CHAPTER 8
WORKING WITH YOUR BELIEFS
Now the task before you is to properly integrate the five fundamental truths presented in Chapter 7 in
your mental environment at a functional level. To help you do that, we will take an in-depth look at
beliefs—their nature, properties, and characteristics. However, before we do that I will review and
organize the major concepts presented thus far into a much clearer and more practical framework. What
you learn from this and the next two chapters will form the foundation for understanding everything
you need to do to achieve your goals as a trader.
DEFINING THE PROBLEM
At the most fundamental level, the market is simply a series of up and down tics that form patterns.
Technical analysis defines these patterns as edges. Any particular pattern defined as an edge is simply
an indication that there is a higher probability that the market will move in one direction over the other.
However, there is a major mental paradox here because a pattern implies consistency, or, at least, a
consistent outcome. But the reality is each pattern is a unique occurrence. They may look (or measure)
exactly the same from one occurrence to the next, but the similarities are only on the surface. The
underlying force behind each pattern is traders, and the traders who contribute to the formation of one
pattern are always different from the traders who contribute to the next; so the outcome of each pattern
is random relative to one another.
Our minds have an inherent design characteristic (the association mechanism) that can make this
paradox difficult to deal with. Now these edges, or the patterns they represent, flow by in every time
frame, making the market a never-ending stream of opportunities to get in, get out (scratch a trade),
take profits, cut losses, or add to or detract from a position. In other words, from the market's
perspective, each moment presents each one of us traders with the opportunity to do something on our
own behalf.
DEFINING THE TERMS
What prevents us from perceiving each "now moment" as an opportunity to do something for ourselves
or to act appropriately even when we do? Our fears! What is the source of our fears? We know its not
the market, because from the market's perspective, the up and down tics and the patterns they create are
neither positively or negatively charged.
As a result, the up and down tics themselves have no capacity to cause us to enter into any particular
state of mind (negative or positive), lose our objectivity, make errors, or take us out of the opportunity
flow. If it's not the market that causes us to experience a negatively charged state of mind, then what
does cause it? The way we define and interpret the information we perceive. If that's the case, then
what determines what we perceive and how we define and interpret that information? What we believe
or what we assume to be true. Our beliefs working in conjunction with the association and pain
avoidance mechanisms act as a force on our five senses, causing us to perceive, define, and interpret
market information in a way that is consistent with what we expect. What we expect is synonymous
with.what we believe or assume to be true. Expectations are beliefs projected into some future moment.
Each moment from the market's perspective is unique; but if the information being generated by the
market is similar in quality, properties, or characteristic to something that is already in our minds, the
two sets of information (outside and inside) automatically become linked. When this connection is
made, it triggers a state of mind (confidence, euphoria, fear, terror, disappointment, regret, betrayal,
etc.) that corresponds to whatever belief, assumption, or memory the outside information was linked.
This makes it seem as if what is outside is exactly the same as whatever is already inside of us. It's our
state of mind that makes the truth of whatever we're perceiving outside of us (in the market) seem
indisputable and beyond question.
Our state of mind is always the absolute truth. If I feel confident, then I am confident. If I feel afraid,
then I am afraid. We can't dispute the quality of energy flowing through our mind and body at any
given moment. And because I know as an indisputable fact how I feel, you could say that I also know
the truth of what I'm perceiving outside of me in the same moment. The problem is that how we feel is
always the absolute truth, but the beliefs that triggered our state of mind or feeling may or may not be
true relative to the possibilities that exist in the market at any given moment. Recall the example of the
boy and the dog.
The boy "knew" for an absolute fact that each dog he encountered after the first was threatening,
because of the way he felt when one came into his field of awareness. These other dogs did not cause
his fear; his negatively charged memory working in conjunction with the association and his pain
avoidance mechanism caused his fear. He experienced his own version of the truth, although that did
not correspond with the possibilities that existed from the environment's perspective. His belief about
the nature of dogs was limited relative to the possible characteristics and traits expressed by dogs. Yet
the state of mind he experienced eveiy time he encountered a dog caused him to believe thats he
"knew" exactly what to expect from them.
This same process causes us to believe that we "know" exactly what to expect from die market, when
the reality is there are always unknown forces operating at every moment. The trouble is, the instant we
think we "know" what to expect, we simultaneously stop taking all the unknown forces and die various
possibilities created by those forces into consideration. The unknown forces are other traders waiting to
enter or exit trades, based on their beliefs about the future. In other words, we really can't know exactly
what to expect from the market, until we can read the minds of all the traders who have the potential to
act as a force on price movement. Not a very likely possibility. As traders, we can't afford to indulge
ourselves in any form of "I know what to expect from the market." We can "know" exactly what an
edge looks, sounds, or feels like, and we can "know" exactly how much we need to risk to find out if
that edge is going to work.
We can "know" that we have a specific plan as to how we are going to take profits if a trade works. But
that's it! If what we think we know starts expanding to what the market is going to do, we're in trouble.
And all that's required to put us into a negatively charged, "I know what to expect from the market"
state of mind is for any belief, memoiy, or attitude to cause us to interpret the up and down tics or any
market information as anything but an opportunity to do something on our own behalf.
What Are the Objectives? Ultimately, of course, making money is everyone's objective. But if trading
were only a matter of making money, reading this book wouldn't be necessary. Putting on a winning
trade or even a series of winning trades requires absolutely no skill. On the other hand, creating
consistent results and being able to keep what we've created does require skill. Making money
consistently is a by-product of acquiring and mastering certain mental skills. The degree to which you
understand this is the same degree to which you will stop focusing on the money and focus instead on
how you can use your trading as a tool to master these skills.
What Are the Skills? Consistency is the result of a carefree, objective state of mind, where we are
making ourselves available to perceive and act upon whatever the market is offering us (from its
perspective) in any given "now moment."
What Is a Carefree State of Mind? Carefree means confident, but not euphoric. When you are in a
carefree state of mind, you won't feel any fear, hesitation, or compulsion to do anything, because
you've effectively eliminated the potential to define and interpret market information as threatening. To
remove the sense of threat, you have to accept the risk completely. When you have accepted the risk,
you will be at peace with any outcome. To be at peace with any outcome, you must reconcile anything
in your mental environment that conflicts with the five fundamental truths about the market. What's
more, you also have to integrate these truths into your mental system as core beliefs.
What Is Objectivity? Objectivity is a state of mind where you have conscious access to everything
you have learned about the nature of market movement. In other words, nothing is being blocked or
altered by your painavoidance mechanisms.
What Does it Mean to Make Yourself Available? Making yourself available means trading from the
perspective that you have nothing to prove. You aren't trying to win or to avoid losing. You aren't
trying get your money back or to take revenge on the market. In other words, you come to the market
with no agenda other than to let it unfold in any way that it chooses and to be in the best state of mind
to recognize and take advantage of the opportunities it makes available to you.
What Is the "Now Moment'? Trading in the "now moment" means that there is no potential to
associate an opportunity to get into, get out of, add too, or detract from a trade with a past experience
that already exists in your mental environment.
HOW THE FUNDAMENTAL TRUTHS RELATE TO THE SKILLS
1. Anything can happen. Why? Because there are always unknown forces operating in every market at
every moment, it takes only one trader somewhere in the world to negate the positive outcome of your
edge. That's all: only one. Regardless of how much time, effort, or money you've invested in your
analysis, from the market's perspective there are no exceptions to this truth. Any exceptions that may
exist in your mind will be a source of conflict and potentially cause you to perceive market information
as threatening.
2. You don't need to know what is going to happen next in order to make money. Why? Because
there is a random distribution between wins and losses for any given set of variables that define an
edge. (See number 3.) In other words, based on the past performance of your edge, you may know that
out of the next 20 trades, 12 will be winners and 8 will be losers. What you don't know is the sequence
of wins and losses or how much money the market is going to make available on the winning trades.
This truth makes trading a probability or numbers game.
When you really believe that trading is simply a probability game, concepts like right and wrong or win
and lose no longer have the same significance. As a result, your expectations will be in harmony with
the possibilities. Keep in mind that nothing has more potential to cause emotional discord than our
unfulfilled expectations. Emotional pain is the universal response when the outside world expresses
itself in a way that doesn't reflect what we expect or believe to be true. As a result, any market
information that does not confirm our expectations is automatically defined and interpreted as
threatening. That interpretation causes us to adopt a negatively charged, defensive state of mind, where
we end up creating the very experience we are trying to avoid. Market information is only threatening
if you are expecting the market to do something for you.
Otherwise, if you don't expect the market to make you right, you have no reason to be afraid of being
wrong. If you don't expect the market to make you a winner, you have no reason to be afraid of losing.
If you don't expect the market to keep going in your direction indefinitely, there is no reason to leave
money on the table. Finally, if you don't expect to be able to take advantage of every opportunity just
because you perceived it and it presented itself, you have no reason to be afraid of missing out. On the
other hand, if you believe that all you need to know is:
1. the odds are in your favor before you put on a trade;
2. how much it's going to cost to find out if the trade is going to work;
3. you don't need to know what's going to happen next to make money on that trade; and
4. anything can happen;
Then how can the market make you wrong? What information could the market generate about itself
that would cause your pain-avoidance mechanisms to kick in so that you exclude that information from
your awareness? None that I can think of.
If you believe that anything can happen and that you don't need to know what is going to happen next
to make money, then you will always be right. Your expectations will always be in harmony with the
conditions as they exist from the market's perspective, effectively neutralizing your potential to
experience emotional pain. By the same token, how can a losing trade or even a series of losers have
the typical negative effect, if you really believe that trading is a probability or numbers game? If your
edge puts the odds in your favor, then every loss puts you that much closer to a win. When you really
believe this, your response to a losing trade will no longer take on a negative emotional quality.
3. There is a random distribution between wins and losses for any given set of variables that define
an edge.
If every loss puts you that much closer to a win, you will be looking forward to the next occurrence of
your edge, ready and waiting to jump in without the slightest reservation or hesitation. On the other
hand, if you still believe that trading is about analysis or about being right, then after a loss you will
anticipate the occurrence of your next edge with trepidation, wondering if it's going to work. This, in
turn, will cause you to start gathering evidence for or against the trade. You will gather evidence for the
trade if your fear of missing out is greater than your fear of losing. And you will gather information
against the trade if your fear of losing is greater than your fear of missing out. In either case, you will
not be in the most conducive state of mind to produce consistent results.
4. An edge is nothing more than an indication of a higher probability of one thing happening over
another.
Creating consistency requires that you completely accept that trading isn't about hoping, wondering, or
gathering evidence one way or the other to determine if the next trade is going to work. The only
evidence you need to gather is whether the variables you use to define an edge are present at any given
moment. When you use "other" information, outside the parameters of your edge to decide whether you
will take the trade, you are adding random variables to your trading regime.
Adding random variables makes it extremely difficult, if not impossible, to determine what works and
what doesn't. If you're never certain about the viability of your edge, you won't feel too confident about
it. To whatever degree you lack confidence, you will experience fear. The irony is, you will be afraid of
random, inconsistent results, without realizing that your random, inconsistent approach is creating
exactly what you are afraid of. On the other hand, if you believe that an edge is simply a higher
probability of one thing happening over another, and there's a random distribution between wins and
losses for any given set of variables that define an edge, why would you gather "other" evidence for or
against a trade? To a trader operating out of these two beliefs, gathering "other" evidence wouldn't
make any sense.
Or let me put it this way: Gathering "other" evidence makes about as much sense as trying to determine
whether the next flip of a coin will be heads, after the last ten flips came up tails. Regardless of what
evidence you find to support heads coming up, there is still a 50-percent chance that the next flip will
come up tails. By the same token, regardless of how much evidence you gather to support acting or not
acting on a trade, it still only takes one trader somewhere in the world to negate the validity of any, if
not all, of your evidence. The point is why bother! If the market is offering you a legitimate edge,
determine the risk and take the trade.
5. Every moment in the market is unique.
Take a moment and think about the concept of uniqueness. "Unique" means not like anything else that
exists or has ever existed. As much as we may understand the concept of uniqueness, our minds don't
deal with it very well on a practical level. As we have already discussed, our minds are hardwired to
automatically associate (without conscious awareness) anything in the exterior environment that is
similar to anything that is already inside of us in the form of a memory, belief, or attitude. This creates
an inherent contradiction between the way we naturally think about the world and the way the world
exists. No two moments in the external environment will ever exactly duplicate themselves. To do so,
every atom or every molecule would have to be in the exact same position they were in some previous
moment.
Not a very likely possibility. Yet, based on the way our minds are designed to process information, we
will experience the "now moment" in the environment as being exactly the same as some previous
moment as it exists inside our minds. If each moment is like no other, then there's nothing at the level
of your rational experience that can tell you for sure that you "know" what will happen next. So I will
say again, why bother trying to know?! When you try to know, you are, in essence, trying to be right. I
am not implying here that you can't predict what the market will do next and be right, because you
most certainly can. It's in the trying that you run into all of the problems. If you believe that you
correctly predicted the market once, you will naturally try to do it again.
As a result, your mind will automatically start scanning the market for the same pattern, circumstance,
or situation that existed the last time you correctly predicted its movement. When you find it, your state
of mind will make it seem as if everything is exactly as it was the last time. The problem is that, from
the market's perspective, it is not the same. As a result, you are setting yourself up for disappointment.
What separates the best traders from all the rest is that they have trained their minds to believe in the
uniqueness of each moment (although this training usually takes the form of losing several fortunes
before they "really" believe in the concept of uniqueness). This belief acts as a counteracting force,
neutralizing the automatic association mechanism. When you truly believe that each moment is unique,
then by definition there isn't anything in your mind for the association mechanism to link that moment
to. This belief acts as an internal force causing you to disassociate the "now" moment in the market
from any previous moment filed away in your mental environment. The stronger your belief in the
uniqueness of each moment, the lower your potential to associate. The lower your potential to
associate, the more open your mind will be to perceive what the market is offering you from its
perspective.
MOVING TOWARD "THE ZONE"
When you completely accept the psychological realities of the market, you will correspondingly accept
the risks of trading. When you accept the risks of trading, you eliminate the potential to define market
information in painful ways. When you stop defining and interpreting market information in painful
ways, there is nothing for your mind to avoid, nothing to protect against.
When there's nothing to protect against, you will have access to all that you know about the nature of
market movement. Nothing will get blocked, which means you will perceive all the possibilities you
have learned about (objectively), and since your mind is open to a true exchange of energy, you will
quite naturally start discovering other possibilities (edges) that you formerly couldn't perceive. For your
mind to be open to a true exchange of energy, you can't be in a state of knowing or believing that you
already know what's going to happen next. When you are at peace with not knowing what's going to
happen next, you can interact with the market from a perspective where you will be making yourself
available to let the market tell you, from its perspective, what is likely to happen next. At that point,
you will be in the best state of mind to spontaneously enter "the zone," where you are tapped into the
"now moment opportunity flow." CH