Trading to Win: THE PSYCHOLOGY OF MASTERING THE MARKETS

"Trading to win" defines a goal-oriented approach designed to help
JL traders maximize their performance in a unique way¡ªby tapping
personal resources they might never know they had, by developing a ra-
tional strategy for trading, by learning new psychological skills, and by
letting go of unproductive, even maladaptive, behavior patterns.
This approach puts a special emphasis on learning to get rid of past
memories and erroneous notions around which people have organized
their lives. This book shows you how to commit to a future goal by sur-
rendering to it, and simultaneously relinquishing all thoughts of gain,
achievement, or attachment. Sounds paradoxical, you say? It is. That's
the point.

This system encourages you to trust a higher power that assists you
in realizing the power within yourself. Periodically it helps you refocus
on your goal, realigning yourself with your objectives. Then, you use
your objectives as a filter through which to make distinctions in the
present moment.

The world of trading is one of high stakes and high-risk activity.
The goal is, ostensibly, financial gain. Give up that goal, and you gain
the freedom to genuinely listen to the sounds of the marketplace and to
be able to read the movement of stock prices in a way that enables you
to increase your probability of success.

For master traders, the monetary result is secondary to the gratifica-
tion that comes from being able to make the right market call. They get
their primary satisfaction from having an idea about a stock and imple-
menting this idea in a profitable trade. Master traders trust their infor-
mation, sense the direction of the marketplace, and assess many other
variables before finally executing a lucrative trade.

This requires an enormous ability to abandon pride and to maintain
equanimity in the face of loss or excessive profit. The master trader
knows¡ªand you can learn¡ªthat neither despair nor euphoria should
cloud one's judgment. As you improve, the market becomes even more
challenging, requiring you to commit to bigger numbers or more com-
plex dimensions of the game. If you are willing, this can lead you to
give up more of your old habits and to become more at one with the
universe.

I have watched this occur in real-life traders. For the past six years I
have met weekly with a group of professional traders to explore the psy-
chological and emotional dimensions of their trading and to find ways
of maximizing their performance. The Trading to Win principles dis-
cussed in this book evolved from these seminars and have since been
tested and developed in several other trading settings. I am deeply in-
debted to Steve Cohen for making this opportunity possible and for
paving the way to a greater appreciation of these broader issues to the
traders in his and other firms.

(Because of the proprietary nature of many of the issues considered
in this book, I have not identified any specific traders by name. All per-
sonality profiles represent composites of the various traders and, al-
though there are female traders, the masculine persona has been used
throughout for realism in this currently male-dominated field.)

Reading the market's direction and the directions of specific
stocks is essential to trading success. It is like the childhood game of
musical chairs. In that game, you have to time your move so that you
do not jump for a chair before the music has stopped; you also don't
want to linger too long after the music stops so that there are no
seats left. This is the trader's dilemma as well. The more skilled you
are, the more patience you have, the longer you can stay in as the
stock rises or falls before you act. You stay in longer, and therefore
maximize your profits. However, you do not stay in so long that, by
holding declining stock in hope that it will turn around.

The same goes for being able to minimize your losses. Rather than
hoping and praying and rationalizing your hesitation by convincing
yourself that the stock will eventually turn around, you cut your
losses instead.

The Trading to Win program spotlights a set of philosophical and
behavioral principles that can help you to implement proactive trad-
ing strategies. This approach involves commitment, concentration,
recovery, and preparation for the next day. It enables you to trust
your true self.

This approach is not for the fainthearted. It puts much emphasis on
proactive trading strategies designed to produce exponential results. It
encourages you to do counterintuitive things¡ªsuch as admitting uncer-
tainty, fear, and lack of knowledge and asking for help; sharing informa-
tion; and facing vulnerability. All of this means letting go of ego and
arrogance, which blurs your focus on the marketplace. It compels you
to learn to communicate directly and clearly with others, whether they
be staff, associates, or floor brokers.

Trading to win obliges you to review each day's trades, so you can
see how you may have veered from your commitment, what dropped
out of your trading, and what commitment you must add to get the de-
sired result. You might need to raise the number of shares traded so they
are consistent with your level of commitment. You might have to aban-
don energy-draining behavior¡ªimpulsiveness, chest beating, whining,
and scalping (selling too soon to book a quick profit and missing the
larger upward movement of a stock). You'll need to understand how to
get out fast when stocks are dropping. You'll have to shed counterpro-
ductive habits, such as taking personal calls during trading times or rac-
ing home after the bell instead of reviewing the day with other traders
and coaches.

In addition, you must learn the appropriate role of money. In
trading, it's not so much to be rich or secure. It is a way of keeping
score. It is a way of defining the framework of events so that you can
determine what actions are needed in the present. Paradoxically, the
greater the amount of money, the more you must renounce your fo-
cus on it.

While this program has been developed for professional traders, its
principles have value for the ordinary trader as well. Sound trading ap-
plies to everyone, including the advanced trader who must regularly re-
turn to basics. Since it concentrates on a goal, yet makes you detach
your ego from it, it has relevance not only to investing, but to life as
well. I define "winning" as maximizing your own potential, as seeing
the world realistically, and as living life like the miracle it is. After all,
trading is a metaphor for the perilous yet exhilarating nature of living
on the edge.

What's the Concept, Doc?

The objective of this book is to try to get at the underlying thought
process behind trades. What are you are really thinking? What's moti-
vating you? Is it consistent With your style? Does it make sense for you?
Or are you governed at a given moment by emotion, by panic, or by
whatever is going on in the Street? The ultimate objective is to be much
more capable of reading the tape and reading the changes in the market
in terms of what is occurring based on what you understand about it.
You'll hear colleagues discuss in these pages things that they don't nor-
mally like to talk about, such as weakness or getting away from one's
game plan.

'Trading, like sports, involves a high degree of uncertainty and un-
predictabilityj This means playing in unfamiliar territory. Many books
explore basic trading and basic psychological concepts such as relax-
ation, but don't link psychology and trading behavior. My aim is to de-
velop the thought processes essential for trading in the realm of
uncertainty. Whether you are hammered by fear or animated by eupho-
ria, both can throw you off your game.

It is important to understand why you may lose after you win big,
or why you may sometimes feel that you don't deserve to win, or feel
guilty about it, or have an attitude about money that colors your trad-
ing. To be a super-trader, you must learn not to forget your discipline
and not to forget to respect the market. How do you surrender and
yet keep your consciousness and your alertness so you can move in
and out?

Trading is a very high-pressure game. It triggers a lot of defensive-
ness that on the surface looks very rational and reasonable. I hope that
this book raises your level of awareness of certain critical processes so
that you can begin to use them in your work.

What Do I Mean by a Strategy?
Once you set a specific goal for the year, you must ask how you are go-
ing to meet it. How many trades at what size would you have to make
in order to make your number? What should your team look like? What
general rules must you establish in terms of holding on, doubling up, or
getting out of positions?
If you reply with a shrug, "Well, I want to do as well as I can," you
are less likely to get there. To reach your target, you'll have to elevate
your game to a level where you say, "Okay, this is what I'm going
to do."
Why have rules? Because some moves, which you can find in your
own database, consistently work. Forget the standard litany of rational-
izations. You can always blame Alan Greenspan, or the market, or the
fact that it's February. But regardless of different styles, certain princi-
ples remain immutable. If a stock goes down and you own it, you're
losing money. "I'm going to make it a long-term trade," you say? You
still lost money today. "It's a six-month trade" or "a three-month
trade"? Maybe. But today you were hoping and wishing; you read
something in Barron's, but it doesn't happen. You may keep thinking
that you can make up for the loss, but, in fact, you would make much
more if your losses were less.

Once you stop having too great a tolerance for a high level of loss,
you can start raising your monthly profit and loss (P&L) significantly.
Some traders, even substantial ones, stay in positions even if they're
dropping, because they are "macho" and can "tolerate pain." The stock
will eventually come back, they tell themselves. But you are not a wimp
if you get out of a losing position.

One trader I know had to learn to get out at three points. Next he
learned to get out at one and a half, and he made more money. Now he
has to take the next big step: learning that it's okay to run away from a
losing stock. So if he's making four thousand dollars and he starts cut-
ting his losses, he can make five or six thousand.