The Way Of The Dollar Part 6

While the D-Mark was consolidating along with sterling in Hl1990, the Yen was still heading down sharply (into May, anyway), and the Swiss franc took over the leaders.h.i.+p of the pack, followed in May by sterling.

The rationale in the case of the SF lay in the perception that the Swiss National Bankas governor Lusser really was determined to reverse the weak franc policy of his predecessors and raise Swiss interest rates to whatever level might be necessary to support the currency a"despite the resentment against high mortgage rates and the price in terms of raised cost of living. Then, come Iraqas invasion of Kuwait, the SF, being already seen as the strongest of the hard currencies, got an added s.h.i.+ne as a ahavena currency for funk money from Arabia. The resultant rise in the Swiss unit drove the DM down to quite near 80c by September.

The rationale for the poundas surge from May onward was of course the idea of sterling joining the ERM* , the exchange rate mechanism of the EMS* a" plus the perception, clearly endorsed by Margaret Thatcher herself, that if the pound did enter the ERM it should do so at a higher level, rather than a lower one.

In both cases, there was no shortage of detractors who ridiculed both the rise in the currencies and the rationales for them. In instances of this sort, it usually pays to let price action be our guide. We have to distinguish two sorts of players a" the crowd and the heavy money. When price moves with the crowd, we can sit out the hand and look to go contrary. But when the media and the crowd sing one song and the price moves another way a" the consensus which is not confirmed by price a" it makes sense to follow price.

However, you had to see these rationales early on a" before the crowd saw them. If you donat see the rationale early ,donat play. Just donat play a" like Jim Rogers.

The rationale followed cla.s.sic lines in the case of the Yen, which had attracted heavy speculative sales against the D-Mark and other currencies. In the course of 1989, the DM had risen from around Y73 to peak at Y95. In the process, sentiment against the Yen had gone about as far as it could go a" to the point of arevulsion*a , as CB called it. The stage was thus set for a major comeback in the currency. The clincher was a further rise in j.a.panese interest yields during the summer, reducing the differential with American yields to zero by August.

Going for it

What we are always looking for is the aset-up conditionsa for major currency moves. And in August, we finally had all the set-up conditions for a major acatch-upa in the Yen. Sentiment had pa.s.sed from revulsion to uncertainty; and at this point, the least show of strength was liable to challenge the perception of the trend, and change it at a stroke from down to up. Moreover the Yen was acting remarkably well in the face of a soaring oil price. With the s.h.i.+ft to a zero-yield differential with the dollar, all the pieces fitted.

DOLLAR FN YEN 1989 TO 1990 (Source: DalastreainJ Such moments call for commitment. There are no certainties in financial markets: but there is conviction. More exactly, there is a scale of confidence, with conviction at one end and something more like hope or wishful thinking at the other. When we have conviction a" when all the pieces seem to fit a"then we have to go for it. We have to commit ourselves, for this act of commitment is as much an essential ingredient of success in trading as risk-control. What we say when we commit ourselves is: athis position can lose, like any position. We must have a contingency plan for getting out economically. But itas an exceptionally good position and itas not going to lose.a And when all the pieces fit, we should bet our final stake straight off, in my view .That way we bet most when the odds are best, i.e. when the risk is lowest.

You may find that difficult to swallow a" and itas not a course of action that is recommended by most pundits, though it was in the end the one recommended by Jesse Livermore. Most futures traders recommend building up positions if and when they seem to go right. That apyramidinga approach may make sense for systems based on price a.n.a.lysis. But it doesnat make sense for CBas system, for the following reasons.

The situation where all the pieces fit is one which can only be recognised with hindsight. For nine tenths of the time we are watching the markets and seeing probabilities s.h.i.+ft around the place. Sometimes nothing fits, sometimes most of the pieces seem to be in place; and we never know whether all the pieces are going to fit until they suddenly do. In other words, most of the time, we are wandering about in the darkness or under thick cloud; and weare not absolutely sure whether the sun is going to s.h.i.+ne, let alone when. Ideally, perhaps, we would just do nothing so long as the sun is not s.h.i.+ning. But that might mean we would have to be inactive for months. And this just isnat realistic for those of us for whom currencies are a business or a pa.s.sion or an occupation a" or even an occupational hazard.

The solution would seem to be to keep our bets small a" on a scale of 10, we might bet just 2 a" until the suns.h.i.+ne actually breaks through. But when that happens, we go for it with maximum exposure a" 8 or 10 out of 10. The Yen in August 1990 was a suitable case for such treatment. Even then, knowing when to get in was one thing: staying in, and knowing when to get out was another.

Formula for Getting out

This move in the Yen was discussed in Chapter 1. And if you remember the story of Old Partridge (page 46) you will have got the message about staying in: we must not alose our positiona so long as the reason for holding it is still intact. The little hesitation around Y137 by no means challenged our reason for holding the Yen, which was to do with its need to acatch upa with the reality of its changed yield equation: our catch-up target was Y120.

That target was arbitrary , but the rules for getting out are not quite so arbitrary. Aside from an underlying rationale, our reasons for opening a position always include a polarised picture in our 4 sentiment gauges. If our a.n.a.lysis turns out right, we shall always see some degree of reversal in the polarisation of sentiment. Two times out of 3 we are rewarded with a completely opposite picture: the oversold currency becomes overbought; the overbought currency becomes oversold.

Every case will be different, but the rule for getting out holds: what matters is not how close to the final top or bottom we get out a" thatas mostly luck: what matters, as noted, is that we have a rational formula for getting out which is worked out beforehand. We can set a date: we can use a crawling stop: we can set a price target: we can use a combination of these methods. But deciding the formula beforehand is the thing.

Cross-rate games*

The end of the 1980s and the early 1990s witnessed some large fluctua-tions in the Yen against the Europeans and in the SF and pound against the DM a"in the cross rates, in short. In some instances there was a visible ra-tionale at play, particularly with the Yen. This was the big move by the j.a.panese life insurance companies to reduce the enormous hedges* they had against the dollar risk in their US bond portfolios: when the dollar was perceived to have stabilised in 1989, these hedges made no sense.

During the first stage of the Yenas marked relative weakness, when the dollar was generally strong a"the sharpest move was in the Yen/$ rate a"and this was the right and logical play for performance seekers. This is not said with hindsight: CB forecast the Yen would be athe weakest of the currenciesa in PROSPECT 1989. When the European currencies began to rally in H21990 and the Yen carried on weak, the DM/Yen cross-play was a much better speculation, in the event. But was it foreseeable that the Yen would be a better sale against DM than dollar? This CB did not foresee, nor did one see any a.n.a.lysis to that effect before the event.

There were brief windows when relative strength in sterling and Swiss franc against the D-Mark seemed to coincide with a solid rationale. But in most instances, and for most of the time, I think these cross-rate trends were, and may continue to be, creatures of fas.h.i.+on a" self-feeding from a more or less chance initial price trend. In such a situation, you are forced to fit your time-frame* to the lowest common factor in the market. Itas a matter of taste. But they will surely continue to be popular with professionals, when they are at a loss to forecast the dollar.

CHAPTER ELEVEN.

aTeach us to to care and not to care. Teach us to sit stilla.

T.S. ELIOT.

Acurrency fund adviser had two accounts. He lavished great care on his flags.h.i.+p account, which had a good record. The other one took little of his time. It was an individual account, whose owner was not concerned with the week to week or even month to month evolution of the account.

One day the adviser decided to do an a.n.a.lysis of the two funds. As he had expected the number 2 account, which was more highly leveraged, had a better record. But he was quite unprepared for the extent of the difference. Over the brief study period of 15 months, the flags.h.i.+p account was up 35%, and the maximum adrawdowna was 11.5% from monthly peak to trough. Meanwhile the number 2 account was up 92%, with a maximum drawdown of just 9.2%.

The two accounts had been run on a similar basis. The only difference lay in the att.i.tude of the account adviser to the two accounts. On the flags.h.i.+p account, the adviser lavished daily care, with frequent adjustments to the risk level; he was acutely conscious of each monthly reporting date; he was deeply concerned about drawdown*; and he kept a careful tally of the value of the account. With the number 2 account, he was barely conscious of the account value and made few changes, typically dealing only at multi-week intervals.

The difference in the performance of the two accounts was not luck. It reflected a phenomenon which has been noted and observed by a number of expert fund advisers. The phenomenon is not easy to put into words: worry doesnat help performance; being careful does, but being full of care does not; caring about doing the right thing helps, but caring about being right doesnat; nor does caring about money. The crowd worries, cares about being right and cares greatly about money.

The thing we must be absolutely clear about is the crowdas inherent tendency to be wrong in financial markets. Crowds are not noted for understanding and clear thinking. In fact they are deluded and mad, according to Charles Mackay (Popular Delusions and the Madness of Crowds), But thatas not the prime reason for their inherent wrongness. Itas to do with the price mechanism of free markets. The crowdas partic.i.p.ation makes the price movement so it has to be diametrically wrong at the extremes a"inherently. And that applies to all extremes, to greater or lesser degree, i.e. short, intermediate and long-term extremes. In zero-sum games like the currency markets, the crowd has to lose over both years and decades. It loses to players who play differently from the crowd.

The crowd loses, If you are part of it, you lose.

As readers know, Currency Bulletinas approach to a.n.a.lysing the currencies a" its method a" is essentially anti-crowd. We look where the crowd is not looking for an underlying rationale for the direction of the main trend. And we use a series of contrarian* sentiment indicators designed to orient us in the opposite direction to the crowd. This method has worked well, and it is timeless so it should always work. The method is OK. If we can have confidence in it and can apply it, we shall win.

But as the great traders constantly remind us, being able to have confidence in a method and to apply it consistently, hence winning, depends on our mental att.i.tude. So long as our mental att.i.tude is that of the crowd, we wonat make it. And but for the grace of fortune or our own determination, we are members of the crowd. Who is the crowd made of but you and me and the rest? If you cut us, do we not bleed?

Well, who is the crowd made of a" the trading crowd, that is? Or more precisely, who dominates it? The Joker (the mischievous spirit of the marketplace) determined that the leaders of the crowd be the people most of the crowd aspire to be. Of above average intelligence; good at their lessons; possessed of highly a.n.a.lytical minds; plausible; conforming. The kind of couth, clean-cut individual that appeals to members of the investment committee, because he (she) resembles them or incarnates the image they have of themselves. Such are the people who run the management funds, bank trading desks, trust departments and economic advisory sections, at the major financial inst.i.tutions.

Their (our?) mental att.i.tudes and thought patterns tend to follow along similar lines, which have been programmed by their upbringing. Letas consider three forms of programming which are common to all of us.

1) The first happens before the age of about six. The founder of the Jesuits, Ignatius Loyola (1491-1556), is linked with the saying: agive me a child till heas 7 years olda and I will show you the man.a (There are varying versions). The theory is that the beliefs and character of individuals can be set in stone by their programming in the early years of life. And since the work of Freud and the psychoa.n.a.lysts, this notion has become more or less the conventional wisdom. As a Freudian psychoa.n.a.lyst by formation, the brilliant American psychiatrist Dr Eric Berne* came up with a theory of personality which he called atransactional a.n.a.lysis*a (TA).

In a nutsh.e.l.l, Eric Berne believed that our personalities include three parts. Each of us has: a Parent, which consists of a system of beliefs received from our parents or whoever was looking after us from birth to the age of roughly six; a Child, which is the child we were at 6 years old; and an Adult, which is the part of us that responds rationally to the facts presented to us. Each of these can be called aego statesa, meaning acoherent systems of feelings which motivate a related set of behaviour patterns.a When our Child takes over, it dictates a certain behaviour pattern, and when our Parent or Adult takes over, they dictate different behaviour patterns.

Caricaturing grossly, the Child is impulsive (playful, petulant, intuitive, impatient, whimsical); the Parent is all pre-judgement (rule-bound, conventional, bigoted, occasionally sage); and the Adult is the computer (rational, a.n.a.lytical and independent).

The voice of the crowd equates with the voice of the Parent Think back to occasions in the past when you were confronted by an experienced salesperson a" a car dealer, say, or an insurance salesman, or a perfumery saleswoman a" and you bought something you didnat want; and consider whether your mental state and behaviour wasnat that of a child before a parent. Smart companies teach their sales-people to take the adult role when they donat do it naturally. Think also of the occasions when prescriptions you inherited from your childhood came between you and freedom to choose the right answer. The voice of the crowd, incidentally, would equate with the Parent. So does the voice of the arisk-committeea meeting in your mind which decides youave been naughty, so you close out a perfectly good position.

Berneas theory fits the findings of Dr Wilder Penfield, the famous American neuro-surgeon. In open-brain operations carried out in the 1950s, Dr Penfield made some remarkable findings a" operating with electric probes on patients who included epileptics. On stimulation of the temporal lobes of his subjects, whole tracts of experience from childhood and later years would sometimes come bubbling out. I say experience, because it wasnat so muchmemory as actual aplaybacka of awhat seems to the patient to be present experience.a Penfield concluded that the playback was a areproduction of what the patient saw and heard and felt and understooda at the time of the original experience. Such childhood arecordingsa cannot be erased, it would seem. They are with us forever.

Following in the footsteps of the original psychoa.n.a.lysts (Freud, Adler, Jung et al), Dr Berneas theory of personality developed largely from observation. As its name, transactional a.n.a.lysis, implies, it provided an explanation for the common transactions that take place between two or more people and it lent itself to group therapy rather than the a.n.a.lystas couch. Hence by the time Berne died, in 1970, transactional a.n.a.lysis had been tried out and seen to fit in tens or even hundreds of thousands of case studies in and outside California (where Berne practised).

He went on to conclude that peopleas lives followed a more or less detailed ascripta, programmed by the original childhood experience, with a sad or a happy ending. The best statement of his final theory is to be found in his last book What Do You Say After You Say h.e.l.lo* , which everyone on earth must read.

A winner says: aI made a mistake, but it wonat happen again.a To the point, Berne discusses awinnersa and alosersa. Winners have an OK Child, and a helpful Parent. Winners, needless to say, achieve what they set out to do: losers donat. A winner says things like a1 made a mistake, but it wonat happen again.a A loser says aIf onlya I shouldavea Yes, but.a And in between are anon-winnersa who are scripted to break even. aThey are aat leastersaa they say aWell at least I didnat make a lossaa.a Perhaps we recognise ourselves in all of these situations. Recognition is the sine qua non: the first step on the difficult road of turning ourselves into habitual winners from non-winners and losers.

We might as well admit that itas a difficult road. Most people are losers in efficient markets. It must be so because thatas the way markets work. But it doesnat have to be so in life, and yet it is a"isnat it? A fellow transactional a.n.a.lyst of Berneas and founder of the Inst.i.tute of T A in Sacramento Ca, Dr Thomas Harris* concluded ait is a fair estimate to say that everyone has a NOT OK Childa (from Iam OKa" Youare OK*, first published in 1967). As a result of all thea donatsa and acanatsa it has inevitably received, aVery early in life, every child concludes aIam not OKa. We make a conclusion about our parents also: aYouare OKa.a This, being the starting point for everyone, is the common position for most adults. It is also the position of alosers who call themselves gamblersa as Heme puts it a"though aBecause it is a decision it can be changed by a new decision. But not until it is understooda adds Harris.

Finally, almost all of us inherit an injunction from our Parent to worry. To care about being right. To care about money. And to work hard. No-one told us that the hard work ended with adoing your homeworka.

2) The second form of programming was mentioned in Chapter 8. In short, money has become the symbol of success for modern society. Even n.o.bel Prizes are attended by a handsome purse. Setting aside our personal views on the matter, leta s simply recognise that the situation today is very different from what it was in the first millenium before Christ a"not to mention palaeolithic times. Making money now occupies most of most peoplesa lives and spending it selectively occupies much of the rest.

The upshot is that we are conditioned to regard money as important (the crowd is, anyway). Making it is nice; losing it is nasty .That is something we may have to work on, because if we find losing money is nasty, it may be difficult torus to take losses. And every successful trader agrees that taking losses must be no problem; at least one of the most successful traders alive regards acutting lossesa as the most important rule of trading.

3) The third form of conditioning comes primarily from schooling. As you know, our brain is divided into two halves (like most of the rest of our bodies a"two arms, two eyes etc). In the early 1960s, some experiments were conducted on badly incapacitated cases of epileptics, which consisted of cutting the corpus callosum, which is the channel linking the two halves of the brain (n.o.bel prize-winner Roger Sperry was the pioneer ). The results were successful in ridding the patients of epilepsy a"though at an unexpected cost.

It had long been known intuitively that each half of the brain performed different functions, rather than each supplementing the efforts of the other . The corpus callosum-section experiments confirmed that the function each of the halves of the brain is in fact radically different. The left half controls the right side of the body (in most people) and is the processor of language, logic and all forms of linear, a.n.a.lytical thinking. The right half handles all the holistic or gestalt thought patterns concerning relations.h.i.+ps and wholes a" music, shapes and patterns, pictures, intuitions, abreakthroughsa etc.

The two hemispheres are normally so perfectly linked (by the corpus callosum) that the two functions are inextricable in most people, though activity in each side is easily differentiated by an electro-encephalogragh (EEG). The result of the bisection of the two functions in the case of the treated epileptics was stark. For example, if allowed to see out of only the left eye (controlled by the arighta brain) they could not read or write. And if allowed to see out of only the right eye, they were quite incapable of drawing a simple shape like a cube. For a useful introduction to the subject of lefta" and right-brained thinking, see Robert Omsteinas popular book The Psychology of Consciousness* (preferably in the original version).

Further studies have clarified the extent of specialisation of the two sides of the brain. Subjects with damage to the left side of the brain are able to recall poetry and songs a"but no prose. Subjects with damaged right brains read, write and talk lucidly a"but without any expression of emotion, or the slightest sense of humour. Young debutant musicians call mainly on the right, holistic sides of the brain: old hands exercise the left, a.n.a.lytic side almost exclusively. An urbane and intelligent professor of music, who proved to have suffered severe damage to the right brain, was The Man who Mistook his Wife for a Hat* in the famous account by the psychotherapist and author Oliver Sachs: at one pathetic meeting, the music professor accompanied by his wife, was taking leave of the brilliant psychologist, when he turned and reached for his wifeas head. He could not tell the difference.

The aright braina handles the thoughts that do not come in words or numbers.

Reading, writing and arithmetic are the first things taught at most schools a"all left-brained activities. Languages and sciences follow later, and even the arts are taught as left-brained sciences, by left-brained teachers. Over the years, the mental approach of the child a"which starts out with a right-brained domination a"is bent progressively further and further towards the left side until the balance is usually reversed. The result is that most schoola" leavers, and graduates even more so, end up with a lop-sided mental balance dominated by logical, linear, a.n.a.lytical thought processes. aVertical thinking*a is what Edward de Bono*, the modem pioneer of alateral thinking*a, would call it (see The Use of Lateral Thinking*). The Taoist* would say the the Yang* had been over-developed at the expense of the Yin*.

Flight can be the fantastic soaring of buzzards, the effortless gliding of a Va" formation of migrating cranes; or it can be the air-pressure difference of the lower and upper parts of a wing. Both kinds are valid descriptions. Because of its conditioning, the crowd looks at the currency market as engineering students look at aeroplanes: it misses the soaring and the gliding. But the crowdas view of things tends to be already discounted in prices, so it has little light to shed on future price movements. What Currency Bulletin calls athe underlying rationalea for a price trend is usually only sensed, when it first appears a" before it has been put into words a" with the same kind of sixth sense that feels the soaring and the gliding. The most useful capacity in the business of antic.i.p.ating price movement a" which is what trading is about a" would appear to be pattern recognition: recognition of inter-relations.h.i.+ps between price movement and a matrix of events including sentiment and news background, before such relations.h.i.+ps have been verbalised. Itas a right-brained function, which is often called intuition. The crucial function of the left-brain comes after a" i.e. rationalising and verbalising the patterns once they have been conceived, and determining whether they are consistent valid and usable.

Who are you?

When asked what traits identified the winning trader, Ed Seykota(in Market Wizards) replied: a1) He/she loves to trade; and 2) He/she loves to win.a Surely every trader wants to win? On the evidence, manifestly not.

Do you sincerely want to win?

This question has to be the starting point. Or Van K Tharp* is a well-known American psychologist who has spent the past decade studying what makes people win and lose in financial markets; thatas his profession. He has concluded that a commitment to win is the one quality that is absolutely indispensable to success in financial markets: not intelligence; not the desire to make money; not intuition as such; not anything else, in fact. He believes that in financial markets aanyone can win if they are committed to do soa: itas just a matter of learning how.

Many other required attributes of winning traders in fact must necessarily follow from such a commitment: attributes like following a consistent method; doing careful homework; using a valid risk-management system. Itas quite simple: a trader who does not do these things is not committed to winning. This rules out an amazing number of market partic.i.p.ants.

Well then, are most partic.i.p.ants in some way committed to lose? With Freud, Eric Berne and others behind us we can consider that question levelheadedlya" though it may be a bit exasperating if we ask it of ourselves. First think about the game of ahide and seeka. The payoff in hide and seek, as Berne points out (in Games People Play), is not to stay hidden but to befound a" after a suitable delay. If daddyas too slow about it, Lucy makes a noise to help him. The fun lies in the chagrin of being found. You win by losing.

Wasnat Jesse Livermore in some odd way committed to losing, as he did so often to the point of wipe-out, and at last, terminally? Wasnat he playing hide and seek? What was the meaning of his remark in Reminiscences that ano man living can beat the stock marketa. Wasnat that what athe boy plungera spent his trading life ostensibly trying to do? He knew lots of people who had beaten the market. The phrase looks remarkably like a parental injunction (aYou canat beat the system, kida) that he carried with him from early childhooda to oblivion. Was his life, subconsciously and tragically, scripted to prove the injunction true?

So ask the question: a am I committed to win; to lose; or to not-win?a Once weave answered it truthfully, we can take it from there. But we may have to think about it long and hard to get the true answer. And letas not undera" estimate the size of the problem of going from loser to winner. a A losing trader is not going to want to transform himself into a winning trader .Thatas the kind of thing winning traders doa, said Ed Seykota to Jack Schwager. The first step in the transformation is to recognise that you are a loser.

Yes. If youare not committed to winning, you donat possess the one indispensable pre-requisite for being a winner (according to Dr Tharp, who should know), so you are a loser, or at best a non-winner. Itas not easy to recognise that you may be a loser. We spend our lives protecting ourselves from recognising possibilities of this sort. But remember, thereas no question of fault, or blame. What you are is just what you are, and it comes from your programming: but you have to find out what it is you are. To know that, you have to look at the facts not your impressions. Add up your profits and losses. Go over your trades, to see what you did and why. Consider how much homework you did. Consider whether you used stops as aa crutcha. How often did you capitulate to the crowd view? Or blame someone else? There are some more questions below.

If we are committed to winning, we probably know it. But if we arenat, we have to work to find it out for ourselves. However, once we have found out that we are a loser, or a non-winner, so that we know for sure, then that is not only the first step we need to take but also the last. All the rest will follow automatically. Once you know you are a loser, you either give up trading or change. Thatas the way it is.

Do you accept responsibility for your trading?

Recently a reader wrote to me to say that he would renew his subscription to Currency Bulletin, in order to try and win back some of the losses he had made following its advice in the previous year. He made the losses. The advice was OK and others made profits with its help. A newsletter is just a tool that you can use to help you if like. If you blame a newsletter for your losses a" or central bank intervention, or volatility, or a government or anything else a" then you are not committed to winning. You can see that. And once you understand it deep down and know it for sure, youave learnt something priceless.

Is money what matters to you?

Here is the paradox. Money is by definition the measure of success in trading: yet money is not important to top traders, by and large. Itas just one of the many paradoxes in financial markets, though it would present no problem to the Zen archer*, who hits the centre of the target by just shooting at it, not by aiming.

The answer is that 1) trading is a game, which 2) is won by playing according to the rules of the game; and 3) if you do that you make money over time; but 4) itas OK to lose money, thatas part of the process of winning.

According to Dr Tharp, the above credo is part of a aconstellation of beliefsa which top traders share. They also believe they have awon the game before they starta: they canat help winning if they play by the rules. If weare worried about losing money, we have a problem with taking losses, and cutting losses is one of the rules of the game. If weare worried about keeping the money weave made, we have a problem with letting profits run, which is another of the rules of the game. The rules of the game were spelt out in Chapters 7 and 8.

I think that if money matters greatly to us, it may help if we donat keep tab of our equity a" especially when weare ahead. That may sound odd, but knowing your equity all the time encourages worry; and worry destroys judgement.

Are you concerned about being right?

aOf coursea , you may say. aObviously being right is essential to successful tradinga. That seems to have been the view of the great Jesse Livermore, who was much possessed by being right. But being right so often didnat bring him success in the end. You can imagine a successful trader claiming that he was usually wrong in his a.n.a.lysis but, somehow when it came to actually trading he managed to do OK.

The distinction is between being right and doing right. Livermore was aware that the two were not the same. aThe thinga, he says awas to be right; to know it and to act accordingly.a It was his way of stressing the importance of confidence, perhaps. But he may have missed the danger that can come from overconfidence. Overconfidence is no more destructive to trading than lack of confidence; but neither is helpful and both result from an intrusive ego. Here is Jesse Livermore again: aAlso, donat forget that I had gone broke (my italics) a little while before because I had seen this break too soon and started selling before it was time. Now when I had a big profit I wanted to cash in so that I could feel that I had been right.a That is in Chapter IX of Reminiscences. A few adventures follow and Chapter XIII begins thus: aThere I was, once more broke (my italics), which was bad, and dead wrong in my trading, which was a sight worse.a Interestingly, in games the notion of being right as opposed to doing right is more or less meaningless. So it is in trading. Being right is an ego trip.

Do you find losing intensely painful?

Asked innocently about the joy of winning and the pain of losing, Ed Seykota responded thus: aThe joy of winning and the pain of losing are right up there with the pain of winning and the joy of losing. Also to consider are the joy and pain of not partic.i.p.ating. The relative strengths of these feelings tend to increase with the distance of the trader from his commitment to being a trader .a (My italics).

The more committed you are a"and there can be ebbs and flows in the degree of commitment of any trader a"the less smitten you are by emotions attaching to individual losses and gains. You will know you are getting there when you view losses and gains with equanimity.

How do you perform under fire?

As we all know, the danger points in trading come when weare under stress. The immediate source of stress is usually adverse price movement and the danger is that we capitulate to internal promptings (often from the Child or the Parent within us) which are irrational.