Everyone thinks the market is a game of numbers. We use complex models, umpteen oscillators or retracement calculations and even a fundamental analysis of supply and demand – all based in numbers and about numbers.

But in reality, the numbers of the market are but an illusion.

Markets are only the vacillating prices that other human beings, using the same mathematically based tools, are willing to pay. For example, what can be expensive one day can be very cheap the next if a trend has ensued.

It is only a matter of perspective. And perspective is a matter of the judgments you make.

Judgments on the other hand will be influenced by both impulsive feelings and by intuitive feelings – or pattern recognition. The trick is to have all the data on the table so you can tell the difference.

In order to do this, us market participants need to do a couple of things – give up the notion of a iron-clad trading plan based purely on historical probabilities and replace it with a trading plan based on historical probabilities (yes you read that right) AND a systematic way to leverage your judgment under uncertainty. This way you can make a decision about factors that may now be in play for the future probabilities. I mean who thought the VIX could stay over 30 for 6 months? … I am just askin.

Now in order to do this successfully, you have got to learn to optimize your judgments – which means spending more time focused on deciphering and understanding them than you spend on deciphering and understanding the charts.

This is revolutionary trading psychology – and it works.

In trading we talk about odds, risk and being consistent. We see ourselves go on winning and losing streaks where we feel like “I finally have it now” and “Oh man I am doomed – I will never be consistent!“? Many traders see-saw back and forth between the two states and then find themselves at the end of the month, quarter or year making substantially less than they could have if they hadn’t spent the downside time on the teeter totter.

In pursuit of becoming more consistently profitable, typically traders will either tweak their system (Oh if I just look at the market this way) or read a book. Trader faves when it comes to books can run the gamut from sports psychology to the current Deep Survival. Nobly, everyone is trying to understand the market and their reaction to it. In fact, many traders work harder at trading than they have ever worked at anything.

Nevertheless, there are a couple of secrets lurking out there that aren’t well publicized…

#1) The first impulse trade you take is meaningless. In other words, you can totally #&$*)@ -up, ONCE and it means almost nothing to your end of the month.

#2) It is what you do next that makes all the difference.

#3) The most profitable action you can next take is to resolve the immediate emotional/feeling dilemma. If you made a really stupid mistake, you are in BIKB – or but I know better…. and you are likely to punish yourself with more losing trades. You are mad at yourself without putting that feeling into words, you will act it out but taking it out in your account.

#4) The least profitable thing you can do at this point is to intellectualize or intentionally try to control your emotions or feelings.

How can this be? Doesn’t every book on the shelf say “control the emotion” and take ALL your signals. Yes I think almost every book does. (I don’t read them anymore but this is what people tell me).

See here is the real secret, no one can say for sure how we make a risk decision (despite books like How We Decide) but the contours appear to look something like this. If it isn’t LITERALLY mathematically precise – if you can’t solve for X, then our brains use context, senses, and feelings to evaluate what action should be taken. No one can tell you exactly how the brain uses context, senses, and feelings to assess, but the experimental evidence is mounting to the point that top neuro-researchers are willing to say “It is not enough to know what should be done, one must also feel it.” (Camerer, et. al. Journal Economic Literature)

If you turn that around it means that every single thing you do has a feeling associated with it.

Where does this leave us in relationship to consistently good trading decisions? The simple (but not easy) answer is all you need to do is understand the feelings - preferably both macro level (what you expect of yourself and echoes from your past) and micro or in the moment reactions to the result of a trade or price movement.

Every time you truly understand what you feel in the moment – you will make a better trading decision. The feelings may be ugly, they most likely are at least a bit uncomfortable but if you research and analyze them, well… as the Men’s Wearhouse hawker on local NYC TV says, “I guarantee it, you are going to like how you look“.

PS You will also automaticaly know when you feel clear and calm enough to venture back into the jungle of uncertainty that is trading.

“I return from holiday rested and relaxed, to quote Ben Lichtenstein, “I have tasted the sweetest Mediterranean tomatoes brought to me by dusky maidens and washed down with oaky red wine in the shade of orange trees, I have felt real warmth from the sun on my skin again.” Pulling up a chart once more, and looking at the comments to my previous post, I am full of good will. I have set aside my weapons of war and my heart has turned to love.

I do not quite, however, see trading as some kind of sixties group hug, where there’s plenty of weed for everyone. The money has to come from somewhere after all. So where’s the love? There are so many beautiful trades, so little time. How to choose? I should explain that I am truly a romantic. I long for commitment, for a lasting relationship. I enter each trade with the same hopes, the same fervour, the same simple faith that our love might last forever, that we will trend and trend and never look back. Once the first flush of my passion is over and my first target filled, my second half is there for as long as my lovely companion continues to show interest. And I am quick to forget the sins of the past: if I have been hurt by Cupid’s arrows before, I myself have wounded too, and will happily embrace again yesterday’s lover.

On my return, I found that the languid Euro (I always see her as French don’t you?), has invited me to join her for the afternoon. Charmed, I accept her invitation, but find her at first quarrelsome then sleepy. I take what pleasure I can, but as she dozes, I notice the door push open and her pretty blond cousin from Switzerland winking at me and beckoning to join her. Perhaps all that mountain air gives her more energy, but I am pleasantly surprised by her enthusiasm while Euro sleeps, and even more so when she introduces me to a young American friend she has made, a certain Mini Dow from Chicago, who is eager for me to help her with her extraordinarily tight shorts. Naturally, we have met before. From the window I see that the fickle Miss Soy Bean has made other friends while I was away, and seems to have had a fine old time after kicking me out of her bed just before I left for my holiday. But I forgive her already. I love them all, and I know that despite our occasional tiffs, we will always make up.

Before I let my imagination go too far, or grossly offend anyone, I should perhaps say two things: first, I would like to assure you that I am neither a psychopathic killer nor a serial philanderer. This is all part of a game to engage the psyche with the human side of trading, to connect the flickering numbers and bouncing price bars with some of the real human feeling that this strange activity has such a capacity to generate. And yes, perhaps trading does touch on the darker side of our psyches. By acknowledging this I believe there is a chance we will become better traders.

Secondly, there are of course many metaphors for trading, and I certainly don’t see combat as the only one. I have found helpful comparisons with sailing (attention to currents, the tide, the strength of the wind etc), viticulture (trading is like harvesting a crop, a stroll through a vineyard in search of the ripest and juiciest grapes, much is wasted, but the wine at the end is worth it), skiing, paragliding, the list goes on. I am sure there are many ways of visualising the process, and each trader must find what rings his or her bell. Ultimately, trading is the Lottery of Babylon in Borges’s story – it is like life itself, filled with perverse rewards and punishments, a labyrinth of both startling simplicity and complexity. Recently, though, with Denise’s help, I have come to see a particular reality in metaphors that recognise the traders on the other side of my trade, and my attention to detail, my ability to use judgement to enter or exit a trade at the right moment is linked to that sense of my enemy’s strength or weakness, or of my lover’s enthusiasm or languor.

Now, you’ll have to excuse me, but I must go and get some flowers for Euro before she wakes up.”

Trader K