By M. William Scheier, a futures trader and analyst in the E-mini Index contracts*
Posted: May 30, 2008
No matter how clever your trade entries are, successful trading is mostly a mental game. The following treatise on trade psychology will appear hereafter in a series of installments and has been excerpted (and modified for use on this site) from chapters of the book Pivots, Patterns and Self Recognition. The excerpts appear here by permission of the publisher, valhallafutures.com.
The first installment in this series, the Prologue, published last month, was an introduction to examining the internal decision environment the trader faces within his or her 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 Account and the Analyst.
Chapter One
Trading Places
Even the scholar most in repute knows only
what is reputed and holds fast to that. Heraclitus
The market is the outcome of mass behavior making decisions about itself. Technical analysis and its various methodologies are the interpretive language of that behavior. You've no doubt heard all that before. The majority of the investing public does not believe in technical analysis.
Many of us who practice it don't really believe in it either although we usually give it lip service in chat rooms with fellow traders because it's more impressive to quote established market wizards who profess this opinion than to appear less their equal. Many who approach technical analysis for the first time have trouble accepting it at all. In fact, it goes even further.
From debates I've had with traders in technical analysis user groups on the Internet, I've discovered that a significant number of these so-called technicians only believe in technical analysis as a superficial tool. What they really believe in, as revealed in debate, is that the market is controlled by people in-the-know and forces and events outside the market. These include such entities and episodes as the Federal Reserve, Congress and the President, 9/11-like catastrophes, government reports, huge investment funds and their orchestrated market campaigns, and so forth.
For the individuals of such belief, technical analysis is but an overlay to those of real power who can change the course of the market arbitrarily. At heart, these technical traders are still Efficient Market Theorists. Simply stated, that theory says that the market's direction is governed by economic and political news events. And, therefore, if you tinker or outright change the one, the direction of the other will surely follow.
These otherwise technical traders seem all to be acting as though -- because of certain external current events -- the market is supposed to respond in certain ways to certain things. And, moreover, they expend a good deal of mental energy by projecting the belief that, if only certain changes were made to our economic and political structure, the market would soon turn from its present course and somehow start delivering something more beneficial than it already is to us all.
I have observed, furthermore, that these technicians believe in their technical analysis only up to the point where their tools go wrong. Whereupon, they assert that it was the sudden appearance of one or more of these outside forces that deterred the market from its otherwise destined trend. It's as if, at such times, technical analysis must be suspended, at least momentarily.
I believe these traders are missing an all-important internal ingredient to trading: A willingness to let the market be bigger than what they can know, a willingness to let the market tell them where it intends to go instead of quoting available rationale as to why it didn't get there. I believe these traders are missing a fundamental truth about how the market really works, and are acting -- for the most part unaware -- on assumptions that keep them distanced from greater success.
There was a popular movie a few years back about commodity speculators trying to get the best of each other, called "Trading Places", starring Eddie Murphy. The title was a good pun. The conflict between, on the one hand, the well established brokerage firm of Duke & Duke and, on the other, the street hustler Billy Ray (played by Eddie Murphy) and his outcast friends was won in the end by those who knew what the orange juice market was actually going to do the next day. The plot revolved around obtaining, in advance, the results of the USDA Orange Juice Report from a "Deep Throat" source, in a dark parking lot at night.
If you can really grasp some of the basic messages about trading conveyed in this book, you will, I hope, find the availability of such supposed invaluable information totally irrelevant to your trading. Moreover, not only will you act without the need of such inside information, you won't even suffer from the want of it.
Imagine yourself being offered such information in a brown manila envelope and yet feeling no compulsion whatsoever even to review its contents before trading resumes on the following day...
*Reprinted (and modified) with permission from M. William Scheier and the publisher, valhallafutures.com
