CHAPTER 4
4 CONSISTENCY: A STATE OF MIND
I hope that after reading the first three chapters you are getting die idea that just because you are acting
in the capacity of a trader, doesn't mean that you've learned the appropriate ways to think about what
you do. As I have already stressed several times, what separates the best traders from everyone else is
not what they do or when they do it, but rather how they think about what they do and how they're
thinking when they doit. If your goal is to trade like a professional and be a consistent winner, then you
must start from the premise that the solutions are in your mind and not in the market. Consistency is a
state of mind diat has at its core certain fundamental thinking strategies that are unique to trading.
Experiencing a few or more winning trades can convince almost anyone that trading is easy. Recall
your own experiences; think back to those trades that brought a stream of money flowing into your
account when all you had done was make a simple decision to buy or sell.
Now, combine the extremely positive feeling you get from winning and getting money with no effort,
and it's almost impossible not to conclude that making money as a trader is easy. But if that's the case,
if trading is so easy, then why is it so difficult to master? Why are so many traders at their wits' end,
grappling with the obvious contradiction? If it is true that trading is easy — and traders know it is
because they've had the direct experience of how easy and effortless it is — then how can it also be
possible that they can't make what they've learned about the markets work for them over and over
again? In other words, how do we account for the contradiction between what we believe about trading
and our actual trading results over time?
THINKING ABOUT TRADING
The answers are all in the way you think about it. The irony is that trading can be as much fun and as
effortless as your experience of it has been on occasion; but experiencing these qualities consistently is
a function of your perspective, your beliefs, your attitudes, or your mindset.
Choose the term you are most comfortable with; they all refer to the same thing: Winning and
consistency are states of mind in the same way that happiness, having fun, and satisfaction are states of
mind. Your state of mind is a by-product of your beliefs and attitudes. You can try to create consistency
without having the appropriate beliefs and attitudes, but your results won't be any different than if you
tiy to be happy when you're not having fun. When you're not having fun, it can be very difficult to
change your perspective to one where you, all of a sudden, start enjoying yourself. Of course, the
circumstances of your situation could suddenly shift in a way that causes you to experience joy. But
then your state of mind would be the result of an external shift in conditions, not a result of an internal
shift in your attitude. If you depend on outside conditions and circumstances to make you happy (so
that you always are enjoying yourself), then it is extremely unlikely that you will experience happiness
on a consistent basis.
However, you can greatly increase the possibility of your being happy by developing fun-type attitudes
and, more specifically, by working on neutralizing the beliefs and attitudes that prevent you from
having fun or enjoying yourself. Creating consistent success as a trader works the same way. You can't
rely on the market to make you consistently successful, any more than you can rely on the outside
world to make you consistently happy. People who are truly happy don't have to do anything in order to
be happy.
They are happy people who do things. Traders who are consistently successful are consistent as a
natural expression of who they are. They don't have to try to be consistent; they are consistent. This
may seem like an abstract distinction, but it is vitally important that you understand the difference.
Being consistent is not something you can try to be, because the very act of trying will negate your
intent by mentally taking you out of the opportunity flow, making it less likely that you will win and
more likely you will lose. Your veiy best trades were easy and effortless. You didn't have to try to
make them easy; they were easy. There was no struggle. You saw exactly what you needed to see, and
you acted on what you saw. You were in the moment, a part of the opportunity flow. When you're in
the flow, you don't have to try, because everything you know about the market is available to you.
Nothing is being blocked or hidden from your awareness, and your actions seem effortless because
there's no struggle or resistance. On the other hand, having to try indicates that there is some degree of
resistance or struggle. Otherwise, you would just be doing it and not have to try to be doing it. It also
indicates that you're trying to get what you want from the market. While it seems natural to think this
way, it's a perspective fraught with difficulties.
The best traders stay in the flow because they don't try to get anything from the market; they simply
make themselves available so they can take advantage of whatever the market is offering at any given
moment. There's a huge difference between the two perspectives.
In Chapter 3, I briefly illustrated how our minds are wired to avoid both physical and emotional pain. If
you trade from the perspective of trying to get what you want or what you expect from the markets,
what happens when the market doesn't behave in a way that will fulfill your expectations? Your mental
defense mechanisms kick in to compensate for the difference between what you want and what you're
not getting, so that you don't experience any emotional pain.
Our minds are designed to automatically block threatening information or find a way to obscure that
information, in order to shield us from the emotional discomfort we naturally feel when we don't get
what we want. You won't realize it in the moment, but you will pick and choose information that is
consistent with what you expect, so that you can maintain a pain-free state of mind.
However, in the process of trying to maintain a pain-free state of mind, you also take yourself out of
the opportunity flow and enter the realm of the "could have," the "should have," the "would have," and
the "if only." Everything that you could have, should have, or would have recognized in the moment
appeared invisible, then all becomes painfully evident after the fact, after the opportunity is long gone.
To be consistent, you have to learn to think about trading in such a way that you're no longer
susceptible to conscious or subconscious mental processes that cause you to obscure, block, or pick and
choose information on the basis of what will make you happy, give you what you want, or avoid pain.
The threat of pain generates fear, and fear is the source of 95 percent of the errors you are likely to
make. Certainly, you can't be consistent or experience the flow if you're consistently making errors, and
you will make errors, as long as you're afraid that what you want or what you expect won't happen.
Furthermore, everything you attempt to do as a trader will be a struggle, and it will seem as if you are
struggling against the market or that the market is against you personally. But, the reality is that it's all
taking place inside your mind. The market doesn't perceive the information it makes available; you do.
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Now, you may be asking yourself, how can I think about trading in such a way that I'm no longer afraid
and, therefore, no longer susceptible to the mental processes that cause me to block, obscure, or pick
and choose information? The answer is: Learn to accept the risk.
REALLY UNDERSTANDING RISK
Other than the many issues surrounding responsibility that we discussed in Chapter 3, there isn't
anything about trading that is more central to your success and also more misunderstood than the
concept of accepting the risk. As I mentioned in the first chapter, most traders erroneously assume that
because they are engaged in the inherently risky activity of putting on and taking off trades, they are
also accepting that risk. I will repeat that this assumption couldn't be further from the truth.
Accepting the risk means accepting the consequences of your trades without emotional discomfort or
fear. This means that you must learn how to think about trading and your relationship with the markets
in such a way that the possibility of being wrong, losing, missing out, or leaving money on the table
doesn't cause your mental defense mechanisms to kick in and take you out of the opportunity flow. It
doesn't do you any good to take the risk of putting on a trade if you are afraid of the consequences,
because your fears will act on your perception of information and your behavior in a way that will
cause you to create the very experience you fear the most, the one you are trying to avoid. I am offering
you a specific thinking strategy composed of a set of beliefs that will keep you focused, in the moment,
and in the flow. With this perspective, you will not be trying to get anything from the market or to
avoid anything. Rather, you will let the market unfold and you will make yourself available to take
advantage of whatever situations you define as opportunities. When you make yourself available to
take advantage of an opportunity, you don't impose any limitations or expectations on the market's
behaviour. You are satisfied to let the market do whatever it's going to do.
However, in the process of doing something, the market will create certain conditions you define and
perceive as opportunities. You act on those opportunities to the best of your ability, but your state of
mind is not dependent upon or affected by the market's behavior. If you can learn to create a state of
mind that is not affected by the market's behavior, the struggle will cease to exist. When the internal
struggle ends, everything becomes easy. At that point, you can take full advantage of all your skills,
analytical or otherwise, to eventually realize your potential as a trader. Here's the challenge! How do
you accept the risks of trading without emotional discomfort and fear, when at the moment you
perceive the risk, you simultaneously feel discomfort and fear? In other words, how do you remain
confident and pain-free when you are absolutely certain you can be proved wrong, lose money, miss
out, or leave money on the table?
As you can see, your fear and feeling of discomfort are completely justified and rational. Each of those
possibilities becomes real the moment you contemplate interacting with the market. However, as true
as all of these possibilities are for every trader, what isn't true or the same for every trader is what it
means to be wrong, lose, miss out, or leave money on the table. Not everyone shares the same beliefs
and attitudes about these possibilities and, therefore, we don't share the same emotional sensitivities. In
other words, not everyone is afraid of the same things.
This may seem obvious, but I assure you it is not. When we're afraid, the emotional discomfort we feel
in the moment is so real that it's beyond question, and it's natural to assume that everyone shares our
reality. I will give you a perfect example of what I am talking about. I recently worked with a trader,
who was deathly afraid of snakes. As far as he was concerned, he had always been afraid of snakes
because he couldn't recall a time when he wasn't. Now he is married and has a three-year-old daughter.
One evening, while his wife was out of town, his daughter and he were invited to a friend's house for
dinner. Unbeknownst to my client, his friends child had a pet snake.
When the friends child brought out the snake for everyone to see, my client freaked and practically
leapt to the other side of the room to get as far away from the snake as possible. His daughter, on the
other hand, was completely enthralled with the snake, and wouldn't leave it alone. When he related this
story to me, he said that he was not only shocked by the unexpected confrontation with the snake, but
that he was just as shocked by his daughter's reaction. She wasn't afraid and he assumed that she would
be. I explained to him that his fear was so intense and his attachment to his daughter was so great that it
was inconceivable to him that his daughter would not automatically share his reality about snakes. But
then I pointed out, there really wasn't any way she could have shared his experience, unless he
specifically taught her to be afraid of snakes or she had had her own painful frightening experience.
Otherwise, without anything to the contrary in her mental system, the most likely reaction to her first
encounter with a living snake would be pure, unadulterated fascination.
Just as my client assumed that his daughter would be afraid of snakes, most traders assume the best
traders, like themselves, are also afraid of being wrong, losing, missing out, and leaving money on the
table. They assume that the best traders somehow neutralize their fears with an inordinate amount of
courage, nerves of steel, and self-control.
Like many other things about trading, what seems to make sense, just isn't the case. Certainly, any one
or all of these characteristics may be present in any top trader. But what is not true is that these
characteristics play any role in their superior performance. Needing courage, nerves of steel, or self
control would imply an internal conflict where one force is being used to counteract the effects of
another. Any degree of struggle, trying, or fear associated with trading will take you out of the moment
and flow and, therefore, diminish your results. This is where professional traders really separate
themselves from the crowd. When you accept the risk the way the pros do, you won't perceive anything
that the market can do as threatening. If nothing is threatening, there's nothing to fear. If you're not
afraid, you don't need courage. If you're not stressed, why would you need nerves of steel? And if
you're not afraid of your potential to get reckless, because you have the appropriate monitoring
mechanisms in place, then you have no need for self-control.
As you contemplate the implications of what I am saying, I want you to keep something in mind: Very
few people who go into trading start out with the appropriate beliefs and attitudes about responsibility
and risk. There are some who do but it's rare. Everyone else goes through the same cycle I described in
the example of the novice trader: We start out carefree, then become scared, and our fears continually
diminish our potential. The traders who break through the cycle and ultimately make it are the ones
who eventually learn to stop avoiding and start embracing the responsibility and the risk.
Most of those who successfully break the cycle don't make the shift in thinking until they have
experienced so much pain from large losses that it has the positive effect of stripping away their
illusions about the nature of trading. With respect to your development, the how of their transformation
is not that important, because in most cases it happened inadvertently. In other words, they weren't
completely aware of the shifts that were taking place inside their mental environment until they
experienced the positive effects their new perspective had on the ways in which they interacted with the
market. This is why very few top traders can really explain what accounts for their success, except to
speak in axioms like "cut your losses" and "go with the flow."
What is important is that you understand it is completely possible to think the way the professionals do
and to trade without fear, even though your direct experience as a trader would argue otherwise.
ALIGNING YOUR MENTAL ENVIRONMENT
Now we're going to start zeroing in on exactly how you can align your mental environment in order to
accept the risk and function like a professional trader. Most of what I've discussed up to this point was
designed to get you ready to do the real work. I'm going to teach you a thinking strategy that has, at its
core, a firm belief in probabilities and edges.
With this new thinking strategy, you'll learn how to create a new relationship with the market, one that
disassociates your trading from what it typically means to be wrong or to lose, and that precludes you
from perceiving anything about the market as threatening. When the threat of pain is gone, the fear will
correspondingly disappear, as will the fear-based errors you are susceptible to. You will be left with a
mind that is free to see what is available and to act on what you see. Getting to this carefree, fearless
state of mind, in spite of being burned over and over again, will take some work, but it's not going to be
so difficult as you may think. In fact, by the time you've finished reading this book, most of you will be
amazed at how simple the solutions to your problems really are. In many respects, a state of mind or
perspective is like software code.
You could have several thousand lines of perfectly written code, with only one flawed line, and in that
one flawed line there might be only one character out of place. Depending on the purpose of the
software and where that flaw is in relation to everything else, that one misplaced character could ruin
the performance of an otherwise perfectly written system. You see, the solution was simple: Fix the
misplaced character, and everything runs smoothly. However, finding the error or even knowing it
exists in the first place can take considerable expertise.
When it comes to the ideal trading mentality, everybody is a certain psychological distance away. In
other words, virtually everyone starts out with flawed software code. I use terms like clicks or degrees
to indicate psychological distance but these terms don't imply a specific distance. So, for example,
many of you will find that you are only, let's say, one click away in perspective from the ideal mind
set. That one click could represent one or two erroneous or misplaced assumptions you have about the
nature of trading. As you reflect upon some of the ideas presented in this book, your perspective may
shift.
To use the analogy of software code, that shift would be equivalent to finding the flawed line in your
mental system and replacing it with something that works properly. People normally describe this kind
of internal mental shift as an "ah, ha" experience, or the moment when the light goes on. Everyone has
had these kinds of experiences, and there are some common qualities associated with them. First, we
usually feel different. The world even seems different, as if it had suddenly changed. Typically, we
might say at the moment of the breakthrough something like, "Why didn't you tell me this before?" or,
"It was right in front of me the whole time, but I just didn't see it" or, "It's so simple; why couldn't I see
it?"
Another interesting phenomenon of the "ah, ha" experience, is that sometimes within moments,
although the amount of time can vary, we feel as if this new part of our identity has always been a part
of who we are. It then becomes difficult to believe that we were ever the way we were before we had
the experience. In short, you may already have some awareness of much of what you need to know to
be a consistently successful trader. But being aware of something doesn't automatically make it a
functional part of who you are. Awareness is not necessarily a belief. You can't assume that learning
about something new and agreeing with it is the same as believing it at a level where you can act on it.
Take the example of my client who is afraid of snakes. He is certainly aware that not all snakes are
dangerous, and that learning how to make a distinction between the ones that are dangerous and the
ones that aren't would not be difficult.
Will learning how to make these distinctions suddenly cause him not to be afraid of "non-dangerous
snakes"? Can we assume that his awareness will drop down to a level in his mental environment where
he can now interact with snakes without fear or immobility? No, we cannot make this assumption. His
awareness that some snakes aren't dangerous and his fear of snakes can exist side by side in his mental
environment, as a contradiction to each other. You could confront him with a snake and he might
readily acknowledge that he knows the snake is not dangerous and wouldn't hurt him; but, at the same
time, he would still find it extremely difficult to touch the snake, even if he wanted to. Does this mean
that he is doomed to be afraid of snakes for the rest of his life? Only if he wants to be. It's really a
matter of willingness.
It's certainly possible to neutralize his fear, but he will have to work at it, and working at anything
requires sufficient motivation. Many of us have what we know to be irrational fears and simply choose
to live with the contradiction because we don't want to go through the emotional work that is necessary
to overcome the fear. In this example, the contradiction is obvious. However, in my many years of
working with traders, I have uncovered several typical contradictions and conflicts surrounding the
issues of risk and responsibility, where holding two or more conflicting beliefs can easily cancel out
your positive intentions, no matter how motivated you are to be successful.
The problem is that none of these contradictions are really obvious, at least not at first glance.
Contradictory beliefs, however, aren't the only problems. What about assertions like "I'm a risk taker,"
that traders typically assume have dropped down to the functional level of a belief when, in fact, the
underlying dynamics of the way they perceive the market indicates they are doing everything possible
to avoid risk. Contradictory beliefs and nonfunctional awareness represent flawed mental software
code; code that destroys your ability to stay focused and accomplish your goals; code that makes it
seem as if you simultaneously have one foot on the accelerator and the other on the brake; code that
gives learning how to trade a mysterious quality that will be challenging in a fun way at first, but
usually turns into pure, unadulterated exasperation. When I was in college in the late 1960s, one of my
favorite movies was Cool Hand Luke, starring Paul Newman. It was a very popular movie back then, so
I'm sure some of you have seen it on late-night TV.
Luke was in a Georgia chain gang. After he escaped and was caught for the second time, the warden
and guards were determined not to let Luke make fools of them a third time. So while forcing him to do
an inordinate amount of work with no rest and giving him intermittent beatings, they kept asking,
"Have you got your mind right yet, Luke?" Eventually, after considerable suffering, Luke finally told
the prison bosses that he had his mind right. They said that if he didn't, and tried to escape again, they'd
kill him for sure. Of course, Luke attempted another escape, and true to their word, the guards killed
him. Like Luke, many traders, whether they realize it or not, are trying to have it their way by beating
the market; as a result, they get financially and emotionally killed. There are easier, infinitely more
satisfying ways of getting what you want from the market, but first you have to be willing to "get your
mind right." C