To operate effectively in the trading environment, we need rules and boundaries to guide our behavior.
It is a simple fact of trading that the potential exists to do enormous damage to ourselves—damage that
can be way out of proportion to what we may think is possible. There are many kinds of trades in
which the risk of loss is unlimited.
To prevent the possibility of exposing ourselves to damage, we need to create an internal structure in
the form of specialized mental discipline and a perspective that guides our behavior so that we always
act in our own best interests. This structure has to exist within each of us, because unlike society, the
market doesn't provide it. The markets provide structure in the form of behavior patterns that indicate
when an opportunity to buy or sell exists. But that's where the structure ends—with a simple indication.
Otherwise, from each individual's perspective, there are no formalized rules to guide your behavior.
There aren't even any beginnings, middles, or endings as there are in virtually every other activity we
participate in.
This is an extremely important distinction with profound psychological implications. The market is like
a stream that is in constant motion. It doesn't start, stop, or wait. Even when the markets are closed,
prices are still in motion. There is no rule that the opening price on any day must be the same as the
closing price the day before. Nothing we do in society properly prepares us to function effectively in
such a "boundary-less" environment. Even gambling games have built-in structures that make them
much different from trading, and a lot less dangerous. For example, if we decide to play blackjack, the
first thing we have to do is decide how much we are going to wager or risk. This is a choice we are
forced to make by the rules of the game. If we don't make the choice, we don't get to play.
In trading, no one (except yourself) is going to force you to decide in advance what your risk is. In fact,
what we have is a limitless environment, where virtually anything can happen at any moment and only
the consistent winners define their risk in advance of putting on a trade. For everyone else, defining the
risk in advance would force you to confront the reality that each trade has a probable outcome, meaning
that it could be a loser. Consistent losers do almost anything to avoid accepting the reality that, no
matter how good a trade looks, it could lose. Without the presence of an external structure forcing the
typical trader to think otherwise, he is susceptible to any number of justifications, rationalizations, and
the kind of distorted logic that will allow him to get into a trade believing that it can't lose, which
makes determining the risk in advance irrelevant.
All gambling games have specified beginnings, middles, and endings, based on a sequence of events
that determine the outcome of the game. Once you decide you are going to participate, you can't change
your mind—you're in for the duration. That's not true of trading. In trading, prices are in constant
motion, nothing begins until you decide it should, it lasts as long as you want, and it doesn't end until
you want it to be over. Regardless of what you may have planned or wanted to do, any number of
psychological factors can come into play, causing you to become distracted, change your mind, become
scared or overconfident: in other words, causing you to behave in ways that are erratic and unintended.
Because gambling games have a formal ending, they force the participant to be an active loser. If you're
on a losing streak, you can't keep on losing without making a conscious decision to do so. The end of
each game causes the beginning of a new game, and you have to actively subject more of your assets to
further risk by reaching into your wallet or pushing some chips to the center of the table.
Trading has no formal ending. The market will not take you out of a trade. Unless you have the
appropriate mental structure to end a trade in a manner that is always in your best interest, you can
become a passive loser. This means that, once you're in a losing trade, you don't have to do anything to
keep on losing. You don't even have to watch. You can just ignore the situation, and the market will
take everything you own—and more.
One of the many contradictions of trading is that it offers a gift and a curse at the same time. The gift is
that, perhaps for the first time in our lives, we're in complete control of everything we do. The curse is
that there are no external rules or boundaries to guide or structure our behavior. The unlimited
characteristics of the trading environment require that we act with some degree of restraint and selfcontrol,
at least if we want to create some measure of consistent success. The structure we need to
guide our behavior has to originate in your mind, as a conscious act of free will. This is where the many
problems begin.
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