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PSYCHOLOGY IS THE KEY
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You may base your trades on fundamental or technical analysis. You may trade because of hunches about economic and political trends, use "inside information," or simply hope.

Remember how you felt the last time you placed an order? Were you anxious to jump in or afraid of losing? Did you procrastinate before picking up the phone? When you closed out a trade, did you feel elated or humiliated? The feelings of thousands of traders merge into huge psychological tides that move the markets.

Getting Off the Roller Coaster

The majority of traders spend most of their time looking for good trades. Once they enter a trade, they lose control and either squirm from pain or grin from pleasure. They ride an emotional roller coaster and miss the essential element of winning—the management of their emotions. Their inability to manage themselves leads to poor money management of their accounts.

If your mind is not in gear with the markets, or if you ignore changes in mass psychology of crowds, then you have no chance of making money trading. All winning professionals know the enormous importance of psychology in trading. All losing amateurs ignore it.

Friends and clients who know that I am a psychiatrist often ask me

whether this helps me as a trader. Good psychiatry and good trading have one important principle in common. Both focus on reality, on seeing the world the way it is. To live a healthy life, you have to live with your eyes open. To be a good trader, you need to trade with your eyes open, recognize real trends and turns, and not waste time or energy on regrets and wishful thinking.

A Man's Game?

Brokerage house records show that most traders are male. The files of my educational firm, Financial Trading Seminars, Inc., confirm that approximately 95 percent of traders are men. For this reason, you'll find that I commonly use the masculine pronoun (he) in the anecdotes and cases throughout this book. Of course, no disrespect is intended to the many successful women traders.

The percentage of women is higher among institutional traders—employees of banks, trading firms, and the like. In my experience, however, the few women who get involved in trading succeed more often than men. A woman needs exceptional drive to plunge into this male preserve.

Trading is similar to such thrilling and dangerous sports as sky-diving, rock-climbing, and scuba-diving. They also attract mostly men—fewer than 1 percent of hang gliders are female.

Men are drawn to risky sports in our increasingly regulated society. Dr. David Klein, a sociologist at the University of Michigan, was quoted in the New York Times as saying, "as work becomes more and more routinized . . . we turn to recreation for a sense of accomplishment. The safer and more routine we make work, the more we will push people into recreations where individual distinction and discretion, adventure and excitement play a part."

These sports provide intense pleasure but have a stigma of danger because many participants ignore the risks and take thoughtless chances. Dr. John Tongue, an orthopedic surgeon in Oregon who studied accidents among hang gliders, found that the chance of death rises among more experienced pilots because they take greater risks. An athlete who wants to enjoy risky sports has to follow safety rules. When you reduce risks, you gain an added sense of accomplishment and control. The same goes for trading.

You can succeed in trading only if you handle it as a serious intellectual pursuit. Emotional trading is lethal. To help ensure success, practice defen­sive money management. A good trader watches his capital as carefully as a professional scuba diver watches his air supply.

How This Book Is Organized

Successful trading stands on three pillars: psychology, market analysis and trading systems, and money management. This book will help you explore all three.

The first chapter of this book shows you a new approach to managing your emotions as a trader. I discovered this method while practicing psychiatry. It has greatly improved my trading, and it can help you, too.

The second chapter describes the crowd psychology of stock markets. Mass behavior is more primitive than individual behavior. If you understand how crowds behave, then you can profit from their mood swings and avoid being swept up in their emotions.

The third chapter of the book shows how chart patterns reveal crowd behavior. Classical technical analysis is applied social psychology, like poll- taking. Trendlines, gaps, and other chart patterns actually reflect crowd behavior.

The fourth chapter teaches modern methods of computerized technical analysis. Indicators provide a deeper insight into mass psychology than classical technical analysis. Trend-following indicators help identify market trends, while oscillators show when trends are ready to reverse.

Volume and open interest also reflect crowd behavior. The fifth chapter focuses on them as well as on the passage of time in the markets. Crowds have a very short attention span, and a trader who relates price changes to time gains a competitive advantage.

The sixth chapter focuses on the best techniques of stock market analysts. They can be especially helpful for stock index futures and options traders.

Sentiment indicators measuring the opinions of investors and traders are profiled in the seventh chapter. Crowds follow trends, and it often pays to join them when prices are moving. Sentiment indicators show when it is time to abandon the crowd—before it misses an important reversal.

The eighth chapter reveals two proprietary indicators. Elder-ray is a price- based indicator that measures the power of bulls and bears below the surface of the markets. Force Index measures prices and volume. It shows whether the dominant market group is becoming stronger or weaker.

The ninth chapter presents several trading systems. The Triple Screen trading system is my own method. I have used it for years. This and other systems show you how to select trades and find entry and exit points.

The tenth chapter focuses on money management. This essential aspect of successful trading is neglected by most amateurs. You can have a brilliant trading system, but if your money management is bad, then a short string of

losses will destroy your account. Trading without proper money management is like trying to cross a desert barefoot.

You are about to spend many hours with this book. When you find ideas that seem valuable to you, test them in the one crucible that matters—your own experience. You can make this knowledge your own only by questioning it.

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