Secrets of the Top 4

Secrets of the Top 4% Kenneth Reid. Ph.D. "Dr. Reid's work is the difference between me going through the motions and making money" Jeffrey Moormeier, Quantum-Advisors

INTRODUCTION: WHO ARE THE 4%?

I am an active trader just like you, and like you I’ve learned most of what I know about trading from first-hand experience. Personally, I found trading to be more difficult than I expected when I first started, back in 1996. Why is trading a profession that looks so much easier than it really is? I’ve studied the academic research on trading and financial decisionmaking. The largest study ever conducted of active day traders revealed that most lost money .... even during a raging bull market! About 15% did very well each year, but fewer than 4% were able to make significant profits two years in a row. That 4% number got me curious. Who are those folks? What do they know that the vast majority of traders don’t? What do they do that other traders don’t? What’s their secret??? I know from more than a decade of coaching, that aspiring traders are among the most intelligent, motivated and hard-working individuals I’ve ever met. But something is going wrong for active traders that traditional academics are clueless about and most traders don’t seem to be able to figure out for themselves. That’s what this report is all about. www.daytradingpsychology.com

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SHOULDN’T TRADING BE EASY?

Shouldn’t trading be relatively easy? In a casino, the odds of success at games such as Roulette are around 48% for simplistic bets such as red/black. One would think predicting the basic up-ordown movement of a market over the short term would have similar odds. Shouldn’t the diligent trader get ‘up’ or ‘down’ correct around 50% of the time? Therefore, shouldn’t the average aspiring trader be a breakeven trader? Theoretically, that makes some sense, but in the real world, it is certainly not the case. Most active traders perform much worse than chance. Fees and commissions significantly degrade profits, but that’s not the only issue. We know from research studies on the behavior of active traders and investors that they tend to buy and sell at the wrong time. They tend to sell winners and hold losers, and commit other acts of seeming self-sabotage. In fact, it’s not uncommon for highly active traders to develop a Reverse Midas’ Touch, having days when almost everything one does is wrong! Have you been there? I have. They were some of my darkest days as an aspiring trader. The harder I tried, the worse my results. I vividly remember losing $30k in one day back in 1996, when I was just starting out. I was in emotional shock for weeks and I think that one experience ruined my trading for years. I felt ashamed and defeated. I thought I was a hopeless case. www.daytradingpsychology.com

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I realized that although markets constantly present fantastic profit opportunities, a hidden factor in my own mental makeup was preventing me from exploiting the opportunity flow. At first I wondered whether I had a hidden wish to fail or some other unconscious self-sabotaging belief? But I’m Ivy League educated and a successful entrepreneur. I’ve always believed in myself and my ability to succeed at anything I put my mind to. Something else was wrong. I noticed that when it came to trading, I couldn’t do anything consistently because I was constantly tweaking things. I sought out new methods, new indicators, new stocks, new markets… in a desperate attempt to find a combination that would work. After spending over $50,000 on workshops, live trading rooms, trading systems and custom indicator programming, I realized something really important about the trading environment… and about myself.

THE NATURE OF THE TRADING ENVIRONMENT

My first realization was that the trading environment is very different than the normal business environment I was accustomed to. Trading isn’t a business; it is much more intense. It is more like a sport or combat, two areas in which I lacked professional experience. This awareness opened my eyes as to why my academic and business background were not helping me…or helping other traders I knew. We had all brought the wrong tools to the job! www.daytradingpsychology.com

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Moreover, I wasn’t a recreational gambler or poker player, so I was also unprepared for the intensity of the risk/reward dynamics in trading. Up $100, down $100; up $1000, down $1000. The moment by moment P&L stressed me out more than I expected; more than I was even aware of. Frankly, I was a nervous wreck when trading and didn’t know it. One day it dawned on me:

In trying hard to do the right thing (like I did in school and business), I inadvertently made matters worse for myself because my natural self-protective instincts worked against me in the trading environment. For example…  I would get defensive when I should have been aggressive. That made me miss out on the best trades.  I would get greedy when I should have been cautious, which caused me to chase, so I was entering too early or too late and with too large a position, so when I was wrong, losses really hurt.  And somehow, I would always miss the obvious, but see it plain as day once the opportunity had passed. Frankly, I suspect that my perceptions were distorted by a combination of primal emotions and my own biases and opinions. After just a few years of trading, I had somehow undermined the confidence, consistency and clarity I needed in order to succeed. www.daytradingpsychology.com

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The most frustrating thing was that even though I knew more about the market from experience, I was less and less effective in real time! Once I realized that my “issue” was largely an internal one, I began to look at exactly how I was getting in my own way. That’s when everything changed for me.

THE NEGATIVITY TRAP

According to Mark Douglas, traders are unprepared for the emotional impact of the trading environment. And I agree. Losses hurt and frequent losses, which are unavoidable in trading, eventually rub most traders raw. Then, add the stress of being wrong 20-50% of the time, constantly missing out on market movements and jumping out of good trades too early… and one has all the ingredients for what I call: the Negativity Trap. The Negativity Trap is the deadliest obstacle aspiring traders face on their Hero’s Journey. It affects 90% of traders because the human brain is programmed to pay extra attention to “bad news.” This insight was part of a body of work on behavioral economics that won a couple of researchers the Nobel Prize. To some extent, they simply proved what the news media already knew: “If it bleeds, it leads.” Bottomline: Over time, the negatives in the market and in our trading become our focal points, especially losses.

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For most traders, it is only a matter of time before risk begins to trump reward. Whereas we previously viewed the market as a field of opportunity, we come to regard it as a predatory environment out to trick us and trap us and cause us to lose. We begin to fear the robots, the Fed, the banks, the brokerages, the Russians, and/or any other “manipulator” real and imagined who might contribute to the loss of our precious capital. Instead of trading-to-win, one then begins to trade-not-to-lose, or not-to-bewrong or not-to-miss-out. These are double negatives. I’m sure you realize that the attempt to avoid a bad outcome is not the psychological equivalent of having a positive vision or goal. Far from it. It is possible that this subtle shift to the ‘dark side’ is what sabotages 90% of traders? Is this what makes it impossible for most traders to follow in the footsteps of success even if they have been mentored by some of the best traders around? Is this why the vast majority eventually leave the active trading community with nothing tangible to show for their truly heroic efforts? www.daytradingpsychology.com

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A LESSON FROM SPORTS

We know from sports psychology that managing negativity in a competitive environment is the key to success. Athletes with great natural ability who don’t have the maturity to handle the mental emotional consequences of losing enter a downward spiral of defeat. They become their own worst enemy on the court, arena or playing field. It is such a familiar experience that we have a name for it: ‘choking.’ I’m a competitive tennis player. I like to compete because it brings out the best in me. In the midst of a challenging point, I often experience a kind of personal transcendence called “flow,” which is a peak experience that comes when one’s skill is perfectly matched to a significant challenge. This experience is really what I play for because it transcends winning and losing. It elevates a tennis match beyond the specific outcome, so that the process seems to become its own reward. (Trading can be like that, too.) But if my opponent falls victim to his own negativity, then he doesn’t challenge me and he beats himself. Do you think this happens in trading? Do you think there are traders waiting for you to make a mistake and get emotional? Do you think they enjoy the challenge of separating you from your capital. I would bet money on it. www.daytradingpsychology.com

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In zero sum markets such as futures, currencies and options (where there are no market makers), the technical “setups” that professional traders use work for this very reason. Someone gets fooled and then they make the situation even worse for themselves by not recognizing the mistake and taking the stop quickly. Instead, these traders freeze… or they deny reality… or they resist taking the loss because they are already trading-not-to-lose and they feel they have already lost too much. Catch 22. This is why trading-not-to-lose actually causes losses. Either way, their small loss quickly multiplies into a major one because their relationship to the market is based on fear. This isn’t not anyone’s personal ‘fault.’ Most human brains are wired this way. Let me explain.

YOUR BRAIN ON TRADING

Throughout the 20th century, psychologists and economists assumed that normal individuals act rationally when it comes to financial decisionmaking. However, after a couple of intense 21st century bear markets and significant advances in neuroscience, researchers began to look at human nature a bit more realistically, especially when it comes to money. It turns out that the irrational aspects of financial decision-making arise from the fact that we have a “triune” brain: part rational, part mammalian www.daytradingpsychology.com

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and part reptilian. In trading, however, there is one part of our brain that really gets in the way of rational, systematic trading. I call it the Risk Manager (RM). It is a primitive defensive structure that we share with mammals and reptiles, dedicated to just one thing: survival. You see, survival is not just a good idea, it’s an imperative, so the attitudes and behaviors that bear directly upon our survival are controlled not by our conscious thoughts, which are variable, but by our instincts, which are invariably reliable. This is why it is difficult to consciously cut oneself or even prick a finger for a glucose test. Your Risk Manager simply objects. Unfortunately for traders, financial losses, or the threat of financial losses (of any size) are closely scrutinized by this part of the brain. A failure to bring home the “bacon,” or losing the bacon you already had, is something the RM takes very seriously. When the Risk Manager is activated four things happen that degrade your trading:    

your field of attention narrows; your deliberative mind is sidelined (forget the trading plan); and your behavioral options are dramatically reduced your protective (split-second) defensive reactions are primed.

These things happen so that the RM can fulfill its prime directive, which is to protect your survival.

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Additionally, your brain is programmed to feel the pain of financial loss acutely, so that it has a better chance of avoiding loss the next time. I’m not making this up.

Clinical studies show that for most people, financial losses have about 2.5 times the emotional impact compared to the pleasure that comes from winning the same amount of money. This built-in neurological imbalance (known as loss aversion) has huge consequences for your trading.  First, the pain of small losses gets exaggerated. This can make trading feel like “death by a thousand cuts.” Feeling the pain of every loss leads to trading-not-to-lose, but at the same time unconsciously expecting to lose.  If the aspiring trader doesn’t win at least twice as often as he or she loses, the trader’s brain drops into a “reward deficit.” You become irritable and lose confidence, consistency and clarity.  If a large loss occurs, there are two possible outcomes. 1) Risk aversion or revenge. Risk aversion makes it virtually impossible to stay in a winning trade. Anger results in repeated account blow ups.

So is there a better alternative?

Is it possible for traders to train ourselves to pacify our internal Risk Manager so we can tolerate losses and thrive in the trading environment? www.daytradingpsychology.com

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THE SECRET

I’ve been a trading coach for 12 years and in that time I’ve been fortunate to work with some of the world’s best traders. I’m talking about hedge fund traders and bank traders with virtually unlimited capital trading 6-9 markets simultaneously, as well as private traders who can make $5,000-$50,000 on any given day. Some, like my friends Russell and Todd, grew up in trading families. Russell’s dad traded crude oil at the Nymex and Todd’s father traded at the CME. Others, like Michael, came to trading from career (insurance) where circumstances had changed, making it less attractive. Observing these outstanding performers up close and personal, I learned a Secret that I want to share with you. By the way, it has little to do with their method. I’ve looked over their shoulders and I can tell you, they don’t have anything special on their charts. Russell is a “cup-and-handle” breakout trader. Todd takes pullbacks into a 14-period Keltner channel in the direction of the trend. Michael trades off hand-drawn micro trendlines and two moving averages. Trust me….these folks are winning virtually every day for a reason that has less to do with their method and more to do with their psychology. The one thing that differentiates them is that they are POSITIVE about everything that happens to them and everything they do. This POSITIVE attitude enables them to think clearly, take losses in stride and not be ego-inflated by their wins. www.daytradingpsychology.com

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But wait. You might be thinking: “These guys are already rich, so of course they can trade well.” I don’t buy it. True story. A Canadian who had recently sold his technology business for around a hundred million dollars wanted to learn to trade futures. Curiously, he would get upset over a $100 loss. It wasn’t the money, obviously, it was his ego that was getting bruised. He could not tolerate any amount of losing. Success had literally ruined him. I’m 100% certain that my trader friends above are not positive merely because they are winning; they win because they are positive. Moreover, they each had periods of intense struggle in which they lost their positive mindset and then re-learned to be positive.

And you can, too! THE BULLETPROOF TRADER

To successfully meet the challenge of the trading environment and your own reactions to it, it is imperative that you create a mindset that is “bulletproof.” By that I mean, a mindset that can quickly rebound from losses so they don’t create a self-fulfilling cycle of doom. www.daytradingpsychology.com

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That’s why I created Positive (+) NeuroProgramming, to give traders just like you the tools you need to immunize yourself against your own negativity, so that you can trade exactly like the best traders….with confidence, consistency and clarity. Positive (+) Neuroprogramming promotes the mind’s resiliency by immediately neutralizing the negativity that spontaneously arises from losses…present or past. This prevents the neural cascade that puts a trader on the sidelines or into a desperate fight with Mr. Market. Positive (+) Neuroprogramming is presented in an audio Mp3: “Training a Winning Mindset.” The program has three neuro-conditioning protocols that:  Clear Negativity,  Install Positive Beliefs; and  Train your Brain to remain clear-minded, resourceful and resilient in the face of adversity. Unlike other programs you may have tried, the Pain Eraser protocol in this Mp3 program clears away the residue of negativity, which is essential before installing the positive beliefs associated with a confident, winning attitude. Here’s what Mike R. wrote: I am writing to tell you how pleased I am with the Pain Eraser. I have been troubled by my previous losses and it was affecting my trading by stopping me from taking qualified trades. I listened to the Pain Eraser twice on the 1st and 2nd days, then daily for the last few days. I don’t know how or why, but it works!. The memory of previous losses was debilitating and now I can remember the losses but I’m not emotionally disturbed by them. The pain has been “erased!” www.daytradingpsychology.com

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Deep-seated neural confidence is your only defense against your brain switching to “survival mode,” a mentalemotional condition in which you are at high risk of reactive, self-sabotaging behaviors. Here’s what Jody C. wrote, a surfer from Australia… “I wanted to let you know that the Mp3 files are really starting to work. I have been battling with this fear of losing for a couple of years now and it was getting worse and worse. I was beginning to feel pretty hopeless about it all. I have listened to the files about two weeks and there is a big difference. it is not imaginary. I can pull the trigger and it feels fine. Instead of focusing on not losing I am now focusing on looking for good setups, which is one of the ideas in the second file on installing new beliefs: quite a difference. Amazing!”

Once the negativity is cleared, the program helps you install the key beliefs and emotional resilience of winning traders. The Technique: Listen to my Positive (+) NeuroProgramming Mp3 once a day for 21 days, using headphones. The Expected Results:  A dramatic reduction in reactive, self-sabotaging behavior;  Increased clarity, confidence and consistency;  Increased ability to trade your plan. You can order the complete downloadable Training a Winning Mindset Mp3 for just $249.00 on my website. www.daytradingpsychology.com/positive-neuroprogramming-fortraders/

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NEXT STEP: GET A COACH

I play competitive tennis and I’ve noticed that errors tend to creep into areas I thought I had already mastered. That’s because hitting a tennis ball well is a complex mental and kinetic chain. Executing the stroke while on the run makes it even harder. So, in order to stay sharp and play my best I have a coach and a personal trainer that I work with every week. My coach sees things about my technique and tactics that I can’t see and he knows how to correct them quickly. He competes in tournaments as well, so he helps me with the psychological aspects of competition. Interestingly, in our conversations, we have discovered extensive parallels between tennis and trading. I spend over $5000/yr on coaching and training. I’m continually surprised, however, at how few traders invest in personal coaches. I believe this is the secondary reason so many traders fail. Of course, men, in general, tend to resist asking for help (in domains outside of sports) until they reach the end of their rope. That’s unfortunate. The longer a person waits, the more bad habits they practice and the more psychological damage they are likely to inflict on themselves. Trading coaches who actually trade (I trade stocks and the e-minis) can help traders:  Formulate and refine their trading plan;  Improve their competitive tactics;  Maintain a clear, confident, consistent and positive mindset. If you are serious about taking your trading to the next level, contact me for a Free 15 min Consultation: www.daytradingpsychology.com

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http://www.daytradingpsychology.com/consultation-request/ I guarantee you will learn something about yourself that you can apply to your trading today. Warm regards, Kenneth Reid, Ph.D. Copyright Kenneth Reid, Ph.D. 2014. All Rights Reserved

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