I have been asked often about Psychology and what books to read. Here is a somewhat detailed reply to that keeping in mind obviously that all of our personalities are different and I am relating what works best for me.
First of all there is nothing I know of that tugs at your emotions more than the business of trading. Most of us are not conditioned in a way that accepts failure well and there is no way around failing during certain periods of time. As a result one of the things we have to do without question is check our ego at the door. If you can't find a way to do that you need to go elsewhere for your riches. However, at the same time you have to be confident in what you are doing to get you through the tough periods. How exactly to you achieve that balance?
I think it is helpful viewing this business like other businesses. For example, Many companies have loss leaders, products they discount heavily to get people to do business with them in the hopes that they will also purchase something that has better margins in it. A restaurant might offer coupons for free deserts etc, or maybe a combo meal. The hopes are that once you are exposed to them you become a regular customer and the whole process works well in the end. That is a sound business strategy but also you have to realize that during periods of time you are going to net lose money doing it. You undertake this with the idea of the bigger picture.
The way this relates to trading in my view is that often when we are watching a setup for a price move, we may have to probe a few times getting stopped out attempting to catch the move. When we do finally catch it we make up the money in spades. This is not easy to do emotionally because we are losing money in the probing process hoping for the larger picture gain. I don't see that as any different than the restaurant example. As hard as it is to do since we all trade to make money, you can't focus on the money aspect of this. You instill money management controls to stop you from losing too much while probing, and that needs to be enough.
If we think about our Bond System, it is a real life analogy of this. It was like opening a restaurant with a good buzz where many people come on based on the reputation of the chef ( yours truly ). The food was fantastic for a good stretch then all of the sudden there was a month where some of the specials were not as good. Do we just ditch the restaurant or go back to the menu items we have always loved? This may seem a little goofy and perhaps there are better analogies, but I think you get the gist of this.
I remember when I was studying with Kevin Hagerty many years ago, who is an ex-marine and one tough and rough character. When asked about psychology his response was always if you can't take the heat get out of the kitchen. He did not believe in reading a bunch of books written by people who don't even trade, trying to teach people the psychology of trading. I agree with that premise. I remember someone telling me after PFG that I should go see "someone" to help me get through it. What the hell is some pencil neck going to tell me that I don't already know? There have been times when I have been so angry about it the thoughts I had were almost shocking and it is fortunate that I was not face to face with anyone involved at those times. This is natural, why is that a problem? Man up sometimes you feel like kicking somebody's ass and sometimes they deserve to have their asses kicked.
I remember the other day a friend of mine telling me that her husband had been really sick for a few days and did not get out of bed, and she said "maybe you are not like that but you know how guys are." Actually I don't. First off I can't stand her husband he is a pansy of the first order and a complete tool. I have not even had a cold in at least 10 years because of my nutritional and fitness regimen, and perhaps genetics. However, the times many moons ago when I did get them I never missed a beat. I also broke my ankle in a martial arts tournament a long time ago and walked on it for more than a week before it finally swelled up so much it split a pant leg so I gave in and went to a doctor who greeted me with laughter calling me "one of those guys." My view is that you suck it up and get on with it. If you have to hack up some flowers like Bill Murray did in Caddyshack to blow off some steam.
When it comes to psychology I don't make a big deal of it. This business is very challenging but so are many other businesses. At times other businesses lose money also. I think drawing the analogy and keeping it mind might be helpful. It makes you realize you are not alone, it is part of the business cycle, and you have to learn to deal with it. You don't have to lay on a couch like Daniero did with Billy Crystal in Analyze This. I remember the one line out of the movie that is one of my all time favorites and one that applies here. "If I go Fag you die." There is also a line out of a movie called Old School with Will Ferrell and Owen Wilson right at the beginning that is similar. The point is you have to deal with adversity in this just like anything else, so just deal with it.
There is another story out there regarding FCM's screwing around with Segregated Money, The Linn Group. Here is the link:
Here is the most important thing to keep in mind. MF Global was a clearing FCM hence the Merc was involved and put money in to help make clients whole. PFG was a non-clearing FCM hence was not under the supervision of the MERC and the MERC basically said F you. When you have a non-clearing FCM like that basically one person somewhat outside of the process has control of the money. This is how the thefts can happen so easily. The head of the firm can order some employee to do something and chances are they will do it even if it means doing something that is not right. I think the best rule of thumb is to not use an FCM that is non-clearing. This will not guarantee you anything but it does put you in the best possible situation. I think Linn is a non-clearing FCM but am not 100% sure on that. There is another firm out there that people have been asking me about. I think if you check you will find they are a non-clearing FCM. This does not guarantee anything other than if they go down the MERC will claim they did not supervise them therefore screw you like they did with PFG. One of the big reasons MF Global worked out so well is that the MERC chipped in a huge chunk of money. They won't do this when a non-clearing FCM goes down.
Back to the Bernanke 500
Here is how things stand now as of Thursday evening.
I have mapped out once again my scenario I through out in the prior post with a different look added. What this shows is a long term measure of momentum and what it would look like if it rolled over and we got a rally against that roll over. This gives essentially a first retracement entry which can be very powerful. I always want to get in as quickly as I can once I identify a trend change. I am hoping this sets up like this.
Have a great weekend and thanks for reading