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Chapter 4: YOU – THE FIRST LEVEL OF THE PYRAMID AND WHY

We lie loudest when we lie to ourselves.

Eric Hoffer

There are many fundamental misconceptions about markets and trading. I have a natural talent for analysis. I wish I had more of a natural talent for trading, but I do not. I have got where I have despite my abilities, not because of them. But my analysis has helped a lot, because I now understand markets and how to make money out of them. I now make consistent profits and as each year goes by those profits get bigger.

This book is not verbose, it cuts to the essentials. I might summarize these essentials as follows:

1 You may think that the market exists somewhere out there. Wrong. How you think of the market is unique and exists only in your head. To win you have to ensure that your version of the market is “useful” and then make use of it.

2 You may think you see your version of the market clearly. Wrong. What you see is shrouded within an emotional whirlwind. The whirlwind may get a lot faster when you have a trading position in place.

3 You may think that trading is an easy function involving buying low and selling high. Wrong. In fact trading is not difficult, although nor is it easy, but the emotional problems we bring with us to the market mean that few win.

These three statements summarize what you are getting into. In normal walks of life these sort of things either do not happen or we soon learn to stay away. The market is different. It does not do the same things all the time. So one day a particular tactic will work, the next day it won’t. Compare this with a normal everyday function like walking down the street. If you walk into a lamp post, you soon learn that you need to walk round them. But in the market-place, the lamp posts keeps moving as you approach them, you can never be sure that you can get round them.

But what you can do is develop the mental discipline so that even when you do bump into them it’s OK.

This section is entitled “YOU.” This is because you are the essential element behind the way you trade. If you refer to the diagram of the Trading Pyramid at the beginning of this chapter you will see that you form the base of the pyramid. This is because you have to develop a style of trading which suits you. In no other way is it going to work.

The trading experience

If you peruse any bookshop with a few books on trading you will soon find that there are masses of people out there seeking to grab some of your hard earned cash so that they can tell you about how they trade the markets, although in many cases these authors do not actually trade themselves, but that is another matter. Now it may be that one of these many books is right for you, but which one? Not an easy question to answer. Apart from the analysis technique you should use, you also have to learn trading skills, which ultimately are about 95 per cent of this game. This takes time. Do not expect to be an instant success at trading, you have to learn this business as you do any other. Whilst you do so you have a simple task and this is the first secret of trading. Like all great secrets it is well known, because that is the best way to keep something a secret, make everyone think it is not a secret at all. But this is where most novice traders fall down, this is where they knock themselves out of the game. I am not going to repeat this secret now because to do so would be to belittle its importance. This secret, plus the other two are revealed throughout this book. When you hear the secrets you will already “know” them but maybe this time they will have sufficient impact to make a difference. That is all I ask, that what I say helps to make a difference, to improve your trading performance.

To introduce the trading experience we must look inside ourselves. This is where it all takes place. There are a few simple rules but before saying what they are I think it is important to stress three points:

1 In the trading environment there is no absolute truth. We never know what is the “right” thing to do in any one situation and what is “right” for one trader is wrong for another. We therefore have to formulate “useful beliefs” which work for us. This is akin to how scientists work when dealing with quantum mechanics. The building block of all matter, according to current theories (or useful beliefs), is a quark. But this is found to have no mass. How can the building block have no mass? Another word for a useful belief is a useful lie. Anything which is not the truth, the whole truth, and nothing but the truth, can be said to be a lie, although this definition is not widely accepted.

2 Given this fact nothing I say is cast in stone, it is important you discover your own “useful lies” that will form the basis of your trading philosophy.

3 In similar vein it is your personality which should guide you in your search for the right approach. Do not be guided by advertising copy, as many are. Ask the question “What is right for me?” and then go out and find it.

So what are the few simple rules? In my opinion they are as follows:

1 Always limit your losses.

2 Try to ensure that your average gain is at least 2.5 times your average loss.

3 Endeavour to find an approach which gives you an edge.

4 Make sure you are comfortable with your trading approach. This involves self discovery, something many shy away from. But peal away the outer layers and what is inside is often very fine indeed. The outward layers can be a bit yukky.

5 Learn to let profits run.

6 Learn to trade selectively.

7 Learn to control your own self sabotage.

SUMMARY

 YOU – the first level of the Trading Pyramid because the whole pyramid has to be based on your personality.

 How we each see the market is unique and we need to ensure that our perception is “useful.”

 The key trading “secrets” are well known.

 In the trading environment there is no “absolute” truth.

 Nothing in this book is “cast in stone” and you must find your own road to success.

 Don’t be led by advertising copy, decide what you need and then go and get it.

 There are seven simple rules to success.