most likely possibilities is that you will create devastating losses for yourself. The big psychological problem here is, if you make up and have to play by your own rules, you also have to take total and complete responsibility for your actions as well as the outcome of your actions. The degree to which you do assume responsibility is the same degree to which you cant shift it to the market and be its victim.

The typical trader will do most anything to avoid creating definition and rules because he does not want to take responsibility for the results of his trading. If he knows exactly what he is going to do and under what conditions, then he would have something by which to measure his performance, thus making himself accountable to himself. This is exacdy what most traders dont want to do, preferring instead to keep their relationship with the market somewhat mysterious.

This creates a real psychological paradox for traders, because the only way to learn how to trade effectively is to make oneself accountable by creating structure; but, with accountability comes responsibility. The typical trader desperately wants to make money, but he has to do it in a way where there is no direct connection between what he does and the outcome that it produces, thereby avoiding responsibility if things dont turn out satisfactorily.

To develop a plan, you have to anticipate events to some extent relative to the depth of your plan. When you plan your trades in advance, you are putting your vision of the future and creative abilities on the line, so to speak, and making yourself accountable to yourself. Your plan either works or it doesnt; you either have the ability to execute your plan or you dont. In any case, it is your plan and your ability to follow it and, therefore, it is difficult to shift responsibility and lay the blame somewhere else if things dont work out.

Now, when a trader doesnt understand market behavior well enough to know what he is going to do and under what market conditions he is going to do it-but if at the same time, he is very attracted to the action and the opportunities he knows exist and if he is also impatient with the learning process-his impatience and attraction will make him feel compelled to do something, even if he doesnt know what he should do. How do you think the typical trader will resolve this dilemma? He will play follow the leader, rationalizing that everybody else is doing something and, furthermore, all these people waving their hands and screaming cant be as

afraid and unknowing as himself, so they must know what they are doing or at least they know more than him. If he does what they do, or better yet, identifies the most successful trader and does what that trader does, then he too can make money.

This type of rationale creates a herd mentality (extremely prevalent on the floor of the exchanges), where most everyone is looking for direction, assuming everyone else must know something they dont, otherwise why would they be doing anything. In a group, this collective mentality is very volatile, where one key trader can start an endless series of chain reactions where everyone mirrors everyone else, all assuming that the other guy must have some rational reason for doing what he is doing.

In fact, I wouldnt even describe what goes on down on the trading floor as follow the leader. It is actually better described as "follow the follower," because most traders dont know what the leader is doing or who the leader may be at any given moment. Therefore, the groups behavior is like these endless waves of back and forth movement, where the traders closest to the leaders (the leaders being those who know exactly what they want to do and why they want to do it) will have the first opportunity to get on the bandwagon at the best price and those next closest have diminished opportunities and so on down the line until you get to the least skilled trader, who doesnt have much of a chance at all. When there is no leadership in the market, the prices usually drift back and forth in a small range until someone who knows what he is doing comes into the market.

If the prices have made any significant move during or at the end of the trading day, all the crowd followers get together to find any reason or rationale that might explain their (the markets) behavior and put it into some understandable context. Basically, what they come up with is a consensus reason for the markets behavior that day. However, the leaders (those traders who take responsibility for their trades and know exactly why they did what they did) do not feel compelled to talk to anyone and usually dont. The typical crowd follower feels compelled to find reasons outside of himself because these reasons dont exist inside of himself and he doesnt want to think he is irrational and acts randomly.

For the crowd follower, trading this way serves many functions. It keeps his relationship with the market mysterious. If he makes money, he must have done something right If he loses money, he

can blame the market, which is obviously very acceptable behavior among traders, since so many of them do it. The rational or logical explanation for the individuals part in the collective behavior will be decided on later (after the fact) by the consensus opinion of the group. This way he can maintain an illusion of being rational and responsible and whatever happened to him also happened to a lot of other traders, so at least he knows he is not alone, which then creates a sense of comradeship among competitors.

Outside of the world of trading, most people think that traders are rugged individualists, associating them with the characteristics of the entrepreneurial types, like being decisive and persevering. Most outside people would be shocked to learn that except for a small minority of successful traders, the rest fall into a group that, at any given moment, have no idea about what they are going to do next or know why they are even doing what they are doing. If you asked them to tell you specifically how they make money or lose money, they couldnt tell you. In addition, as a group, traders (except for the leaders) are indecisive and impatient to an extreme. It isnt too difficult to determine why, if you consider that under normal conditions, the frame of mind of the average trader is one notch away from unrestrained terror. Getting organized and creating structure is one obvious solution to the many psychological problems the typical trader heaps on himself. But that would also force him to cross that psychological boundary line into the realm of accountability and responsibility.

Besides the outright refusal to plan trades, most traders go to great lengths to put as much psychological distance as possible between what they do and the outcome of their actions. I know many traders who can do extremely good market analysis on their own but still seek opinions of other traders on what to do and then take those trades instead of their own, simply because they dont want to take responsibility if the trade doesnt work out. And, more often than not, sticking with their own analysis would have produced far better results.

There are many floor traders who trade hundreds of contracts a day, and although they have to record each trade on a trading card, they will not keep an accurate account of their net trading position, claiming they get too busy or that they added wrong. At the end of the day, they count their cards with intense anxiety, hoping or

praying to whatever unseen forces that they are flat (not carrying a net long or short position).

Obviously, if they were that concerned, the simple solution to their problem would be to trade only at a volume level where they can always keep track of where they are at and if they lose track to stop trading until they get a correct count. But they wouldnt want to do that because, if they kept track of their position, then they would have to take the responsibility for what they end up with. What if they inadvertently end up with a net long position at the end of the day and the market opens several ticks higher the next morning? The unseen market forces have thus blessed these traders with a winning position, or conversely if the market opens lower, they can always find someone or something to blame for their bad fortune. Maybe their lucky tie was sent to the dry cleaners by mistake or they hit three red lights in a row on the way to the exchange. Any reason or excuse to shift responsibility will do. These reasons can range from the most eloquent academic jargon to the most superstitious beliefs, but in essence, they all focus blame outside of oneself for unsatisfactory results.

In an unlimited environment, the less structure you create for yourself, the less accountable you are, the more easily you will be swept along by the force of events, and the less control you seem to have over your life. However, having less structure has the benefit of shifting the responsibility for the events in your life to other unidentified forces. This is precisely why so many traders have such a strong belief in superstitions. If a person refuses to make any connection between his thoughts, intents, skills, and results, then it is very easy to associate ones success or failure to something like the tie one had on that day or inadvertently making some gesture and then finding oneself in a losing trade and associating the gesture with the loss.

I have a personal story to illustrate a typical superstitious belief that traders have. One morning I went into the mens bathroom at the Chicago Mercantile Exchange, and as 1 approached the only urinal not in use, a floor trader using the urinal next to the one 1 was about to use turned his head, looked at me, and said in a very cautious tone, "Dont use that one, you can wait for mine, Ill be done in a second." I gave him a puzzled look, and he then pointed to a penny that was at the bottom of the urinal. I gave him another

The Nature of the Trading Environment

puzzled look because I didnt have the slightest idea about what he was trying to communicate to me. As I proceeded to use the urinal with the penny in it, he turned with a nervous expression on his face and strode away from me as quickly as he could.

Later on that day, I told one of my floor trader clients about this experience and asked if he knew what was going on. He said certainly, that it was very common knowledge that money at the bottom of a urinal is a bad omen and certainty something to be avoided. After I thought about it for a moment, I wondered what would happen if 1 went through the entire exchange and put pennies in all the urinals.

This story illustrates how the typical trader is caught in a psychological trap of refusing to plan and create structure for his trading activity, so that he can avoid taking responsibility for his results. And by doing so, he is subjecting himself to being tossed around by the whims of the crowd, at the mercy of his own unrestrained impulses, finding himself in winning and losing positions, not knowing why or what to do next. This trap is extremely negative because it creates a potentially damaging psychological condition I call random winning and random losing. If you cant define your own behavior and that of the markets, you cant learn how to repeat your wins or prevent your losses.

When you win it is so pleasurable, it creates a need to repeat it and compels you to try again. When you follow the crowd (instead of anticipating the crowd, which would take planning) or trade off news items, tips, or isolated signals from technical systems, the anticipation of the next attempt to win automatically produces fear and anxiety.

Why? Because, you cant define the market conditions or the decision-making process that produced the last win, and so you cant assure yourself of the next.

If you dont know what you did to win the last time, you obviously dont know what to do to keep from losing this time. The end result is intense anxiety, frustration, confusion, and fear. You feel out of control, experiencing a sense of powerlessness as you are swept along by the ensuing events and wondering what is the market going to do to you today.

Consider that the markets cant do anything to any trader who completely trusts himself to act appropriately, in his best interests, under all market conditions. And before people can trust themselves

The Is an Unstructured Environment

in this manner, they would first have to define all those conditions and be able to recognize them.

Understandably, taking responsibility is something that is extremely difficult to do. We dont live in a society that has a highly evolved concept of the growth process, and as a result, we learn to become very intolerant of "mistakes." I say this because we are basically taught as children and, therefore, in turn teach our children through our ridicule of them that mistakes are something that diminish one as a person. Ridicule does not enhance a childs willingness to accept responsibility, and if he doesnt, the typical parent will then criticize the child for being irresponsible.

Taking responsibility is a function of self-acceptance. You can measure this degree of self-acceptance by how positively or negatively you think of yourself when you make what you perceive as a mistake. The more negatively you think of yourself, the greater your tendency to avoid taking responsibility, so you can avoid the pain of your harsh thoughts, thus generating a fear of making mistakes. However, the greater the degree of self-acceptance you have for yourself, the more positive your thoughts will be and the greater the degree of insight you will be able to extract from an experience, instead of generating fear. The more self-accepting you are, the easier it is to learn because you are not trying to avoid certain information.

I dont know of any national prerogative to teach children how to accept themselves in spite of their "shortcomings" as perceived by the adults in their lives. If people had a more accepting attitude about the outcome of their actions, they wouldnt have a need to avoid taking responsibility.

To be successful, the market forces you, as a trader, to be responsible in completely new ways. For example, you cant put on a trade and then release your responsibility to the market to do something for you, like give you money. The market is a fluid, ever-changing event, where at any moment some other trader may decide to jump in with enough force to change the expectations of other traders participating to the point where they reverse their positions and as a result completely negate the potential you believed existed a moment ago, when you put on your trade.

In our everyday lives, objects are very stable, and day-to-day events do not change at anywhere near the rate and frequency that conditions change in the market environment. Relative to the nature of the