By M. William Scheier, a futures trader and analyst in the E-mini Index contracts
Posted: Sep 12, 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 fourth 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 Three
The Cast
Your character is your fate. Heraclitus
In the business of trading, there are three persons living in your head. The first is the Accountant. He wants everything to be sure. He hates risk. He distrusts the other two players. He only cares about being secure. To him, a little security is a lot more desirable than a dozen clever opportunities for wealth. He has all the facts. He dwells in the past. His memory is long. He wants everything that happens to turn out the same. If you ask him advice on investing, he'll always recommend insurance. He is self-conscious and blushes in public. His favorite expression when you've lost money is "You idiot!" But, without considering the Accountant's needs as the basis for a trading plan, your investment capital will be lost in the futures markets in short order.
The second person is the Analyst. He thinks he's the creative genius behind the game. He always has ideas. The Analyst always thinks he's right. In fact, his identity depends on it. So vested is he in proving himself right in the process of asserting his identity that he is unable to admit when he's wrong. He doesn't care about money. He doesn't understand the nature of risk. Risk is a word invented by the Accountant to define what the Analyst eats for breakfast. He lives in the future. His memory is short. He wants everything that happens to turn out differently. He's totally unselfconscious, which lends him the appearance of confidence and strength. If you were to ask the Analyst, he would make a prediction about every market on the board. His favorite expression is "I knew that." But, without his creative market insights and drive, you'd have all your money in the Accountant's whole life policies.
The third person is the Trader. Unlike the Analyst and the Accountant, the Trader did not already exist. He is self-created and must be continually developed. And, unlike the relationship the Analyst and the Accountant have with each other, the Trader has a separate working relationship with each of them. He must ascend to a place of power. To gain and retain this power, the Trader must work with both the other players. The Trader interprets the needs of each and arbitrates rules both can live by. The Trader appreciates the insights of the Analyst but has perceived long ago that he is seldom right much more than half the time. The Trader must constantly prod the Analyst to improve upon his discoveries (or his plagiarisms, as the case may be) and junk the ideas that are no longer working. On the other hand, the Trader must have the character to take the trade even though elements surrounding the trade stir up the Accountant's unease. This is often the Trader's most difficult duty -- to resist the Accountant's reluctance -- especially after a succession of losses.
The Analyst and the Accountant are constants. They repeat their behavior endlessly. They are who they are.
Nothing more or less should be expected of them. They are always certain about what they want, and they always want more of it. They cannot change or be changed. They cannot change or be changed. They cannot change or be changed.
The Trader, on the other hand, inhabits uncertainty. He learns to tolerate a state of doubt. He never assumes he knows anything that cannot be contested and, therefore, must often rely on faith. He's learned through experience that learning itself is a process, and he's well schooled in the errors of his first impressions. To improve his skills, he has learned to separate himself from the undue influence of his two peers -- without expecting them to leave. The Trader knows that building a future with security will require the management of calculated risks. He manages change and the process of change. So much is the Trader involved with change that it can be said of him that he is nearly entirely composed of it.
Although he knows the efforts of his team require a positive outcome, he himself can only accomplish goals by relying on the process of here and now, foregoing for the moment his hopes for the outcome. It is within this paradox that he finds himself. Because the outcome is always uncertain, he must rely on faith in the process. Because he has no ability to change, repress or subvert the Accountant and the Analyst, he must accept the indispensable contribution of their membership. Like it or not, they are here to stay.
The Accountant likes statistics. He has no direct power over the Analyst and feels threatened should the Analyst gain control. But, the Accountant's unease can be contained throughout the trade if there's a plan for each trade that defines the risk and opportunity in black and white. He depends on the Trader to construct and enforce these rules, and by so doing, keep the Analyst contained.
In the absence of the Trader, the Accountant's only means of wresting control away from the irresponsible Analyst is to infect the atmosphere with his pheromone, eliciting a paralyzing fear. In truth, the Accountant actually likes things this way. He infects the room like a poisonous gas, like the sting of a scorpion or the spray of a skunk. His poison paralyzes everything but himself. At times like these, he's free to move about the cabin. And, although at first thought it might seem a safe and even benign exercise to lend control of our trading to the Accountant, we shall see later how the risk-averse Accountant -- when in control of the podium of our inner ear -- can be even more dangerous than the risk-indifferent Analyst is when he has the helm.
The best method of bringing the business of trading together is to: first, translate the parameters of the Accountant's need for security into rules the Analyst can live with; and second, test out the Analyst's observations until the Trader has gained enough confidence in their evolution to put them into trades.
The Trader assigns brand names to the Analyst's market observations. A brand name is his seal of approval. It means the market behavior displays the characteristic of repetition. The brand name is a model.
The Trader assigns rules that limit the risk to the Accountant's security. The rules are the sign of the Trader's command. The Trader is so associated with objectification and rules that he nearly becomes the law. The Trader is the rule of law8.
8Dan Millman's Way of the Peaceful Warrior (Tiburon, CA: H.J. Kramer, 1991) is one among many writings that have described the inner self as divided into three parts. Constance Brown referred to Millman's work in a chapter of her book Aerodynamic Trading (Gainesville, GA: New Classics Library, 1996). At best, superficial comparisons could be drawn between Millman's three selves and the inner voices described herein. But, this book is not derivative. Of critical difference is Millman's view that the three parts work in harmony for best results; whereas, this author agrees with Heraclitus that it is the inherent conflicts between the inner voices that give rise to greatest results. The very thought of a "peaceful warrior" would be for Heraclitus an oxymoron.
*Reprinted (and modified) with permission from M. William Scheier and the publisher, valhallafutures.com
