SUMMARYThe biggest risk you will ever take Is not betting on yourself.
So far, we have discussed the present condition of most traders, looked at how really simple the market is, examined chaos as a more effective trading paradigm, and delved into the two different structures of structure. In this chapter, we construct an interactive map that will guide us through the rest of this book. We want explicit directions and feedback that will tell us where we have been, where we are now as trade/vestors, and what must happen for us to improve our trading ability.
One of the problems of learning to trade is that there is no regular progression that takes a beginning trader from ignorance to knowledge or from losing to consistent winning. The programs currently available either teach the vocabulary of trading or simply provide a series of favorite indicators. Neither of these approaches produces good consistent winners.
There is, however, a universal five-step progression from first interest or novice to becoming an expert in any field of endeavor. This progression was examined by two brothers, Hubert L. and Stuart E. Dreyfuss (1986), in a book about computers, and by James F. Dalton, Eric T. Jones, and Robert B. Dalton (1990), in a book about the markets. This progression will provide us with a framework for creating our map as we move from one level to another and for studying the historical and scientific differences at each level.
Imagine that you have just attended a piano concert featuring Mozart sonatas. During and after the concert, you have become so uplifted and inspired that you decide, “Whatever it takes, I am going to learn to play the piano. No matter my background, lack of musical talent, age, or whatever—I am going to play the piano!” To parallel this scenario, assume that you have been persuaded—by potential profits, challenge, enjoyment, lifestyle, and so on—that you are going to learn the Profitunity approach to trading commodities and stocks.
For your music goal, you would most likely buy or rent a piano, buy an instruction manual, and hire a teacher. For your trading goal, you would most likely buy or lease some quote equipment and begin tuning in to CNBC and other market-oriented stations. You might subscribe to some newsletter, and hire “teachers” in the form of workshops, books, and/or tutorials. In each case, at this level, you are a novice.
You are exposed to all sorts of material that will create either good (effective) or bad (losing) habits and concepts. You are very excited and are living on what psychology calls “germination” energy. You feel as though you are entering a new romance. You have an abundance of energy and almost every thought is, “Let’s get on with it.”
In music, you are learning the basics—the value of a whole note, a half note, a rest, and so on. You learn where middle C is and the correct fingering for playing a scale on the keyboard. You are dealing with individual notes and octaves as opposed to tunes and compositions. In the Profitunity approach, you are learning to trade so that you do not lose money while gaining experience in the markets. Let us examine this Level One or novice level.
The objectives in music at the novice level are: to learn the rudiments of music notation and to begin to understand the vocabulary and abbreviations on the sheet music. In science, the characteristics of this level are numbers. In music, they are the written notes. In computers, they are the binary digits. In physiology, the key is the left hemisphere of the human brain. In history, it is the Middle Ages. In math, it is the level of arithmetic. The assumptions are Aristotelian in that everything is discrete and you can count and/or classify everything in the universe.
Trading is no different. At Level One of trading, we are learning the basics of the market: vocabulary, how to put on a trade, what margin requirements mean, and so on. We begin to see the enormous amount of information contained in the tools at this level. These tools are the price bar or OHLC (open, high, low, and close) and volume. We are looking at the market on a bar-by-bar process. We are focusing on only two bars, the present bar and the one immediately preceding it. Our primary interest is to understand the evolving behavior of the market rather than to attempt to fit some pattern or template from the past onto the current market behavior.
This understanding is the first step on the way to becoming an expert trader. As a novice, you learn how to determine who is running the show and what is currently being done. You begin to identify trends of various lengths. Most novice traders search for a mechanical system that will make them rich and successful if they can just put the pieces of the market puzzle together. Forget this idea; it will not happen. If you are trading from this perspective, you are doomed as soon as your luck runs out. There simply are no good mechanical maps to follow at this level. In our opinion, there never has been a consistently successful mechanical system. There is not now and there most likely never will be, even with artificial intelligence, analog processors, genetic algorithms, orthogonal regression, and neural networks. As you understand how the market really works (remember the Flintstones), you will understand that the market is designed to destroy any successful mechanical system. All mechanical systems die! They are linear tools and cannot accurately or adequately describe a nonlinear market. If there were a consistently successful mechanical system, it would not be worth $3,000 but could be sold in hours for $30 million. Note that we are talking about a mechanical system that will work consistently and profitably over time.
The maps used by novice traders are generally price comparisons, which all fall short of being adequate because price is an effect and not a cause. They are comparing effect with effect. This technique generally does not lead to profitable trading. Every now and then, it will send out a good signal, but using these tools does not produce consistent profits. I have laid down this challenge around the world: For every instance where some typical trading signals—divergence, above or below 80 percent, and so on—produced a profit, I can show you five signals of the same type that would have produced losses, including stochastics, RSI, momentum, channels, and some other old reliables.
The function of the novice level is to enable you to trade in the market and not lose money while you gain experience. In the typical scenario, most novices, whether in music, romance, or trading, tend to generate an enormous amount of germination energy. What follows this elation is usually depression.
“I didn’t realize that, to really play the piano well, I need to spend four hours practicing each day for years.”
“That girl (boy) didn’t look quite so good after I learned more about her (his) personality.”
“Trading is really a much trickier business than I anticipated. Each time I take a step forward, that seems to be followed by a step backward.”
At this point, most novice traders leave trading. Past statistics indicate that the majority of new traders last just over 3 months in the market. For those souls who can weather this depression by continuing to practice music or to learn more about trading, there are great rewards in store.
As you practice this microscopic study (we only look at two adjacent bars) of market behavior, you begin to get insights into how the market really works. You begin to realize that it is a product of nature and not of economics, fundamentals, or technicals. Just as skill in bicycle riding comes only after enough falls to teach you the internal principles of balance, so the novice level teaches you about the balance of the markets. This knowledge then opens the doors of opportunity to enter the next level of understanding, perception, and performance.
At Level Two, we expand our horizons timewise to include more bars than we examined at Level One. We are now moving from novice to advanced beginner. The advanced beginner in music has learned the basic notes and chords, has started to put together music that is pleasing to both the player and listeners, and is enjoying the newly acquired skills. Let us look at some of the differences between Level One and Level Two.
Whereas Level One in math is arithmetic and numbers, Level Two is space (geometry). In music at Level One we are concerned with tones; at Level Two, we become concerned with tunes. In computers, Level Two is the analog computer. In history, it is the Renaissance. It is looking at the shadows as well as the leaves. It is moving from one dimension to a higher dimension. Information is available that is not obvious at Level One. In the market, some examples of Level Two maps are the Fractal and the Elliott wave. The time frame has now changed from comparing two adjacent price bars to a more panoramic view of 140 bars or more.
At this point, all traders reach a crucial impasse. Is the motivation for trading strong enough to overcome the temporary frustrations of the market’s learning experiences? Just as gravity provides frustrations that help you learn about balance on a bicycle, so will market losses let you learn more about yourself and the balance points of the markets.
Fractals and the Elliott wave are tools that reveal the underlying structure of the market. The Elliott wave provides a directory to the up-and-down moves of the market. The Profitunity approach to analyzing the Elliott wave takes out 90 percent of the ambiguity and gives alternative strategies for dealing with the other 10 percent.
Trading is much like the beginning of a new manufacturing endeavor. The first thing you want is to produce a quality product, or you will face returns from dissatisfied customers. The time to increase production is only after you have a quality product. In the markets, a quality product is being able to make profits consistently on a one-contract or small number of shares basis. If you are not doing this, you either do not have a quality approach to trading or you are not implementing the technique properly.
The advanced beginner has become a quality producer of profits. The next move is to the competent level, where you begin trading on a multiple-contract or larger number of shares basis, and the skills learned at Levels One and Two become automatic. A trader’s focus at this point is on maximization of the ROI as opposed to profit per contract. Professionally, at this level, a trader is in the top 3 percent of the profession. We are talking real money.
At Level Three, a piano student can play exactly what is written on the sheet music. Passages that should be loud are played loud; up-tempo parts are played fast. Being competent means following the directions precisely as indicated on the sheet music. In trading, being competent means increasing your total ROI. You are reading the market script accurately. When the market says buy, you buy; when it says sell, you sell; and when it says stay out, you stay out. You are bringing home the bacon competently and consistently. You are not getting in the way of your profit-producing tools.
Level Three opens up another type of universe. In history, it is characterized by the Industrial Revolution, when new opportunities and benefits opened up because of new and different understandings about production and economics. In math, this level is characterized by algebra, which allows us to look for and solve problems with unknown quantities. It permits the finding of x, the unknown factor. It is the early beginnings of understanding chaos. Level Three begins to monitor what most people call “causes” rather than just effects.
The tools of the market at this level include Profitunity techniques, which allow maximum flexibility and profit from monitoring the underlying and unseen structure of the market. It allows one to get into the rhythm and to start dancing to the tune the market is currently playing. It also allows one to know whether an analysis is wrong or out of touch with the market. If wrong, the appropriate strategy is to stop and reverse. If out of touch, the best strategy is to get out.
The purpose of the Profitunity Trading is to squeeze the maximum amount of profits for the specified move, letting the market (rather than some arbitrary system) determine the most appropriate strategy. Profitunity Trading provides the most profit/least risk formula for asset allocation.
At this level, you no longer spend hours each day analyzing the market. Most traders spend so much time in analysis they miss most of the opportunities the market offers daily.
Once you reach Level Three, you are a self-sufficient professional trader. You are acquainted with the always underlying and usually unseen structure of the markets. You no longer need or desire outside opinions. You do not need to read the Wall Street Journal, listen to market-centered TV, subscribe to newsletters, or waste money on hotlines. However, this is only half the equation. The other half is the trader as a person.
There are thousands and maybe hundreds of thousands of musicians who are much more competent than Frank Sinatra, yet more of his records have been sold than anyone else’s on earth. In live concerts, he was often flat, and his timing was his own doing. But the difference that sells records and made him profits is that he did not sing a song exactly the way it was written. He added and communicated feeling. The largest leap in the entire five-step progression from novice to expert is between Level Three and Level Four. At Level Four, you have an educated intuition or a gut feeling about the market that is usually very accurate. You are manipulating your own structure to correspond with the market’s structure. At Level Four, winning becomes the path of least resistance.
At Level Four, a musician’s prime objective is to able to communicate feelings through the language of music. Feelings are translated, through a pianist’s fingers, to the piano keys, which make sound waves that move listeners’ emotions. In trading, you are trading your belief systems (aligning your underlying structure with that of the market), and your enjoyment comes not only from making profits but also from the satisfaction of feeling your trading is in sync with the market.
Level Four is a quantum leap beyond the three lower levels. In history, it is the electronic revolution that allows us to bring in much more powerful data processors than ever before available to humans. Stability we formerly counted on changes at an ever-increasing rate. My computer for writing this book has more manipulating power than everything available in the entire world a century ago. Think about this: From this single keyboard, I have more computing power than the entire world had only one hundred years ago. To give you an idea of what is happening at an ever-increasing rate, think back to 1975. At that time, a Rolls Royce sedan cost $65,000. Computing power at that time was much more expensive than it is now. If Rolls Royce had reduced the ticket price of a sedan as much as the price of computing power that has been reduced, the same model Rolls purchased new today would cost 30 cents. We now have the power, at very little expense, to look at infinitely large masses of data and infinitely small particles and divisions. This ability puts power into the budget of every trader. The complexity of chaos, which has been anathema to progress, is now becoming available everywhere. In math, this level is calculus, which allows us to differentiate to microinfinity on the one hand and to integrate to macroinfinity on the other.
Traders also make a quantum leap to this level. They begin to see that they are a vital part of this whole process, and they bring to the equation all of their background, philosophy, and belief systems. At this level, traders make use of the fact that no one trades the markets, they trade their own individual belief systems. Just as the computer revolution has allowed us to see inside the masses of data and to make sense of them, the new science of chaos is allowing us to look into our behavior with a focus not available to the Aristotelian, Euclidean, Newtonian, and classical physics/psychology approaches.
At this level, we begin to understand and work with our own personal body type and our individual brain structure. The Profitunity Trading Group has developed this understanding to a new level of precision. Our objective is to align our own persona underlying structure with the underlying structure of the market. Let me restate that when that happens, winning becomes the path of least resistance.
Level Five is the beckoning point that invites us into realms of understanding we have only dreamed of until now. At Level Five, we see that basically everything is information, and our purpose in dealing with this information is to find out who we are. At this level, trading truly becomes a game in the largest and best sense of that word; everything is important and everything is a teacher. We understand ourselves and the market, and that understanding gives us more control over both.
At Level Five, we flow deeply into the realm of chaos. In sports, this realm is sometimes called the “zone.” Chaos does not mean disorder; rather, it is a higher form of order that becomes all-inclusive. There is no randomness. What we call random at Levels One through Three is really a catchall for our lack of insight and understanding.
At Level Five, trading is a low-stress way of living. You feel as though you are floating down a river that is providing you with any desire you name. Your nice fantasy has become completely achievable by following the Profitunity approach.
SUMMARYIn this chapter, we looked at the five steps that will take you from being a novice trader to being an expert, and at the parameters that indicate the level where you are currently trading. We have also listed the objectives and tools that are appropriate at each level. For quick reference, they are:
| Level | Objective |
| 1. Novice | To not lose money while gaining experience |
| 2. Advanced Beginner | To make money consistently on a small account |
| 3. Competent | To maximize the total ROI |
| 4. Proficient | To trade your own belief systems |
| 5. Expert | To trade your states of mind |
Congratulations for hanging in. We waded through some very interesting and deep psychological principles that we believe are necessary for you to know to make a profitable career in trading and investing. Now you are ready to try this new philosophy in the actual markets. The question is just how can we translate this learning into the charts representing the market itself. Now the fun really begins, and we will walk you through exactly what has produced profits in our personal accounts. The market is guaranteed to provide you with the opportunities and all we have to do is to mark those opportunities and bring home the profits. Welcome to the best trading years of your life.