using many of the principles put forth in this book. They understand the concept of objectivity, have learned how to trade without fear, and know how to execute their trades properly. Before you can begin to take money out of the markets consistently instead of the markets taking yours, you will also have to learn these skills.

So, I would suggest that you set aside a certain amount of trading capital as tuition for your education. How much you set aside will be a function of how many skills you need to learn. What is most important is that you make a firm commitment to your education as a trader. Even if you have been trading for years and you are successful, but not as successful as you would like to be, setting aside money that you will trade with as an exercise to learn some needed skill is a very powerful symbol of your commitment to learning that skill. The stronger your commitment, the faster you will learn.

STEP TWO: DEALING WITH LOSSES

Trading Rule 1

Predefine what a loss is in every potential trade. By "predefine," I mean determine what the market has to look like or do, to tell you that the trade no longer represents an opportunity, at least not an opportunity in the time frame in which you trade.

When your beliefs about losses are restructured, the possibility of a losing trade will not create any threat of pain. Most successful traders restructured their beliefs about losses after they lost one or more fortunes. They experienced their worst fears about losing and then came to the realization that they didnt have anything to fear if they just did what needs to be done. What needs to be done? Confront the possibility of being wrong and consequently not avoid the inevitability of taking a loss. So confronting and accepting the inevitability of a loss is a trading skill, certainly a skill learned the hard way for most, but nevertheless an essential component at the foundation of virtually everything you need to learn to become a successful trader.

The relatively few successful traders Ln the market today did it the hard way. You, on the other hand, have the opportunity to do it much more easily. There will be two mental components at work to

help you acquire this skill. First is your understanding of why it is so essential to confront the possibility of a loss. If you dont, you will generate fear and end up creating the very experience that you are trying to avoid. When you really understand this concept, it will become unacceptable to you to trade from the old perspective of loss avoidance.

The second is your willingness to change your definitions of what it means to lose. By using some of the mental exercises in Chapter 14 you can change these definitions by using your thoughts instead of having to lose everything or practically everything you own to get to the same place. That place is "losses do not diminish me (you) as a person." The sooner you believe it, the easier it will be to identify and execute a losing trade. By making the execution of a losing trade an automatic function of your trading strategy, you make yourself psychologically available to take advantage of the next opportunity, even if that opportunity is in the same direction of the losing trade you just got out of.

Trading Rule 2

Execute your losing trades immediately upon perception that they exist. When losses are predefined and executed without hesitation, there is nothing to consider, weigh, or judge and consequently nothing to tempt yourself with. There will be no threat of allowing yourself the possibility of ultimate disaster. If you find yourself considering, weighing, or judging, then you are either not predefining what a loss is or you are not executing them immediately upon perception, in which case, if you dont and it turns out to be profitable, you are reinforcing an inappropriate behavior that will inevitably lead to disaster. Or if you dont and the loss worsens, you will create a negative cycle of pain, that once started will be difficult to stop. The next error after letting a loss get out of hand is usually not taking the next opportunity, which invariably is always a winning trade. After which, we get so angry at ourselves for passing up that opportunity that we make ourselves susceptible to any number of other trading errors, like taking a trade that was a tip from another trader, which invariably is always a loser.

It is important for you to note that once you completely trust yourself to cut your losses, you will eventually get to the point where

you may not have to predefine what a loss is. There are traders who have reached such a high degree of objectivity and trust that they can get into a trade and know when it is a loser without having to predefine it for themselves. They let the market define it for them based on their comprehensive knowledge of the various participants involved and their knowledge of the various relationships between price movement and time. However, the reason why they were able to learn what they know about the nature of the markets is because their focus of attention widened to include more undistorted information leading to greater insights, once they learned, first, however, to trust themselves. Keep in mind, that fear is really the only thing that keeps us from learning anything new. You cant learn anything new about the nature of the markets behavior if you are afraid of what you may do or cant do that is not in your best interests. By predefining and cutting your losses short, you are making yourself available to learn the best possible way to let your /its grow.

STEP THREE: BECOMING AN EXPERT AT JUST ONE MARKET BEHAVIOR

Generally, most of us grow up believing that when we have to make a decision, the more relevant information we can gather, the better our decisions will be. This isnt necessarily true with trading, especially in the beginning stages of ones career. In most market situations, there is an even number of traders who have a propensity to buy and those who have a propensity to sell or those who need to buy and want someone to take the other side of the transaction and vice versa. Everyone will have his reasons and rationalizations for all this trading activity, creating about as much conflicting information as there are participants. Because there is so much information and because so much of that information is conflicting, the beginning trader will need specifically to limit his awareness of the market information to which he allows himself to be exposed. More is not better; it just creates confusion and overload that will ultimately lead to losses.

You need to start as small as possible and then gradually allow yourself to grow into greater and greater amounts of market information. What you want to do is become an expert at just one

particular type of behavior pattern that repeats itself with some degree of frequency. To become an expert, choose one simple trading system that identifies a pattern, preferably one that is mechanical, instead of mathematical, so that you will be working with a visual representation of market behavior. Your objective is to understand completely every aspect of the system-all the relationships between the components-and its potential to produce profitable trades. In the meantime, it is important to avoid all other possibilities and information.

Out of all the combinations of behavior possible, you are going to limit your focus of attention to just one combination. Consequently, you will be letting all the other opportunities go by. Starting small and gradually working into other combinations is a real exercise in discipline that has a couple of important psychological benefits. First, you will be building a base of confidence as you learn that you can, in fact, accurately assess what will most likely happen next. It is much easier to gain this confidence if you dont overwhelm yourself with the markets seemingly infinite possibilities. Second, by passing up other opportunities that you are not an expert at yet, you will be releasing yourself from any compelling desire to trade. Any compelling behavior is usually the result of some fear. That fear, in turn, will cause you to behave in many inappropriate ways.

If the idea of letting go of opportunities that dont fit into your framework is troubling to you, then ask yourself, what is the rush? If you are confident in your ability to transform yourself into a successful trader, what difference could it make that you let go of some opportunities now for educational purposes? Once you learn to become the trader you want to be, you can then give yourself as much money as you desire. However, to get to that point, your objective should be to plan your development in such a way that you do the least amount of damage to yourself, both financially and psychologically. Then after you have developed the appropriate skills, taking money out of the markets can be as easy as almost everyone believes it is before he started trading.

If, on the other hand, you end up doing a lot of damage to yourself, you will have to undo that damage before you can accumulate wealth as a trader. After the damage is done, it wont make any difference how much you learn about the nature of the markets or how well you learn to perceive an opportunity. There are many

traders who end up becoming expert market analysts but cant make a dime as traders because of all the damage they did to themselves in the early part of their trading careers. What happens in these situations is a traders "past" will generate so much fear that he wont be able execute his trades properly or not at all, regardless of how well he learned to predict what the market will do next. Nothing is more frustrating than to know what is going to happen next and not be able to do anything about it.

You need to understand that the ability to perceive an opportunity, based on the quality of distinctions that you can make and your ability to execute a trade, are not automatic functions of one another. Perception and execution are separate skills. They can and do work in tandem, if there are no mental components blocking execution. Otherwise, the "intent" to take advantage of what you perceive as an opportunity may not have any inner support or the kind of inner support that is necessary to execute your intent properly. If there are mental obstacles preventing the proper execution of a trade, then learning how to perceive better opportunities is not going to solve the problem.

So the object of this exercise is to help you learn how become an expert and stay healthy while you are doing it. And when you do become one, there will be much less standing in the way of your taking maximum advantage of your perceptive skills. If you are already looking at or trading several markets and you are not successful or not as successful as you desire, then I would suggest that you scale back to just one market or two at the most. Dont expand until you thoroughly understand the markets characteristics.

STEP FOUR: LEARNING HOW TO EXECUTE A TRADING SYSTEM FLAWLESSLY

The proper execution of your trades is one of the most fundamental components of becoming a successful trader and probably the most difficult to learn. It is certainly much easier to identify something in the market that represents an opportunity than it is to act upon it. However, there are some good reasons why it is so difficult to act on a trading signal other than what has already been identified as mental

obstacles. To understand these reasons, you need to understand the nature of trading systems (defined as any methodology that consist-endy identifies an opportunity to buy or sell with a potential profit in some future moment), and how they interact with the markets and ourselves.

Most good trading systems, technical or otherwise, will take consistent money out of the markets over the long run. Many of these good systems have been available to the public for years, and yet, there is still a huge gap between what is possible and what almost everyone ends up with. The problem with trading systems is they define market behavior in limited ways when the market can behave in an infinite combination of ways. Systems mathematically or mechanically reduce relationships in human behavior characteristics to percentage odds of what could happen next. They can only capture a very limited number of these behavior characteristics compared to the billions that are possible. Any identified pattern may or may not be repeating itself with respect to the way the pattern or relationship progressed when it was observed in the past. Therefore, we never really know if it is valid or not until it has actually completed itself. The big psychological problem here is that people have difficulty acting on opportunities with probable outcomes.

Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make them feel as if the outcome had been in doubt. The momentary suspense adds the thrill factor necessary to keep our lives from getting too boring. When it comes right down to it, no one trades to lose, no one puts on a trade believing it is going to be a loser, and all systems will definitely have some percentage of losing trades. So its difficult not to be tempted into trying to guess which ones are going to be the losers and not participate.

As most of you reading this book already know, trying to outguess your trading system is an exercise in extreme frustration. Sometimes the system will give you signals to trade in ways that are completely contrary to your logic and reasoning. Sometimes the system will defy your reasoning and be right, and sometimes you will agree with the system and it will be wrong. You need to understand that technical trading systems are not designed to be outguessed. What I mean is, they arent designed to give you isolated signals of an opportunity to