be taken when it seems right. What they do is mathematically define, quantify, and categorize past relationships in collective human behavior to give you a statistically probable outcome of the future.

As a comparison to trading, it is much easier to take risks and participate in a gambling event with a purely random outcome based on statistical probabilities, simply because it is random. What 1 mean is, if you risk your money on a gambling event that you know has a random outcome, then theres no rational way you could have predicted what that outcome would be. Therefore, you dont have to take responsibility for the outcome if it isnt positive.

Whereas, with trading, the future is not random, price movement, opportunity, and outcomes are created by traders acting on their beliefs and expectations of the future. Every trader contributes to the outcome of the future by putting on and taking off trades in accordance with their beliefs. Because traders actually create the future by collectively acting on their beliefs about the future, the outcome of their actions is not exactly random. Why else would traders try to outguess their systems, unless they had some concept of the future and how that future will affect the markets?

This adds an element of responsibility to trading that doesnt exist with a purely random event and that is difficult to avoid. This higher degree of responsibility means that more of your self-esteem is at stake, making it much more difficult to participate. Trading gives you all kinds of ways to beat yourself up for all of the things you should have or could have considered that would have resulted in a more satisfying outcome.

Furthermore, you dont trade in an information vacuum. You form your expectations about the future with information technical systems dont take into consideration. Consequently, this sets up a conflict between what your intellect says should be happening and the purely mathematical means of predicting human behavior afforded by your technical system. This is precisely why technical systems are so difficult to relate to and execute. People arent taught to think in terms of probabilities-and we certainly dont grow up constructing a conceptual framework that correlates a prediction of mass human behavior in statistical odds by means of a mathematical formula.

To be able to execute your trading systems properly, you will need to incorporate two concepts into your mental framework-thinking

in terms of probabilities and correlating the numbers or the mechanics of your system to the behavior. Unfortunately, the only way you can really learn these things is actually to experience them by executing your system. The problem is that rarely will the typical trader stay with his system beyond two or three losses in a row, and taking two or three losses in a row is a very common occurrence for most trading systems. This creates something of a paradox or Catch 22. How do you do it if you dont believe it, and you wont learn to believe it unless you do it long enough for it to become a part of your mental framework? This is where you employ mental discipline to make flawless execution a habit.

Exercise

Take some of the trading capital that you set aside for your education to buy and trade a simple trading system with well-defined entry and exit points. Make a commitment to trade this system exactly according to the rules. You need to make a very strong commitment here and not play any games with yourself. The object of this exercise is to work through any resistance you may have to following your rules.

This system does not have to be expensive. You can get one out of many of the books on technical analysis available today. I think it is important to buy one instead of devising one of your own because it might be a little easier to stay focused on the objectives of this exercise. With any system you devise, you are naturally going to want to make money. Save it for later, after you have learned how to execute properly.

You also need to find a system that suits your unique tolerance for taking a loss. The amount of money you risk per trade should be an amount that you are completely comfortable with, at least at first. If you dont stay within this tolerance level, you will be, at the very least, uncomfortable, in which case to whatever degree you are uncomfortable, you shut down the learning process. When you are feeling pain, instead of being focused on what the market is teaching you about itself and yourself, you will be focused on information that will ease your pain. Which usually results in a painful lesson.

Your objectives are to (1) learn the skdl of flawless execution by learning that you can follow the rules you set forth for yourself (I am

defining "flawless execution" as executing a trade immediately upon perception of an opportunity; inclusive within opportunity is the opportunity to exit a losing trade.) and (2) to incorporate a belief into your mental system about the nature of probable outcomes so that you believe that you can make money in the long run with your trading system, if, of course, you can execute it properly.

You will likely encounter many beliefs arguing against flawless execution. Here are few suggestions to help you work through this resistance:

First, understand that this exercise {at least for most people) is not going to be easy, so be easy on yourself. The more accepting you are of your mistakes, the easier it will be to make the next attempt. If your child were learning how to ride a bike, Im sure you wouldnt scold him for falling off and tell him not to try again. You would encourage him and eventually hed leam. Give yourself the same kind of understanding and consideration.

Second, taking all the signals generated by your system is the only way you can get the firsthand experience you need to establish a belief in probable outcomes, and relating the mathematics or the mechanics to the behavior. You have to do it in spite of your resistance, and you have to do it long enough for the system to become a part of your mental framework. When that happens, you will have the force of habit working for you, and the struggle will cease. Just do the best you can and look for ways to improve your performance. Constantly keep in mind that what you are doing is more of an exercise in learning trading discipline and the skill of flawless execution, which in the long run is far more important than your immediate desire to make money So keep your contract size light You can always increase it later, when you have learned to trust yourself completely to always do what needs to be done without hesitation.

Stay with the exercise until it becomes second nature or a part of who you are. As you gain in your confidence, you will learn more and consequently leam how to make money as a trader. As you make money you will gain in your confidence. This positive cycle will expand your ability to be successful just as easily as a negative cycle will feed on itself to end in despair.

STEP FIVE: LEARNING TO THINK IN PROBABILITIES

After you have mastered the more fundamental skills, in other words, once you have acquired the discipline necessary to interact with the trading environment effectively, you can start to use your reasoning skills and intuitive powers to determine what the market is likely to do next. This will entail learning to think in probabilities. What I mean by this is, if you cant personally move the market, then you will want to be able to identify the group that is demonstrating the greatest possibility of moving the market and you will want to trade with that group. Or you will want to determine the prevalent beliefs being expressed in the market and how those beliefs will affect price movement. That identification process requires a detached objective perspective, where you are watching and listening to what the market is telling you, instead of being focused on what the market is doing to you personally.

Remember, two traders willing to trade at a price make a market. Whatever the extreme ends of human expression are is what the market is capable of doing. For example, have you ever said, "The market cant break contract lows, its never been there before"? If you bought those lows based on your belief of its impossibility, then consider that all it takes is one trader who is willing to sell lower to make you wrong. The fact that the market did it makes it right. You could have been a seller at the all-time lows and been a one-tick winner when the next trader broke those lows, if you could have perceived selling as an opportunity.

If prices were to penetrate those lows with any kind of fol-lowthrough, it would indicate that there are plenty of traders who believe it wasnt going higher. These sellers obviously acted on their beliefs with enough force to outnumber the buyers available to take the other side of the trade. Regardless of the criteria the sellers used to justify their actions, how rational or irrational by anyone elses standards, nothing will alter the fact the market traded lower. The fact that you believed it couldnt do it is of no consequence, unless you can trade big enough numbers to reverse it. Otherwise, you can either be with it or against it.

To help you leam how to be with the flow of the market, I pose a

series of questions that are designed to keep you focused in the "now moment" to determine what is true about the market.

1. What is the market telling me at this moment?

2. Who is paying up to get in or get out?

3. How much strength is there?

4. Is momentum building?

5. Can it be measured relative to something?

6. What would have to happen to indicate the momentum is changing?

7. Is the trend weakening or is this a normal retracement?

8. What would show that? If the market has displayed a fairly symmetrical type of pattern and that pattern has been disturbed, then it is a good indication the balance of forces has shifted.

9. Are there any places where one side will definitely gain dominance over the other? If that point is reached, it still may take sometime for the other side to be convinced they are losers. How long are you willing to give them to stampede out of their positions?

10. If they dont stampede out of their positions, what will that tell you?

11. What did traders have to believe to form the current pattern relative to the past? Remember that peoples beliefs dont change easily unless they are extremely disappointed. People are disappointed when their expectations arent fulfilled.

12. What will disappoint the predominate force?

13. What is the likelihood of that happening?

14. What is the risk of finding out in a trade?

15. Is there enough potential for movement to make the trade worth the risk?

We may never know what traders will in fact do But we can determine what they will likely do if certain things happen first. For example, if traders push the price lower than the previous low, what will likely occur? Is this new low significant enough to cause traders

holding long positions to bail out? Will it cause new shorts to enter the market or attract existing shorts to add to their positions? New shorts may be attracted to the market, and old shorts will add to their position. This price slide will stop when enough traders believe the price is cheap relative to something. That reference point will likely be some other previous old high or low.

If you cant determine the significance of any particular high or low or any other significant reference point for that matter, then you have to ask yourself if it is worth the risk of finding out. How much room will you have to give the market to define itself before it is evident that the flow of the market is not in the direction of that trade?

Ask yourself this question: For this trade to be valid or continue to be valid, the market shouldnt trade to what point? If it trades within that point, then the trade still has potential for working. Beyond that point, it is no longer valid in the direction that I started.

Keep in mind that the amount of price movement that you determine is necessary for the market to define itself has to correspond with your emotional tolerance to accept the dollar value of a loss that size. Otherwise, dont take the trade regardless of how much potential you think it might have, unless you can realistically change the foregoing parameters to fit your capacity for a potential loss.

Let the market define itself and then apply whatever criteria you use to define an opportunity. Identify your significant reference points and place your orders on either side of the point; then wait for the market to do whatever it is going to do. Try putting your orders in the market in advance of whatever you perceive as having a high probability of occurring based on the existing market conditions. By putting your orders in advance of some anticipated move, you will be learning how to let the market work for you Placing your orders in advance will also help to keep you from having an opinion, and you wont be subjecting yourself to the moment-to-moment conflict inherent within all price movement.

Keep in mind that since the market is in perpetual motion, it puts you in a position of having to make never-ending assessments of the current risk in relationship to the current possibilities for reward. To do this effectively, you will have to learn to observe the market as if you were not in a position. This perspective will free you to take whatever action is appropriate for the situation instead of hesitating, hoping, and wishing that the market will make you right.