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founded in human fear and greed. Both fear and greed will compel people to act or not act depending on their needs in relation to the perceived external conditions. The price for goods and services will be determined by the individuals needs in relationship to their belief in their ability to fulfill those needs. Implied within that belief is their perception of the availability of the goods and services they need.

Greed is founded in a belief in scarcity and insecurity. Both beliefs generate fear. I am defining "greed" as a belief that there will never be enough available to fulfill oneself in combination with a belief that one always needs more to feel secure or satisfied. The perception that these conditions exist either internally or externally will generate a fear that will compel one to act or not act, depending on who controls the supply. The behavior someone displays will be consistent with what they believe they must do to satisfy the deficit. If two or more people have the same fears, they will typically compete among one another for the existing supply.

If the supply of something is limited in relationship to the need, those that are in need will compete for the available supply. They will compete by their willingness to exchange more resources (pay more money) than will someone else who may also be in need. If, however, the supply is great in relationship to the need (demand), there will be no fear of scarcity; consequently, people will conserve their resources (money) by diverting them to other needs or just waiting for the possibility that the price may come down.

Any system of interaction founded in individual fears of lack or scarcity will cause the price of goods and services to fluctuate in relationship to the relative degree of security or insecurity that is being experienced by the collective masses at any given moment. These fluctuating prices create economic risk for all those dependent on others to fulfill a need that they cannot fill themselves. What is risk? Risk is the possibility of a net loss of personal resources (energy, money etc.) in the exchange or pursuit of fulfilling a need. Fluctuating prices also create opportunities for those who are willing to assume the risk created by price movement. As long as there is disagreement between individuals about the value of goods and services, prices will fluctuate, thereby creating opportunities for traders to make money if they will assume the risks.


I define trading as two parties exchanging something of value to fulfill some need or goal. In the context of the stock or futures markets, participants trade for the sole purpose of accumulating wealth or protecting physical assets from deteriorating in value. In essence, all traders in these markets, whether they are labeled speculators or hedgers, trade to accumulate wealth; it is only a matter of perspective. For the hedger the motivation to protect the value of an asset from economic risk is still to accumulate wealth.

Hedgers will trade for a higher degree of economic certainty by transferring the risk created by changing prices to another willing trader. Typically, it will be the speculator on the other side of the trade willing to assume the risk of changing prices for the opportunity to accumulate wealth from those changes. For example, stock owners will sell their stock because they believe the possibilities for the future appreciation of the stock are either nonexistent or minimal in relationship to their assessment of the risk to keeping it. They may also sell even with expectations of future appreciation if there is a need to liquidate to satisfy other needs. The buyers (the other side of the trade) believe that the stock will appreciate in value. We can assume that the buyer believes this because people trade to accumulate wealth.

Since the goal of a trader is to satisfy a need to accumulate wealth, we can assume that people will not consciously enter into a trade believing they will lose or fail at satisfying their needs. Because all traders have basically the same goals (to win), we can then state that no two traders enter into a trade unless they have opposing beliefs about the future value of whatever is being traded. Keep in mind that the current price of anything is always a reflection of what someone is willing to pay and what someone is willing to sell for in that moment. So, although there must be agreement between two parties for a trade to exist at a price, inherent within the transaction is complete disagreement between buyer and seller on the future value of what they are trading. For example, would I be incorrect in stating that any stock owner will not sell his stock if he believed it had potential for future appreciation. When he sells he has basically given up on the possibilities of future appreciation. Why did the

The Nature of the Trading Environment

buyer buy? To lose money? To be wrong? No, of course not. The buyers belief in the future value of the stock is opposite that of the sellers. This disparity is illustrated even more clearly with futures trading.

Of real interest is the academic communitys belief that the markets are efficient, which assumes that traders have rational reasons for their behavior, knowing what they are doing and having a good reason for doing it. Academicians also believe that the markets are basically random, which seems to be a complete contradiction to a market that is supposed to be efficient. In fact, however, the markets behavior is mostly irrational, if you define rational as any action that is the result of a specific methodology or is planned in advance and definitely not random because irrational behavior is very predictable. If you want to learn to predict price movement, you dont need to pay attention to reasons. What you need to do is determine how the majority of traders perceive the external conditions in relationship to either their fear of scarcity, or their fear of missing out, or both.

Before we cover the three stages to becoming a successful trader, it would be a good idea to review some of the material already covered. In the market environment you have to make the rules to the game and then have the discipline to abide by these rules, even though the market moves in ways that will constantly tempt you into believing you dont need to follow your rules this time. This movement allows you to indulge in any illusion or distortion that suits you in any given moment. Certainly you wouldnt choose to feel pain (confronting your illusions about the market) if there is any reasonable information that would support the possibility of your expectation being fulfilled.

In an unlimited environment, if you cant confront the reality of a loss, then the possibility exists for you to lose everything, in each and every trade. If you believe trading is like gambling, it isnt. In any gambling game you have to actively participate to lose and do nothing to stop losing. In the market environment, you have to actively participate to get into a trade and actively participate to end your losses. If you do nothing, the potential exists to lose everything you own.

The Three Stages

to Becoming a Sticcessful Trader

When you participate in gambling games, you know exactly what your risk is and the event always ends. With the markets you dont ultimately know what your risk is, even if you are disciplined enough to use stops, because the market could gap through your stops. Also because the event never ends and is in constant motion, there is always the possibility of getting back what you are losing in any trade. You wont need to actively participate to get back what you are losing, you just have to stay in your trade and let the market give it to you. As a result, there is the constant temptation not to cut your losses which is very difficult to resist. Why choose pain over the possibility of being made whole, when all you need do is ignore the risk.


Each equilibrium (the current price) presents every trader with an opportunity to either buy low or sell high relative to the next change. Except for the time it takes to execute a trade, it is basically the same market for all of us. You are either able to perceive any given equilibrium as opportunity to execute a trade, or you can agonize over what you believe is a missed opportunity from the last price change, or you can refrain from taking the trade at the current price-even though you perceive it as an opportunity-because you fear the market might make you wrong. The market does not create the ways in which you perceive it; it merely reflects what is going on inside of you in any given moment.

Whether you perceived the current market condition as an opportunity and didnt act on your perception, or didnt realize it was an opportunity until after the move occurred is, again, a direct reflection of your unique psychological makeup. You attach the meaning to any particular move.

From an objective perspective the next tick up can be described as the price just moved one tick up from the previous price. That is a reality about that one-tick price change we all share. However, to one trader that one up tick could be the final defeat in a short position he had been carrying. To another trader, it could mean a perfect selling opportunity because the market just cant go higher.

To a third trader it could mean a buying opportunity because the market broke out of a resistance area, based on the way he defines resistance.

The market neither chooses nor has any way of choosing the meaning you attach to any particular price change or market condition. For example, you could perceive an opportunity to sell high and act on that perception by entering the market with a short position. From the point you entered, lets say the market went in your favor and then violently reversed itself. In doing so, it very quickly went through your entry point and kept on going up with only a few rest periods and minor little retracements.

Each rest or retracement could have been an opportunity to get out of your short position and reverse yourself. What would stop you? The answer is inside of you. If you breathed a sigh of relief each time the market paused or retraced a bit, choosing to believe it was finally all over, then I ask you, What is all over? Is it possibly the fact that you wont have to confront yourself and say Im wrong. That again is inside of you. You choose (based on the makeup of your mental environment) to believe the pauses were stopping points, relief from confrontation, instead of a possibility to take advantage of an opportunity to eliminate your risk and a high probability to accumulate a profit by reversing yourself.

The way the market seemed to you was actually the way you created it in your own mind. Out of all the available choices and alternate ways of considering the possibilities, you choose one particular way. Your own mental framework (controlling what and the ways in which you perceive information) locked you into that losing trade. The unique way you define a loss {your beliefs about it) and what it means to you is a component part of your psychological makeup. Your beliefs will interact with your perception of environmental information to form the particular way you pick and choose whatever information you happen to focus your attention on. The market has nothing to do with this process, even though that is where the information is coming from.

In the trading environment the outcome of your decisions is immediate, and you are powerless to change anything except your mind. The power you have to create more fulfilling outcomes from your trading resides in your degree of mental flexibility. You have to learn how to flow with the markets; you are either in harmony with

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