making profits and avoiding large losses should be an attainable goal. But on the other hand, if you do not follow your rules, you ll end up with many more losses than you would otherwise. And here s where the big mistakes begin to happen. Again, I ve seen it happen to countless traders. If you don t follow your rules and your trade ends up being a winner, you ll most likely breathe a sigh of relief. But in reality, you should not be relieved. You ve just made an error that could cause you to fail faster than any other trading mistake. You see, if this trade (where you didn t follow your rules) works out, then you ll be more likely not to follow your rules the next time. Again, this is the worst mistake you can make. This will cause more damage to your trading account than any other error. The worst part? It s tempting not to follow your rules just this one time. But you must learn that there cannot be a just this one time. You must follow your rules every time, without exception, if you want to be successful. 21

26 As I ve said before, I ve seen this happen to many traders. For example, I remember one trader who usually averaged about $500- $1,000 a day in the S&P futures. He was going along just fine, trying to make his goal every day, but he got greedy and said there had to be a way he could make more profits (although I m not sure what was wrong with $500-$1,000 a day). He decided his rules were too restrictive, and he was missing many opportunities. This trader decided that because he was doing so well, he would relax his rules in order to get into more trades and make even more profit. Well, he ignored his rules for a couple of days. Because of that, he ended up taking a lot more risk than he was used to. But he thought it was no big deal because he was now averaging about $2,000 a day for a week. Not following his rules was making him more money at least for a while. But I m sure you already realize what was about to happen. Within the next month, he lost everything he made for the last four months (almost $60,000) and was now down money for the year, when he had initially been on track to make about $200,000 for the year. This happened not only because he didn t follow his rules, but also because not following his rules worked (for a while). It gave him a false confidence that he no longer needed to follow his rules. I m sure you ll go through a time in your trading career (if you haven t already) where you ll be tempted not to follow your rules just this one time. I can t caution you enough how big a mistake this can be, especially if it works out and you make a profit. Making money on this rule-breaking trade could very well be the most expensive profit you ever make. It will always be tempting, but avoiding the temptation and resisting making the worst mistake you can make will be much more profitable in the long run. Following your rules consistently is the only way to be a successful trader. If you decide not to follow your rules just this one time, it won t be long before you are one of the 80-90% of traders who are unsuccessful. Don t let yourself become a statistic. 22

27 Always follow your rules. Don t let there be a just this one time. Chapter 9 GREED It s so easy to be greedy in this business. It s also easy to think that whatever you get, it s still not enough. If you have 2.00 points profit in a trade, you want 3.00 points; if you have 3.00, you want 4.00; and so forth. This lack of satisfaction is a big reason why many people have trouble succeeding in trading. The way to avoid being greedy in your trading is to find out why it s so easy to be greedy with the markets. Greed stems from a belief that there s never enough, or there won t be enough. When the market is continually moving, isn t it always possible to get more out of a trade? A greedy person will never be satisfied; he will always want more, no matter how much he has. People can be greedy when trading because they take non-market factors (such as how badly they need the money, what they need it for, whether they can afford to risk it, etc.) and apply them to the market and to their trades. But it doesn t make sense to do this; those non-market factors have nothing whatsoever to do with what direction the market is going. Wanting to use the money to buy a bigger house or to pay your bills has nothing to do with what direction the market is taking. In other words, don t let those things control your trading decisions and make you want more than what the market may be offering. You easily can be tempted into thinking there is a lot more in a particular trade just because you want more money, and that pushes you into wishing and hoping. And as we discussed a while ago, that is not acting in your own best interest. Wishing and hoping will not make you any money. 23

28 You may remember Michael Douglas saying in the movie Wall Street, greed is good! Well, you know what? He was way off. Maybe it sounds good in the movies, but it s definitely not good in trading. I believe strongly that being greedy will shorten your trading career faster than any other mistake you can make. 24

29 Chapter 10 FEAR We often can sabotage our own trading because of our fears. Fear can be helpful in our lives, except when it comes to trading. Then it really can be harmful. Fear helps us avoid things in an environment that we perceive as threatening. It s important to note that what we perceive as threatening may not necessarily be threatening; we simply perceive it that way. And as far as our minds are concerned, it s a real threat. A good example is offered in The Disciplined Trader. A child severely bitten by a dog will naturally associate all dogs with the threat of pain, and consequently might feel an intense fear or even terror whenever he encounters any dog in the future. The child s fear of all dogs is real. He has no way of making a distinction between a friendly and a dangerous dog because his personal experience leads him to believe that all dogs are dangerous. However, the reality is that not every dog is dangerous; quite the contrary. Few would be considered threatening; most see a child and want to play. Still, in every encounter the child has with a dog in the future, he will create an experience of terror, regardless of the disposition of any dog he happens to run into. If a dog makes any movement toward the child, the child will perceive that movement as an attack, when the dog may only want to play. The child could become so afraid of being attacked that he devotes most, if not all, of his attention to scanning the surrounding environment for dogs. Eventually, his senses will become attuned to picking up their sights and sounds, reliving his negative past experience, and avoiding what he has learned is threatening. The problem is what was learned is erroneous. Not knowing that, he will naturally believe that his terror is coming from outside instead of inside of him. 25

30 Do you see how the fear of the young child could be similar to the fear that we might experience trading? When we focus on our losing trades, mistakes, etc., we give our subconscious mind powerful directions. Then we can easily end up with those same losses that we are trying so hard to avoid. In other words, what we focus our attention on is usually what we get. To be successful it s not as easy as merely focusing our attention on winning trades and proper trading mechanics. But it s not that far off, either. You see, if you continually focus intensely on your mistakes and poor trading decisions, you re more likely to end up with more mistakes. Your subconscious sees the mental pictures and acts on the directions it receives from you. As you may already realize, your subconscious does not care if you re giving it directions that are not in your best interest. It simply attempts to follow the information it s given, regardless of whether it s helpful. Getting back to the dog-biting example, the child sent directions to his subconscious that all dogs are threatening to him. Two things are important here. The first thing is that the information is not necessarily true; not all dogs are threatening. The second thing is that this information is not helpful to the child. The child would certainly be happier if he were able to enjoy dogs rather than be afraid of them. But as far as the child is concerned, the fear is very real. There are still other ways in which our fears cause problems in our trading. When we trade with fear, it s easy to block things out. Instead of clearly seeing all the different pieces of information that help us make good trading decisions, we do the opposite. We ignore important information that can be threatening to us. When trading, this can be dangerous, and it will never help us act in our own best interests. For instance, if the market is offering information that would indicate we are right or information that would indicate we are wrong, what information do you think we ll focus on? We ll obviously put a lot of weight on the information that will prove us right, many times ignoring the information telling us of other possibilities. Eventually, the threatening information can become 26

31 so overwhelming that a trader simply may not be able to ignore it. The only way to relieve the stress and anxiety will be to get out of the trade. A fearful trader will handle a winning trade in the opposite way. His fear of losing causes him to focus on what the market can take away from his current trade. Remember, in a losing trade, the fearful trader will focus only on the information that supports his current position and ignore other factors that may not agree with his opinion. But in a winning trade, the fearful trader will ignore any information that states the market has potential to continue in a profitable direction. He ll be so focused on information that confirms his fears (of the market taking the profits away) that he ll exit the trade early, regardless of the profit potential left. And it s even worse if the market does go his way after he exits the trade! He finds it very easy to agonize over why he didn t stay in the trade a little longer. He certainly doesn t realize that it was his fear of losing that caused him to get out of the trade and leave that money on the table. To summarize, in a winning trade, a fearful trader will focus his attention on information that the market is going to take his profits away. In a losing trade, he ll focus his attention on anything other than what would indicate this trade is a loser. These are the main reasons most traders cut their profits short and let their losses run. Obviously, this fear will sabotage trading because it causes us not to act in our own best interests. To prevent it, we must learn to trade without fear. To trade without fear, we need to trust ourselves completely. So to be successful, you need to focus on different things than the majority of unsuccessful traders do. Letting your losses run and cutting your profits is what most people do. You need to do the opposite, and to do this, you need to change your thinking. 27

32 Chapter 11 WHAT IS PSYCHO-CYBERNETICS? (This chapter is an excerpt from the introduction of Zero Resistance Living by the Psycho-Cybernetics Foundation, Inc.) A science can be defined as a tested, proven system of knowledge that can be used to produce predictable, accurate results. The science of navigation allows us to calculate exactly where we are anywhere on earth or in space, and to predict accurately where our destination is, and when we will arrive at it. The science of chemistry makes possible new compounds and products that enhance our health, nutrition, safety every area of our lives. With a single bone, the science of archaeology can reconstruct the world and life of an animal that died millions and millions of years ago. The sciences of aeronautics and computers make it possible to maneuver an unmanned spacecraft millions of miles away with pinpoint accuracy, as well as broadcast a detailed photographic record of its journey. So a science can be considered a system of information so dependable and true that it can be used to make life better. Psycho-Cybernetics is the first science of human development a system of knowledge that will allow you to make accurate, predictable changes in how you think, how you feel, what you do and the amount of success and enjoyment you get out of life. Psycho-Cybernetics moved human development out of the realm of wishing, hoping, and undependable techniques into the realm of predictable, positive results. You ll find no wishing and no hoping in Psycho-Cybernetics. Psycho-Cybernetics is based on scientific knowledge of how the human brain and nervous system work together to produce thinking, attitude, and behavior. The underlying principles have been tested and proven in countless experiments in laboratories and research institutions around the world. And the millions of people who have used it to change their lives in remarkable ways over the last thirty years have proved the practice of Psycho- Cybernetics successful. 28

33 The word cybernetics comes from a Greek word that means helmsman, a person who steers a ship to port. The science of cybernetics studies automatic guidance systems like those that enable a guided missile to find its target, a computer to solve complex problems, or robots to do complicated sequences of tasks automatically. Psycho-Cybernetics works at a fundamental level and the changes it produces affects all areas of life. Some of the following items will be beyond the scope of this book, but Psycho-Cybernetics has many uses for improving life beyond the trading arena. The more you learn how to master Psycho-Cybernetics, the more you can expect to: 1) Build a strong, positive self-image that expresses the real you, the best you. 2) Set clear goals and achieve them predictably. 3) Stop seeing your mistakes as failures and actually learn to use your mistakes as valuable feedback that guides you to your goals. 4) Be more productive and successful financially and in your career. 5) Forgive others and yourself and wash away resentment that takes the joy out of living. 6) Learn how to relax and stay relaxed. 7) Learn how to deal with anger, even how to use it creatively. 8) Learn how to think more clearly. 9) Feel good about your life and yourself continually. 10) Learn how to improve your relationships with everyone in your life: your family, friends, coworkers, and especially yourself. 29

34 11) Feel a sense of overall satisfaction, fulfillment, and peace as you are bringing out the best of yourself each day. Psycho-Cybernetics will not produce these changes overnight. It takes time to learn the new ways of thinking and acting so that they become automatic in your life, but you ll begin to experience positive results almost immediately. Psycho-Cybernetics is easy. You ll quickly realize that the techniques do not involve willpower or difficult effort. The exercises and methods of Psycho-Cybernetics utilize your creative imagination in a relaxed, playful way. They re simple to learn and fun to do, and like any skill, the skill of finding your best self grows easier with practice. The science of cybernetics gives us a very effective way to look at the human brain and nervous system. Our subconscious mind is actually a goal-seeking servomechanism in other words, an automatic human guidance system. Psycho-Cybernetics is the science of this human guidance system. This servomechanism has access to everything you ve ever seen, done, tasted, smelled, felt, and learned. It s all recorded in your brain. If you provide this servomechanism with a goal, it will automatically produce the means to achieve that goal. Human beings are naturally cybernetic or goal-seeking beings; this is the way we re created. It s the servomechanism that allows you to tie your shoes, fix breakfast, and pilot your car through a complicated journey to get to work, while all the time you re thinking of other things. This servomechanism is completely impersonal. It works entirely with what is programmed into it. An incredibly powerful tool, it s totally under the direction of the conscious mind. If you give it positive, successful goals, it will produce positive, successful results. It will become a success mechanism. If you give it goals of failure, it will just as automatically function as a failure mechanism and produce failure. 30

35 The Importance of Mistakes All automatic guidance systems reach their goals by constantly correcting mistakes. A guided missile on its way to its target has sensors that detect when it s off course. The guidance mechanism then makes the necessary adjustment and proceeds. This is done thousands of times on its journey. The guided missile relies on this negative feedback to get to its destination. Without this feedback, a guided missile would actually not know where it was going and would never reach its target. The same is true for the human servomechanism. It s unfortunate that so many of us interpret mistakes as failures and suffer feelings of frustration and discouragement, when in reality our mistakes provide the exact information our servomechanism needs to make the necessary corrections to take us to our goals. Your servomechanism has no opinion one way or the other about mistakes. It simply uses the information to guide it to its objective. What we call mistakes are actually valuable lessons for success. An important part of Psycho-Cybernetics is learning to use mistakes creatively and to remove the negative feelings that mistakes cause. Self-Image Self-image is the mental blueprint or mental picture a person has of himself. We usually don t consciously pay attention to it, but it s there in detail outside the conscious awareness. Much as the destination or goal of a guided missile is a set of coordinates programmed into its computer, the goals that program a person s creative servomechanism are mental images, voices, and feelings created by using imagination. This self-image is our view of the kind of person I am. We construct self-images from our beliefs about ourselves--beliefs that have been unconsciously formed from our past experiences, our triumphs and failures, our successes and disappointments, and by our observations of the way other people react to us. This is particularly true in regard to our early childhood. Once an idea or a belief about ourselves becomes part of self-image, we accept it as being true. We don t think to question it; we act as if it is true. Self-image determines our thinking, our feelings, our actions, even 31

36 the limitations of our abilities. It controls the degree of success, excitement, joy, and satisfaction we have. The kind of life we have and even the world we appear to live in are determined by our self-image. Self-image explains why positive thinking is so unreliable. It explains why willpower is so ineffective and difficult to maintain. Not all the willpower and positive thinking in the world can produce change and success if they don t match an individual s self-image. Your self-image is constantly programming your creative mechanism. If your self-image is that you re a failure, your servomechanism will find a way to deliver that result to you. If your self-image is that you re a victim of circumstances, it will be reflected in your life. If, on the other hand, your self-image is that you re capable and successful, your creative mechanism will produce those results. The science of Psycho-Cybernetics teaches you to change or to create a self-image that is strong, caring, productive, and capable. This self-image is realistic, reasonable, and expresses your best self--your true self. Imagination the Tool of Change Again, you ve built your current self-image from the vivid and detailed mental pictures and feelings you ve experienced in connection with the events of your life, especially in childhood. And you ll continue to use this same powerful tool, your creative imagination, to construct the kind of self-image that expresses the best of you. You ll use your imagination to create images and feelings of success, satisfaction, accomplishment, and strength. With these new positive images, you can reprogram your servomechanism so that it begins to produce results in accordance with your new self-image. In other words, you ll learn to use your imagination in a relaxed, playful way, never straining or trying too hard. This process will take time, because you didn t construct your current self-image overnight. But soon the new programming will begin to take hold. You ll feel yourself beginning to think, to 32

37 feel, and to act in accordance with your new successful image of yourself. Eventually, this new self-image will become second nature, completely natural and spontaneous, and it will bring you success, satisfaction, enhanced relationships, and increased happiness in the future. 33

38 Chapter 12 SOME BACKGROUND TO GET YOU STARTED I truly feel that in order for you to learn and understand an idea or a set of ideas, it s essential for you to know its background. If you understand the foundation on which they are based, it makes understanding the details much easier, as well as more meaningful. Dr. Maxwell Maltz is the author of a book called Psycho- Cybernetics, first published in It became a huge bestseller and often was considered one of the best self-help books ever written. Even today, Dr. Maltz s discoveries in the field of self-image psychology continue to influence thousands of people worldwide. Psycho-Cybernetics is still on the cutting edge of personal development technology. It remains as timely today as the personal computer. In fact, Psycho-Cybernetics often has been called the first and only true science of personal development, and many experts feel it s the only way to alter your personality. Dr. Maltz was one of the world s most widely known and highly regarded plastic surgeons. A professor of plastic surgery at the University of Nicaragua and the University of El Salvador, he operated on thousands of people. The plastic surgery (usually facial) he performed on people not only changed their physical appearance, but in many cases, amazing changes often occurred in their personalities as well. Dr. Maltz realized that when you change a man s face, you have the potential to change his psyche too. Dr. Maltz knew this was an awesome responsibility and was determined to learn as much as possible about this phenomenon. He believed he owed it to his patients and himself to understand everything about what he was doing and the dramatic changes that he was bringing about in people s lives. The strange thing was that some patients showed no personality 34

39 change whatsoever after dramatic changes in appearance. On the other hand, other patients showed huge changes in attitude and personality less than a month after surgery. Dr. Maltz needed to find out why some people s personalities changed for the better, and others simply acted as if there was no change at all, as if there had been no surgery. This told Dr. Maltz that the changes in appearance were not the key to the changes in personality. Something else was influenced by the facial surgery in some cases, and in others, it was not. When this something else was reconstructed, the person himself changed. When it was not reconstructed, the person himself remained the same, although the physical features might be radically different. It was as if personality itself had a face. This non-physical face of personality seemed to be the real key to personality change. If it remained scarred, distorted, ugly, or inferior, the person himself acted out this role in his behavior, regardless of the changes in physical appearance. If this face of personality could be reconstructed and if old emotional scars could be removed, then the person himself changed, even without plastic surgery. Once he began to explore this area, Dr. Maltz found more and more phenomena that confirmed the fact that the selfimage, the individual s mental picture of himself, was the real key to personality and behavior. 35

40 Chapter 13 MENTAL PICTURES Since the beginning of time, successful men and women have used mental pictures and rehearsal practice to achieve success. Napoleon, for example, practiced soldiering in his imagination for many years before he actually stepped onto a battlefield. He vividly imagined himself as a commander and drew up maps showing where he would place various defenses. He would make all of his calculations with mathematical precision in mind. Conrad Hilton, the owner of the famous Hilton hotel chain, said he imagined himself being a successful hotel man long before he became one. A famous basketball coach once said, There is no way to put the ball in the basket when the pressure is on, if you can t see the ball going in the hoop clearly in your imagination first. I would say the same is true for trading. If you can t clearly see yourself in your imagination as a successful trader, there s no way you can be a successful trader. The most successful traders have been vividly picturing themselves as successful for many years. And in many cases, these traders pictured themselves as successes long before they actually were. Again, each of us has what Dr. Maltz calls the servomechanism, an automatic internal goal-seeking machine that steers its way to a goal we want to reach. This servomechanism works much like a guided missile and, in the same way, it, too, needs proper programming to hit its target. That comes in the form of the mental pictures we give it. If we continually give the servomechanism clear, vivid pictures of the goals we re trying to achieve, our subconscious automatically will do the necessary things to help us achieve our goals. On the other hand, if we continually think and picture the things we do not want to happen, our servomechanism will make those things 36

41 happen. Our servomechanism doesn t care if those mental pictures are in our best interests or not. It simply reacts to what it s given. For example, suppose you re worried about presenting a speech to a large number of people. If you vividly picture in your mind the speech going well and the audience receiving you in a positive way, this will go a long way to helping you give the speech with the results you want. But on the other hand, if you continually worry that the audience will laugh and that the words will likely come out all wrong, then this is what will most likely happen. This is precisely how the success and failure mechanisms inside us work. (We ll talk more about the success and failure mechanisms a little later.) However, the goal or picture in your mind must be within your capabilities. For example, in trading, if you picture yourself making a few hundred dollars a day or a week, then you can probably achieve that goal as long as you see it clearly enough in your imagination. On the other hand, if you picture yourself making $5,000 every day, it will be nearly impossible to make that goal become a reality, because it s probably not within your capabilities. You can imagine yourself as a future success or failure. It s up to you. All too often, people are not willing to exercise this control. They allow their imaginations to destroy their potential by picturing situations in the past in which they have failed. We all carry mental scrapbooks, but instead of preserving the joyous occasions of life, the moments of accomplishments, some people save only their times of failure and frustration. These negative things easily take control of their imaginations. All we need to remember is that our brains have a hard time distinguishing between real and imagined experiences, as long as they are imagined vividly enough. If we clearly picture ourselves functioning in specific situations, it s the same as the actual performance. Mental practice can help you perform better in real life. You ll learn specific mental exercises to help you improve your trading. These mental exercises, if imagined vividly enough, will be almost the same as 37

42 the real situation. They ll help you prepare for many different situations you ll come across while trading. A well known psychologist, R.A. Vandell, demonstrated the power of mental pictures. He found that mental practice could help people throw darts more accurately. Don t get me wrong; I m not suggesting that throwing darts is the same as trading. I just want to give you an example to make the idea of mental pictures clearer. First, the psychologist seated his subjects in front of the target and told them to imagine that they were throwing darts at it. He did this for several days and then tested their actual performance. The mental practice improved each person s aim as much as actually throwing the darts would have. Golfers use this technique, too. When you next watch golf on television, note how the pro rehearses his shot, imagining what s going to happen before he physically hits the ball. The all-time great golfer, Ben Hogan, once described for Time magazine how he mentally rehearsed each shot before he attempted it, making the shot perfectly in his imagination, feeling his back swing and follow through, exactly as it needed to be. Another example would be shadow boxing. Boxers regularly use this technique to improve their performance in the ring. You, too, can learn to apply this technique to improve your trading, shadow boxing in areas of the trading arena where you might be having trouble. You may be asking yourself, is it actually true that you can exert control over your behavior and outside events by using your imagination? Well, it s certainly not as easy as saying, Okay, I will imagine my way to success. As with anything, in order to become good at it, there are steps you ll have to learn and regularly practice. Ultimately, if you can achieve a clear picture of yourself as a successful trader, that will take you further than you can imagine in taking the necessary steps to become (and remain) a successful, profitable trader. It s the only way to achieve trading success. 38

43 Chapter 14 HOW TO USE VISUALIZATION TECHNIQUES TO IMPROVE YOUR TRADING You may be tempted to think Psycho-Cybernetics and visualization techniques are voodoo, magic, or witchcraft. When doing these exercises for the first time, you may feel a little awkward. Don t be deterred. Anything new usually feels somewhat awkward at first, but with time and practice, it will get much easier. And make no mistake about it. Millions of hugely successful people all over the world have used visualization techniques. They ve used techniques very much like ones you re going to learn to achieve incredible success in their lives. The key is that they see themselves as successes long before they actually become successful. Furthermore, they continue to see themselves as successes in their given fields on a daily basis. They certainly don t just sit back and think success is theirs forever. They know they have to nurture it and continue to see themselves in their mind s eye as the success they want to be. I had a mentor when I first started at the Exchange. He was probably one of the 10 best floor traders in Chicago. He would consistently make a seven-figure income trading in the pit. He had one practice that always intrigued me. He would lie on his couch for 30 minutes before the market opened each day and visualize his trades. He would see himself in his mind s eye buying and selling from the different traders on the floor. He would picture in his mind the bright colors of the other traders jackets. He would see the quote boards as they displayed the ever-moving prices. He would get into winning trades and get out of them at a profit. He would get into losing trades and get out of them the second he thought they would not be profitable. All in his mind s eye, he would remember the past winning trades he d had, and feel the feelings that those trades produced. Everyday he would do this, and in my opinion, it had a lot to do with how successful he was. 39

44 In the mind s eye is a key term in using visualization techniques. This is where you do your visualizing. It s very much like when you read a book or someone tells you a story. You use your imagination. You don t just listen to the words; you see the pictures in your mind s eye. As children, we used our imaginations on a daily basis. But as adults, most people use creative imagination less and less, which is a shame because this is really when we need it most. When we were kids, we used to pretend things. We would imagine that a tree we were climbing was actually a huge army fort. We would pretend a play fire truck at the park was a real, working fire truck; we actually could drive it to fires (in our imagination) and put those fires out. Because we practiced using our imaginations on a daily basis, these things seemed very real to us. We could see all the details very clearly. But as adults, most of us have let our imagining skills deteriorate. Thus, it takes time to relearn these skills and to receive the benefits from them. Most people don t see things in their minds as clearly as they probably could. Remember, we said earlier that the mind can t tell the difference between an imagined experience and an actual one, as long as the images are vividly imagined. Unfortunately, most people don t see the pictures clearly or vividly enough. Over time, their imaginations haven t been used enough to stay sharp and focused. In other words, it will be extremely essential to strengthen your imagination. Instead of the mind s eye, Dr. Maltz uses a different term: theater of your mind. It works well because everyone is familiar with a movie theater. Everyone has been in one and can easily picture the screen, the projector, the seats. This is an excellent place to do your visualizing. In fact, Dr. Maltz suggests you pick a comfortable chair in the theater of your mind. Then the idea is to watch the big screen in front of you (in your imagination) and picture little movies starring yourself the way you want to be. In trading, this can help you with things like pulling the trigger without hesitation, getting out of losing trades, etc. We ll talk about exercises using this kind of mental practice later. 40

45 The key to using the theater of your mind is to change your selfimage. As we discussed earlier, the self-image is the picture you have of yourself. The self-image also is the product of your experiences, failures, successes, humiliations, and other programming. From these experiences, you create a picture of yourself. Maybe you ve had some bad trading experiences, and after a while you lost confidence to pull the trigger when you saw a trading opportunity. Most likely, your self-image is that of a person who can t pull the trigger. Remember, your self-image is a subconscious thing. You probably don t even consciously think about yourself that way. The important thing to remember is that using visualization techniques on a daily basis can change your self-image so that you re the kind of person you want to be. It doesn t matter how others see you; how you see yourself is most important. If your image is that of a failure, you ll act as if you re a failure. But on the other hand, take comfort in the fact that the picture you have of yourself can be changed, and you re the one who can change it. Visualization techniques will work 100 times better than trying to use willpower to force yourself to change. For instance, saying, I will pull the trigger the next time there is a trading opportunity will not do any good if it doesn t agree with your self-image. This is why you need to use your imagination to change the image you have of yourself. That is the only true way to change; willpower alone won t work. Your self-image will always be stronger. You may be tempted to think this won t work or that it s silly. All I can tell you is that Michael Jordan, Dennis Rodman, Bart Star, Ben Hogan, as well as many successful traders I know, myself included, believe in it and have used it to improve the way we perform. If we can be successful from it, the least you can do is see if it can be successful for you as well. People from eight years old to senior citizens have benefited from the use of Psycho-Cybernetics and the visualization techniques that go along with it. Professional athletes, salesmen, traders, and 41

46 people of all occupations have successfully used it to improve their concentration and performance. There s no reason to think you can t do the same thing. We have a choice of either using our success mechanism (by seeing positive, helpful pictures) or using our failure mechanism (by seeing negative images of the past). The choice is up to us. If we begin to trade with negative feelings, we ll fail before we even start. On the other hand, if we start to trade with positive feelings, these feelings will go a long way in helping us to succeed. You certainly can use Psycho-Cybernetics to change more than just trading skills. It can change and improve almost any aspect of your life. Here are some rules to remember when using visualization techniques to improve your self-image: 1) You must be in a relaxed state when going into the theater of your mind. Michael Jordan is obviously in a relaxed state when he s working his magic on the basketball court. Without being in a relaxed state of mind, it s next to impossible to succeed. At the end of this chapter is a relaxation technique that will get you in the right frame of mind to visualize your success. It also helps to be comfortable, such as seated in your favorite chair, without any distractions (no music, TV, etc.). 2) You must pay close attention to the details of your mental pictures. Remember, in our mind s subconscious, we can t tell the difference between an imagined experience and a real one if the details are vividly portrayed. This is not daydreaming. You must focus intensely on the details around you. The sights, sounds, and smells are all very important for these exercises to benefit you in a positive way. 3) You must act as if you are already the kind of person you want to be. The real key to changing your self-image is to think continually of yourself as already being the kind of person you want to be. Continually keep that picture in your mind (for instance, a disciplined, consistent trader) and keep acting as if 42

47 you re already there. After not too long, your powerful subconscious will begin to follow suit. 4) You should enter the theater of your mind at least once a day, preferably the same time each day. Scientific experiments have shown it takes about 21 days to change a habit or a thought process. In the simplest terms, that s exactly what we re trying to do. We re trying to change a bad or unhelpful habit into a good and helpful one. But doing this takes time. You didn t form your bad habits in one day, so it s impossible to expect them to change in one day. But if you consistently use these exercises for 21 days in a row, you ll be pleasantly surprised at how your habits have changed. Relaxation Technique: Calm Body, Calm Mind It s hugely beneficial to be physically and mentally relaxed before doing the visualization exercises. Here s a simple technique to use in the theater of your mind to bring on relaxation. 1) Sit in a comfortable chair or lie on a bed. There should be no other distractions. Turn off the TV, radio, and the lights. Go into the comfortable theater of your mind. See yourself getting ready to watch a movie about yourself. 2) Lie down and imagine your body is a series of rubber balloons. There are two valves in your feet. They open and air escapes from your legs. Your legs collapse until they re empty and lie flat against the bed. A valve now opens in your chest and your whole body begins to collapse limply against the bed. Continue this exercise with the arms, the neck, and the head. You don t have to do this in bed. If you re in the office, try to fix a picture of yourself in your mind s eye of yourself lying in bed doing the exercise. You ll actually feel the relief from being relaxed. Physical relaxation leads to mental relaxation. When practiced daily, it gives us that relaxed attitude that allows us to better control our 43

48 actions. 3) Again, remember to pay attention to details. What is your theater like? How does the seat feel? Is the screen large or small? Are you sitting in the middle of the row or in an aisle seat? Are there armrests on the chair? How do they feel under your arms? The details are very important. Each time you practice this technique, when your body and mind are feeling completely relaxed, be sure to say to yourself mentally, calm body, calm mind. This deepens the programming of your servomechanism. As you practice this technique, you ll find the time that it takes you to become relaxed grows shorter and shorter. Eventually, you ll be able to relax totally at any time, and in any situation, simply by saying to yourself mentally calm body, calm mind. 44

49 Chapter 15 GOAL-SETTING EXERCISE I can t stress enough how important goal setting is to being successful in your trading. If you don t have daily, weekly, monthly, and yearly goals for your trading, it will be very difficult for you to visualize your success. This is because you won t have something specific to strive for. To be at our best, we always need clear, measurable goals in mind. This exercise will teach you how to visualize reaching your set goal of making a certain amount of money each day. That does not mean you ll reach that goal every day. But without having that clear, set goal, you probably won t reach it most days. EXERCISE Get into a relaxed state with the calm body, calm mind relaxation technique: 1) Enter the theater in your mind. Remember to make the theater as comfortable as possible. Be sure you re sitting in a soft, comfy chair. Remember, details are very important. How do the armrests on the chair feel? Pay attention to them. Is the screen large or small? Details, details, details! At this point, you re trying to strengthen your imagination and see the pictures in your mind s eye very clearly. If you can t see the pictures clearly yet, don t worry; it gets easier with time and practice. 2) With this exercise, we ll visualize having reached our goal at the end of the trading day. Remember, it s vital that your goal be realistic and measurable. The measurable part is easy, because an amount of money is always measurable. But also remember that your goal must be realistic. So if you re an electronic day trader and visualize yourself making $250 a day, that seems realistic. If you re an electronic day trader and you try to visualize making 45

50 $3,500, a day that s probably not so realistic. Making that kind of money on a daily basis is probably beyond most people s capabilities. 3) First we want to visualize in our minds the days we ve been successful with our trading. We want to remember those days where we ve been able to make our goal (for this exercise, we will use the daily goal of $250). If you need to go back and look at your trading statements to find days that you made money, then do it. The idea here is to see those days in your mind and re-live the feelings you had from being successful on those days. Play those days back to yourself in your mind. Remember to notice the details. Try to remember placing the orders that gave you winning trades. Can you see yourself moving the mouse on the computer to check the charts? Can you see yourself placing your orders? How does the pen feel in your hand? Details, details, details! 4) For those who have not had winning trading days, or can t remember them, that s OK. As we said earlier, you can simply make up an experience of being successful in your mind s eye. See yourself getting out of your winning trades successfully. See yourself getting out of a losing trade as soon as you realize the profit potential is no longer there. Remember, if there s enough detail, your mind can t tell the difference between an imagined experience and a real one. The imagined experience doesn t necessarily need to be in trading. Just remember clearly a time when you were successful in anything and feel those winning feelings. That s the first step. 5) Now we want to move to the next scene in our theater of the mind. We want to see ourselves reaching our goal of $250 each day. One of the keys of successful visualization is to see the final results and let the success mechanism do the work for you. Picture yourself having made $250, or whatever amount you choose, on the first day of the week (Monday). See yourself in the theater of your mind after 46

51 the trading day is over. Do whatever you do when the day is over. See yourself mark down that you made $250 on Monday. Then turn off your computer or the light, or push in your chair...whatever you do when the day is over. 6) Do the same thing on Tuesday. Remember the details you see. I know it s been said a hundred times, but if you don t pay attention to the details, it won t work. To see the details, this exercise will take longer than two minutes; if it s only taking two minutes, you re not doing it right. You must see the pen touching the paper as you write down that you made $250. How does that pen feel in your hand? You must feel your hand turning off the computer and hear the sound it makes. See the room go dark as you turn off the light and leave for the day. 7) After you ve seen, in your mind s eye, reaching your goal each day for a week (Monday through Friday), then go back and look at your successful trades again, or at least successful experiences from the past. This will build confidence and help you to get used to the visualization process. This goal setting exercise is extremely important. Without having clear-cut goals, it s impossible to succeed in trading. Every truly successful trader sets clear goals for himself. Having these goals will help you program your success mechanism for the other visualization exercises. Remember to do these exercises for at least 30 minutes a day. It s also helpful to try to do them at the same time each day. And finally, you must be relaxed for these exercises to be effective. 47

52 Chapter 16 PULLING THE TRIGGER EXERCISE People can t pull the trigger when they sense an opportunity because of one reason and one reason only--they re afraid! Not of the market, but of themselves. Their fear comes from not having complete trust in themselves to act in their own best interests. You fear your inability to do what you need to do, when you need to do it, without hesitation. Being afraid causes us to freeze up and makes us unable to pull the trigger to execute our trades. This causes missed opportunities, which leads us right back to the real problem of not being able to pull the trigger kind of a vicious circle. After we miss an opportunity (because we are afraid) we play the scenario in our minds in a very unrealistic way. For example, let s say we want to get long the market. The opportunity comes up for us to get in the market, but our fear prevents us from pulling the trigger, so we do nothing. Then, the worst possible thing happens (in our minds). The market rallies and we start to count the money we re missing out on because we didn t pull the trigger. If the market moves our way 5.00 points, we think that we should have had those 5.00 points. We do this whether it s realistic or not. This is the failure mechanism hard at work. This kind of thinking is most harmful to our trading. We mentally beat ourselves up for missing the trade, and we feel as if we lost the money we would have made had we gotten in on the trade. Therefore, we get angry at ourselves. We call ourselves stupid. We play the trade repeatedly in our minds, thinking about the things we did wrong. This is just like the visualizing techniques we ve been talking about, with one crucial difference--we re visualizing ourselves doing the wrong thing. By continually thinking of ourselves as unable to pull the trigger, we re reinforcing that idea in our subconscious. All of this is destructive 48

53 and makes things much worse. Therefore, we need an exercise to help us pull the trigger when we see a trading opportunity. We need to get past the fear that is causing us to freeze up and not move when we should. And, we definitely want to avoid visualizing or continually thinking about the mistakes we ve made and the opportunities we ve missed. We can t change the past, only the future. EXERCISE 1) Get in a relaxed state with the relaxation technique calm body, calm mind. 2) In this exercise, we want to visualize ourselves being able to pull the trigger without hesitation when we see an opportunity, or when it s time to get out of a trade. 3) Enter the theater of your mind and first play back (in detail) times when you ve pulled the trigger as soon as you ve seen a trading opportunity. Remember to see the details. See yourself watching the charts and discovering the opportunity. You see the green light go off in your head and you don t hesitate. You place your order. (Can you feel how the mouse feels in your hand? Notice how you feel sitting in your chair watching the screen.) 4) See the trade going your way. Re-live your feelings when you ve seen an opportunity and jumped on it. Feel how you felt when you were able to pull the trigger without hesitation. 5) If you haven t had trades where you were comfortable pulling the trigger, then try this: Remember a time when you did something you were comfortable with, something that s hard for most people to do. For instance, maybe you re a good negotiator and you re not afraid to ask for a lower price when others wouldn t be confident doing so. Try to visualize that time vividly and feel those confident feelings. Maybe you re a person who is good at fixing 49

54 things and wouldn t hesitate tackling a big fix-it job. You would obviously feel confident that you could get the job done. Then switch the scene in your mind s eye back to the trading situation and see yourself pulling the trigger at the right time. It s OK to make up the situation, as long as you have the confident feeling first and are seeing the pictures in your mind vividly and with detail. 6) See yourself liquidating this trade when you feel the time is right. See the details clearly. Clearly see yourself getting out of the trade. See yourself hitting the correct keys to liquidate the trade. Feel the confident feelings you get from having a successful trade. Again, it s important that you do these exercises on a daily basis. They won t work after just one day. You didn t become afraid to pull the trigger in just one day, so you can t expect to turn it around in just one day, either. Also, these exercises work better if you do them at the same time each day. This mental practice will reprogram your self-image. After several weeks of practice, if you feel the confident feelings, your inability to pull the trigger will be a thing of the past. 50

55 Important Note: Attempting to do these exercises right after a losing trade or a bad day will not work. It s very unlikely you ll be able to get relaxed enough for the visualization process to work if you re upset or angry at yourself. I would suggest doing these exercises only when you re in a relaxed state not when you re aggravated or upset. That won t get you anywhere and will simply turn you off from continuing to do them in the future. The term time heals all wounds is very true here. If you give yourself some time to calm down (a day, an hour, whatever), you ll be in a much better position to relax and get some benefit from these exercises. 51

56 Chapter 17 MORE RELAXATION EXERCISES The following relaxation exercises, taken from Psycho- Cybernetics, can be used instead of the calm body, calm mind exercise. 1) In your mind s eye, see yourself lying stretched out upon the bed. Form a picture of your legs as they would look if made of concrete. See these heavy concrete legs sinking far down into the mattress from their sheer weight. Now picture your arms and hands as made of concrete. They also are very heavy and sinking down into the bed, exerting tremendous pressure against it. In your mind s eye, see a friend come into the room and attempt to lift your heavy concrete legs. He takes hold of your feet and attempts to lift them, but they re too heavy for him. He can t do it. Repeat with arms, neck, etc. 2) Your body is a big marionette doll. Your hands are tied loosely to your wrists by strings. A string to your upper arm connects your forearm loosely. A string to your shoulder connects your upper arm very loosely. Your feet, calves, and thighs are also connected together with a single string. The strings that control your jaw and hold your lips together have slackened and stretched to such an extent that your chin has dropped down loosely against your chest. All the various strings that connect the various parts of your body are loose and limp, and your body is sprawled loosely across the bed. 3) Many people will find this the most relaxing of all. Go back in memory to some serene and pleasant place from your past. There s always a time in everyone s life when they felt relaxed, at ease, and at peace with the world. Pick out your own relaxing picture from your past and call up detailed memory images. Yours may be a peaceful scene at a mountain lake where you went fishing. If so, pay 52

57 particular attention to the little incidental things in the environment. Remember the quiet ripples on the water. What sounds were there? Did you hear the quiet rustling of the leaves? Maybe you remember sitting perfectly relaxed and somewhat drowsy in front of a burning fireplace long ago. Did the logs crackle and spark? What other sights and sounds were there? Maybe you choose to remember relaxing in the sun on a beach. How did the sand feel against your body? Could you feel the warm, relaxing sun touching your body, almost as a physical thing? Was there a breeze blowing? Were there gulls on the beach? The more of these incidental details you can remember and visualize, the more successful you ll be. Daily practice will bring these mental pictures or memories into focus. The effect of learning also will be cumulative. Practice will strengthen the tie-in between mental image and physical sensation. You ll become more and more proficient in relaxation and this will be remembered in future practice sessions. 53

58 Chapter 18 WHY VISUALIZATION TECHNIQUES WORK The question often arises as to why visualization techniques work so well and why so many people use them daily. It s quite simple, actually. Everyone has a self-image or, in other words, a picture of the way they see themselves. This picture may not necessarily be true, but it will still influence your behavior in extreme ways. For instance, let s say you think of yourself as a person who lacks coordination. That alone will cause you to drop things easily, possibly slip and fall, as well as other things that go along with a lack of coordination. Your self-image will always control your behavior. On the other hand, seeing yourself as a coordinated person will go a long way in helping you be surefooted. The power your self-image has over you is remarkable. The key to acting the way you want is to first change your selfimage. Once you do that, your behavior will change quickly and almost automatically, similar to the example of a person trying to lose weight. Sure, he may be able to force himself to eat better foods and get to the health club for a few days, but if he doesn t change the picture he has of himself, relying on that rather than willpower alone, he won t be able to sustain it. What Does This Have to Do with Trading? The same is true for trading. To a trader with a self-image of someone being afraid to pull the trigger, being successful and making money will be next to impossible even before he starts. On the other hand, if he has the self-image of a disciplined trader who acts in his own best interest, that alone will go a long way to helping him make money consistently. Don t simply say that you will now be a confident, disciplined trader and then expect it to happen. That s like trying to use 54

59 willpower to force yourself to go to the health club. Just saying it is not enough. You need to use visualization on a daily basis to change that picture of yourself. The skills you ve learned here can help you change that picture so you can become the kind of trader you want to be. But make no mistake about it: if the self-image is not changed first, the behavior will not change! It s that simple. 55

60 Chapter 19 THE CLOSE How do you know that these techniques will work for you? That s the hardest part--you don t know for sure. One of the most important things to remember when using the Psycho-Cybernetics techniques is that you must have faith they will work, and practice them on a regular and consistent basis. People often become easily discouraged when they don t see results immediately--understandable, but not realistic. You didn t get the self-image you have right now in only one day, and so it makes sense that it will take more than one day to change that self image for the better. Again, the key is for you to have faith that it will work, even when it hasn t worked yet. I hope I have proven to you that the techniques behind Psycho- Cybernetics have worked for me as well as many other successful people (traders, athletes, etc.) And, I believe it will work for you too. So what are you waiting for? Good Luck! Larry Levin Professional Floor Trader & President, Tradingadvantage.com 56

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65 BIBLIOGRAPHY The following were used for research: 1) Psycho-Cybernetics by Maxwell Maltz Pocket Books / Simon & Schuster, ) The Disciplined Trader by Mark Douglas Prentice Hall, ) Zero Resistance Living, presented by The Psycho-Cybernetics Foundation, Inc.,