By M. William Scheier, a futures trader and analyst in the E-mini Index contracts*
Posted: Mar 27, 2008

No matter how clever your trade entries are, successful trading is mostly a mental game. This treatise on trade psychology is appearing in a series of installments (and modified for use on this site) and has been excerpted from chapters of the book Pivots, Patterns and Self Recognition. The excerpts appear here by permission of the publisher, valhallafutures.com.

This is the eleventh installment in this series, whose purpose is to examine the internal decision environment the trader faces within his mind. On the assumption that a better understanding of the mental conflicts we face will improve our trading results, the three modes of conflict are personified in separate "voices" inside of us. These are the Trader, the Accountant and the Analyst.

Chapter Ten
A Know-it-all

Fools although they hear are like the deaf. Heraclitus

The Analyst's position in the world is that he already knows. He'll never admit not knowing how to do something. It's akin to the phenomenon of refusing to ask for directions. If you worked at a commodity brokerage firm as a broker when the Analyst called you to open an account, and you asked him if he'd ever traded futures before, he'd go off on some tangent about having traded stocks for years. He might even have tried to parlay off the size of his wealth as an answer.

I once knew a doctor who called me to open a new futures account and — after dancing around my question about whether he had ever traded futures for a moment or two — finally said that he had a large current portfolio of private-placement, second mortgage loans with which he'd been very successful. And, with that, he put me and my obtrusive question in our respective places.

When pressed further, the Analyst will often say how closely he's been following the market and perhaps mention several books he's read. In short, he'll say anything to avoid admitting he doesn't already know everything he needs to know. When I hear this from a new trader, it tells me his Analyst is firmly in control, will probably remain so and would much rather risk his money on his own intuition than put himself in the position of having to admit he doesn't know.

Doctors are typical of this profile, and you'll hear stockbrokers and futures brokers almost universally complain about having to work with them. Accomplishing the admittedly difficult task of getting a medical degree put them into an all-knowing mode. The problem is: They tend to stay in this mode thereafter no matter what subject it is that they're challenged on. They refuse to pay the learning dues that particular subject matter requires. No one is going to tell them anything, least of all the market.

An interesting corollary to this is that, once the Analyst learns a concept, he pretends to have made it up himself and is never more himself than at moments when he's demonstrating his acumen to someone less knowledgeable. I've actually had clients listen to my explanation of some technical phenomenon that was new to them, argue against its validity perhaps only because it was new, and then on some later phone call, refer to it as if they were introducing it to me, as if it had always been their own.

Such experiences always demonstrated to me just how completely subverted their Trader was when the Analyst was in control. He couldn't remember where he'd heard the concept before. He thought he'd made it up.

If you've ever experienced this in someone else, it's like being in the presence of a multiple personality. Could you ever experience this in yourself? Never. And, if you're suffering from this phenomenon as badly as I've just described, you don't even have a clue that you're doing it. The Analyst is denial. And, when he has control of your voice, the Trader is not at home. I see the little finger of a boy named Tony in the movie The Shining as he recites the words, "Tony doesn't live here anymore, Mrs. Torrence."

I've worked at several brokerage firms as a broker, handling clients and trading my own account. I was once approached by a particular firm's self-proclaimed analyst after I had two losing months in a row trading my own account. He had been uneasy with me for some time because I ignored his recommendations and generally had been having winning months back-to-back without any input from him whatsoever.

This losing streak was the perfect opportunity for him to intercede and get more control of my activities. On the surface, he was trying to help me become a more successful trader and broker for my clients, but it was himself he was really serving underneath.

I agreed to meet with him on a Saturday in the office, so he could explain his approach. He had made up a sort of presentation and prepared a list of his talking points in a way that reflected how desperately important this all was to him. His first item was "Why you should be listening to me". He then proceeded to tell me he knew more about the subject of futures trading and analysis "than anyone else in the world". I kid you not. He really said that. And he had never even traded his own account.

He then proceeded to show me his list of indicators. All the indicators were repeated in separate time frames, weekly and daily. The first was a trend indicator based on a 3 day moving average of the Average True Range. A close above this moving average produced a blue bar on the chart; a close below produced a red. A number of software programs can easily provide this indicator. I already owned two.

His other indicators included Wilder's ADX, the MACD, a 5-day Momentum Histogram and the slow Stochastic, and he used them in multiple time frames. That was it. Now, there is nothing wrong with using these and only these technical indicators for decision support, just as he was doing. In fact, Dr. Alexander Elder wrote about just this set of indicators for use in multiple time frames; I recognized my analyst's un-credited source in his presentation immediately.

But, that's only part of the point here. For, had he bothered to talk to me at all, he'd have discovered several ways to use each of these indicators beyond the level he was currently aware of, as well as a host of trading techniques on far different levels altogether than that of oscillator buy / sell signals. But, he didn't ask me even one question that might have revealed what I knew.

What the Analyst doesn't know is not important to the Analyst. In fact, it is usually a threat. What's important to the Analyst is only what other people think of him. He confirms his existence by their affirmation. "They applaud; therefore, I am."

When someone talks to you already clearly in the voice of his Analyst, there's really nothing you can do to contribute. It won't matter what you say anyway. He can't hear you. Even then, when I find myself in those situations — as I did that day the resident analyst made his pitch for my attention — I always nod politely and probe to see if there's something new there I can learn. "You never know," I say to myself. "Maybe there's something I can learn here. After all, I'm the Trader, and I openly admit my ignorance in the interest of furthering my success."

A characteristic gesture of the Analyst's need to be right and superior is the effort he expends in proving just one other person wrong or inferior. This he does to prove he's right about everything else in his argument and firmly in control of his world. Nothing else matters. Whether the trade was profitable or not is irrelevant. All this Analyst needs to do is finish the phone call having proven this one other person wrong about something.

There was once a grandson who needed to prove the favored status he presumed to enjoy with his eighty-year-old maternal grandmother, over her immediate children, that of his mother and his uncles. Prior to arrival at family get-togethers, he'd cram the answers to Trivial Pursuit questions during long airplane flights, while alone and unobserved, knowing how he'd shine brighter than his other family members in her eyes.

Once, he even got the Rubik's cube Cliff Notes and left the solved plastic puzzle carefully in view, where she would surely notice it and speak about his ability to solve it in his absence. He believed that all he needed was to get this one, gullible family matriarch to believe his genius wasn't false, and it would be proven true for the rest of the world around him. That's how bad this disease gets.

In trading, though, the result of this myopia is always devastating.

When, as a broker, I'd find a client's Analyst was too firmly in control of his voice, I'd almost have to invent the Trader for him. One trick I used was to probe to find some extreme sports skill the client would admit to knowing nothing about (e.g., deep-sea diving, sky diving, mountain climbing). Then, I'd ask him to imagine himself in the midst of a situation upon which his life depended, and one in which he had insufficient skill to survive.

I'd get him to agree to a frame of mind of not knowing what would happen next, and that only with the proper set of rules from something or someone outside of himself, would he have any chance of surviving the ordeal.

Now, I'd say, "Let's give this state of mind an identity. Let's call this hypothetical survivor ‘the Trader'. He doesn't already know anything about the subject at hand, and furthermore, he's quite willing to ponder, absorb, construct or admit to a set of rules quite outside himself if he's going to survive this experience at all…Okay, now that I'm speaking to the Trader, let's pause for a moment, step back and consider what we're about to face in the futures markets today."

*Reprinted (and modified) with permission from M. William Scheier and the publisher, valhallafutures.com