The markets are always in motion; they never stop, only pause. As long as there are traders who, for whatever reasons, are willing to buy higher than the last price and, as a result, bid the price up, or traders willing to sell for less than the last price and offer the market lower, prices will remain in perpetual motion. Even when the mar-kets are closed, prices are theoretically in motion. For example, what price traders may be willing to buy or sell at on the opening the next day does not have to be at the price level the market closed at the previous day.
What are usually thought of as three simple decisions of enter, hold, or liquidate a trade become a perpetual process of deciding how much is enough from both a profit and a loss perspective. If you are in a profitable trade, is there ever enough? Greed stems from a belief that there is never enough or there won't be enough. In an unlimited environment that is in perpetual motion, isn't there al-ways the possibility of getting more? The appetite of true greed can never be satisfied; it will always leave the greedy ones with a feeling of lacking regardless of how much they have acquired. If you are in a
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42 The Nature of the Trading Environment Prices Are in Perpetual Motion 43 losing trade, you won't want it to exist because it represents failure,
so you can just act as if it doesn't, by convincing yourself that you are in a winning trade that hasn't gone in your favor yet.
The "how much is enough" question can be answered in an in-finite number of ways relative to your beliefs on the value of money, what you need it for, how important it is, can you really risk it, how secure do you feel, and what is enough today may not be enough tomorrow because of other factors in your life—all relative ques-tions that have no definitive answers and change with the changing environmental conditions. Having to confront these personal issues as a trader will only contaminate your observations of market move-ment because they have nothing to do with market direction and the potential or lack of potential of any particular market move. This is why successful traders have always stated emphatically, "Only trade with money you can afford to lose," meaning money that has little or no value in your life. The less meaning the money has, the less potential there is for your personal "how much is enough" issues to contaminate your perception of market movement.
Thus, if you allow it, the market can always tempt you into think-ing there may be more to be had in a winnthink-ing trade and always give you something to hang on to in order to justify your hope that it will come back and make you whole, if you are in a losing trade. Suc-cumbing to either one of these temptations subjects you to the possibility of some very negative and painful consequences.
The market environment is also unstructured in such a way that, from a psychological perspective, there is no beginning and there is no ending. What I mean by this statement (before you think that it's not true, the market opens and closes at a specified time every day) is that from the perspective of the individual trader, the game only begins when you decide to enter and ends only when you decide to exit irrespective of market openings and closings.
You have the freedom to structure the game inside your mind in any particular way you please. You can get in whenever you want for whatever reasons are good enough to justify your actions. You can get out whenever you want. In fact the game only ends when you have decided that you've had enough and take the appropriate ac-tion to end it. The psychological implicaac-tions to the individual con-fronting these conditions are staggering.
Entering a trade will involve all your beliefs about opportunity in relationship to risk, missing out, needing a sure thing, and not being
wrong. Exiting a trade will involve all your beliefs about loss, greed, failure, and control.
Considering the unlimited potential for profit, entering the mar-ket will be much easier for most traders than will be getting out.
This is because exiting the trade will require that you confront your beliefs about greed, loss, and failure in relationship to the constant temptation of the possibility for unlimited profits.
These individual psychological issues are completely independent of objective market action. And even more significant, as I will explain in Part III, your beliefs about loss, being wrong, failure, and control will operate independently of your conscious intent. For example, think of the last time you perceived an opportunity to profit and the fear of being wrong, or losing, and so on, immobilized you, keeping you from putting on the trade.
To the extent that these issues exist as a component of your mental environment, they will determine the effect they have on your per-ception of market activity, the decisions you make, and your ability to act on what you decide.
However, one of the most significant and potentially damaging factors related to this no beginning and no ending characteristic of the market environment is that it allows you to be a passive loser.
The best way to illustrate this concept is to compare the markets with any form of gambling games. For example, with blackjack, horse racing, or craps the player has to make a conscious choice to play and decide before the event exactly how much he will wager.
The event begins and ends according to the rules of the game, and the risk of loss is limited to the size of the wager.
Each new event is a fresh start, where the odds of winning may be determined by mathematical probabilities and the rules of the game automatically take the player out after each event. When the game ends, the player knows exactly what the outcome is and then must make a conscious decision to participate again. Therefore, the struc-ture of the game forces the player to be an active loser. To subject himself to the possibility of losing any more money than he has already lost requires that he place a wager for a specified amount. He has to actively participate to lose and do nothing to stop losing.
Obviously, if the player does nothing, he will not be subjecting his assets to the possibility of loss.
If the player is losing consistently, he will need to confront his beliefs about loss and failure to quit playing altogether. This could
44 The Nature of the Trading Environment Prices Are in Perpetual Motion 45 be difficult because he can always rationalize that, based on the odds,
he is bound to win eventually and that he can always quit after the next game. But he does not need his own mental structure to end any particular game because it's automatic.
This is very much different from the market environment where you can be a passive loser. Once you put on a trade, you have to actively participate to end your losses. You don't need to do any-thing to continue to lose, and the market could go against your position indefinitely. If for any reason you choose not to act or can't act, you could lose everything you own and more. Depending on the size of your position and the volatility of the market, this could happen very quickly. The only way out is to confront your personal issues about greed, loss, and failure. What specific issues or combi-nation of them come into play in each trade will depend on whether you are in a winning or losing position.
Since, all of us seem instinctively to avoid confronting any issue that could cause pain, such as getting out of a winning trade too soon or having to admit we were wrong to get out of a loser, the easiest way out of a situation like this is to convince ourselves (in-dulge ourselves in the illusion) we are in a winning trade that will never end or gather all the evidence possible to suggest that we really aren't in a losing trade. Therefore, in either case we will have no reason to confront the forces inside of us that keep us from objec-tively perceiving what the market is telling us about the possibilities and potential for profit in any given moment.
The markets make it extremely easy for you not to have to con-front these very tough psychological issues. For example, if you focus your attention on price movement at the tick-by-tick level, the market can graphically display billions of combinations of behavior characteristics and price patterns to get from one point to the next.
It is very easy to use this type of information to support any belief, rationalization, justification, distortion, or illusion you need to want to have about where it is going in the future.
Most traders will attempt to simplify price movement by thinking the price can only do three things. Go up, go down, or stay basically the same. Some traders may even carry this distorted logic to the point where they believe there is a 50/50 probability for success in any give trade. This of course couldn't be further from the truth.
For example, let's say that prices stayed within a 10-tick trading
range for an entire trading session, if you take into account each tick, how many price patterns is it possible for the market to display going from the top to bottom of the range and then back again? I'm not a statistician, but I'm sure it's at least millions. To illustrate this a little further, if point A is the bottom of the range, prices could have changed up one tick, down two, up one, down three, up two, down one, up one, down two, up three, down one, up two, down one, up one, down one, up two, down one, up three, down one, up two, down one, up three, down one, up one, down one, up two, down one, up three to point B, ten ticks up from point A. This is obvi-ously a very shortened version of the way prices usually move, but it does represent one pattern out of millions of possible pattern combi-nations, and each pattern you identify can repeat itself at some point in the future.
If you are a buyer at point A, what are the odds the price will stay above your entry point? What are the odds that the price will be above or significantly above your entry point tomorrow or the next day without having gone below your entry point first, by two ticks, five ticks, or ten ticks, before it goes back up again above your entry point? Once prices go below your entry point, what are the odds they never go above your entry point? What are the odds they never go below? To answer these questions, you would have to know a great deal about the consistency of the market and its potential to behave in certain ways. In any case, relative to most traders' emo-tional disposition to deal with this kind of movement and within the context that most people think of as 50/50 odds, it definitely doesn't apply in the markets.
To illustrate another point, if you got short halfway between points A and B, which ticks would you have the tendency to place greater weight on in terms of market information? The down ticks naturally. They confirm what you believe and the up ticks don't. Yet each in relationship to one another can tell you something about the consistency of the market and its potential to move in any given direction. How can you begin to assess that potential accurately if you place a greater significance specifically on the information that confirms what you want or believe? In effect, you would be using the information to suit your hopes, dreams, wishes, and desires instead of perceiving it in a manner to assess the market's actual potential to do any of the foregoing.
46 The Nature of the Trading Environment Prices Are in Perpetual Motion 47 Thus, what you have in the market environment is a deadly
com-bination of the market forcing you to confront difficult personal issues to survive, an event that produces information in a wide variety of forms that can be used to support any illusion, distortion, or expectation, therefore, making it easy to avoid confronting these potentially painful issues. Furthermore the event continues on until you come to terms with whatever is inside of you to end it. Unless your brokerage firm liquidates your position, you are the only one who can make it stop.
Among many other factors, to become a consistently successful trader your objective has to be to learn how to let the market tell you what it may do next and how much is enough. This is extremely difficult when you consider there is absolutely no relationship be-tween what the market may do next and your personal belief system on what it means to lose, what it means to be wrong, greed (fear founded in a belief there will never be enough), and revenge.
I can anticipate a lot of readers saying to themselves "I can under-stand the loss, being wrong, and greed issues, but where does re-venge come into this?" This can best be illustrated by going back to the gambling game example. In a gambling game you can only lose what you decide to risk. You bet the money and it's difficult not to accept the responsibility for any losses. As a trader, however, you could easily lose far more than you intended to risk, based on your inability to perceive the possible or your inability to execute a trade to get out of your position, or a combination of both.
You may have been willing to take responsibility for what you originally intended to risk on a trade (although most traders are not willing to take this responsibility, which I will demonstrate further on); however, it might not be so easy to take responsibility for losing more than what you intended to risk. This is where the revenge factor comes into play. If you don't take responsibility for what you lost, then who or what can you blame—the markets, of course. The markets took your money. If the markets took from you more than you originally intended to risk, then you will likely feel compelled to get it back.
For example, is a 10-tick profit enough in the trade you are currently in if you lost 20 in the last trade? The market may be giving the objective observer a very clear indication that where the price is now is all that is left in the move and the highest
probability for success is to take profits now. If you lost 20 ticks in the last trade and you only intended to risk 5 and the market is now offering you 10, are you going to take it. If you believe in "getting back," 10 won't be enough regardless of what the market is doing or telling you. You will need at least 15 and preferably 20 to make you whole.
Your last trade obviously has nothing to do with the potential that exists in the market at any given moment. When you feel compelled to get back, it puts you in an adversary relationship with the market. The market becomes your opponent, it is you against it, instead of being in harmony with it. The market can't take anything away from you that you don't allow; if you lost money or lost more than you intended to risk, you gave your money to other traders.
Ultimately, however, revenge creates an adversary relationship with yourself. If you're the one who gives your money to the market, you are also the one who gives yourself money out of the market. If you are angry with yourself for letting the last trade get so out of hand, whatever the market is offering you "now" in terms of an opportu-nity won't be enough. From a psychological perspective, you won't take the opportunity for a profit or otherwise because you haven't accepted the last trade as being all right. In effect, you will be denying yourself the current or next opportunity to punish your-self for the past mistake. In reality you can't get back at the market, and a belief in revenge only allows you to get back at yourself.
There is a direct correlation between your ability to let the market tell you what it is likely to do next and the degree to which you have released yourself from the negative effects of any beliefs about los-ing, being wrong, and revenge on the markets. Not being aware of this relationship, most traders will continue to observe the market from a contaminated perspective until they either make the associa-tion through trial and error or become aware of this relaassocia-tionship through a book such as this. In any case, by the time those who figure it out do so, they have usually subjected themselves to so much psychological damage that it adds a much more difficult di-mension to the process of becoming successful.
This is the principal reason why this book had to address the areas of personal transformation in such depth: you need to know if there is any damage, how to identify it, and most important, how to release yourself from it.