Tpfg 03 Walking

TRADING PSYCHOLOGY FIELD GUIDE Module 03: Walking the Path Mercenary Trader

TPFG Module 03: Walking the Path

TRADING PSYCHOLOGY FIELD GUIDE Module 03: Walking the Path

In the previous module, “Choose Your Strategy Wisely,” we explored some hard truths. In choosing “how to trade,” there are many dead-end paths. Trading small cannot be the way. The purpose of trading small – in the beginning – is to learn and grow, tinker and evolve, so that one can eventually trade big. Walking this path requires evolution: Strategic evolution. Personal evolution. Knowledge expansion. These are the milestones on a path of training and discovery. As Pardot Kynes from Frank Herbert’s Dune put it: “Discovery is dangerous… but so is life. A man unwilling to take risks is doomed never to learn, never to grow, never to live.” And never to become a successful trader. As more pieces of the puzzle are revealed, it should be little wonder why the 90% fail (above and beyond the lack of training aspect). How many approach trading with an understanding of the big picture – the full cycle of evolution, growth, and scale – and a willingness to see it through? By that criteria, one out of ten seems a high estimate. A few have mental breakthroughs later on. The majority do not. Think of your trading strategy like a bridge, designed for trucks to drive across. Your “strategy capacity” is comparable to the weight of truck cargo. You need a bridge strong enough to handle semi-tractor trailers loaded with goods. You also need the mental fortitude to trust in the bridge. That fortitude is not conjured up with psychology tricks. It is earned, and solidified, through empirical validation and accumulated experience. Committing to scale – not right away, but as an eventual goal – separates those who are serious about their long-term trading goals from those who are screwing around. It is also the path to greater freedom. To again quote Dune, “Seek freedom and become captive of your desires. Seek discipline and find your liberty.” Furthermore, this stuff applies to any business endeavor, not just trading. It’s important not just to understand it, but to really “get” it, which is why we persist in driving the point home. That’s why we should talk scale just a little bit more… a tale of two café owners Think of two breakfast café owners. The first is content with just one location. “Why be greedy,” he says, “or go to the hassle of expansion… this was my dream since college.” Attractive as it may seem from a romantic comedy perspective, this café owner has not attained freedom. He may be his own boss, but essentially he has created a job.

© Mercenary Trader 2014 All Rights Reserved TPFG Module 03: of 11


The net profits from the café – what the owner puts in the bank – are less than $100,000 a year, after taking away the huge run of costs: Food, rent, electricity, heating and a/c, cooks, servers, spoilage, marketing, etcetera. And that 100K does not come easy at all. It requires 60 hours a week from the constantly distracted owner, sometimes 80 or more if short-staffed. Constant headaches and struggles. Endless fires to put out. The second café owner starts in the same place, but knows he must expand. He knows he must think bigger, and find a way to scale, to make the whole endeavor worth it in the first place (else why go into the business?). He fixates on discipline, not desire, and maintains a laser-like focus on long-term goals. As a result, he invests substantial extra effort in learning and growing: Figuring out how to grow the business. Finding and cultivating high quality people he can trust and delegate authority to. Learning not to micro-manage, safeguarding against personal weaknesses. Hammering out prudent leverage options. Taking calculated risks. Now let’s fast forward five years… The first café owner is still on the 100K treadmill with his single location. He owns it, yes, but it’s still a treadmill… and in some ways the ownership makes it worse, because he can’t really quit. Nobody would buy the business for what he feels it’s worth. The profits are too low, the mortgage note too high. He works much harder than most white collar middle managers, who earn the same paycheck with far less stress. The second café owner, in contrast, has eight different locations by now. Economies of scale (buying in bulk, advertising regionally) have lowered costs and increased profit margin. He also has solid management he can trust. It was an incredibly challenging task to find the right people, get them in place, and delegate authority. It took a few years of trial and error, and more than a few horrible gut-wrenching mistakes. But he did it. He saw it through. As a result, his business has scaled to the point where his personal profits, as owner, are on the order of $500K a year and growing. He still works 40-50 hours a week on average, but the load distribution is far better, because he has built an infrastructure with talented people seeded throughout. He’s not one guy running around with his hair on fire – like so many small business owners are. Most of his time is spent weighing important strategic decisions: Deciding what is good for the business. And his options are much more attractive: Having cracked the code of scale, the second café owner can expand further if desired. Or go to the Bahamas for three weeks at a time if he wants to. Or eventually sell the business for an eight figure sum. The first guy built a treadmill and never got himself off it. The second guy built a path to freedom and a better life.



Of course, what the second café owner did was much harder. To scale the business, he had to figure out multiple aspects of entrepreneurship that extended far beyond making great eggs benedict or what have you. To pull it off, he had to embrace the evolution challenge. Grow strategically and emotionally. See the bigger picture and make it happen. Take risks, make painful mistakes, then learn and bounce back. The first guy had a dream, but stayed with thinking small. The second guy had the guts and vision to think bigger, and make his vision happen. And that’s why he got free. A small business without scale, regardless of what it is – widgets, apple pies, auto repair, book-keeping, or even trading – is just another self-created job, and possibly a crappy treadmill one at that. Now I don’t care about restaurants, and I doubt you do either. But the logic is the same with trading. For real freedom you need scale, and the rewards that come with it. If you’re truly going to walk the trading path, you should think long-term and think big. In creating this material, the question occurred: “Why don’t more traders think this way? Why don’t they see the importance of this?” Perhaps because no one had clarified the importance before. Perhaps because no one had explained the how along with the why. Well now you’re getting the how. We’re not just going to tell you “why” you need to do this. We’re going to show you how to make it happen. truth and lies At Mercenary Trader we are allergic to bullshit. Our desire to snow people is zero. (If anything, we have to remind ourselves to be less blunt at times. Jack has a post-it near his desk that simply reads, “Be Nice.”)

The result can feel like the above cartoon sometimes. In the niche world of trade-related publishing – which is a very dream-filled and aspirational place, with many hoping to escape their present circumstances, or instantly create a better life for themselves, magically on the spot with no effort – the appetite for “comforting lies” is huge.



The taste for “unpleasant truths,” on the other hand, is slim. That’s perfectly fine with us though. This is human nature… it’s always been this way. And we know something quite important. We know it with the certainty of gravity: • The millions who take the “comforting lies” approach to trading will fail. • A large portion of this group will quit in disgust, never to trade again. • Another portion will become “permanent dabblers,” screwing around forever. • But a small portion, a remnant, will tire of the lies and finally seek truth. Simon and Garfunkel: “A man hears what he wants to hear, and disregards the rest.” Truer words were never spoken. What most people “want to hear” is that a trading method or system can make them successful, with a small amount of capital and minimal effort, in three to six months. So when we come along and say nope, it’s more likely to take three to six YEARS… with a lot of effort and focus and sweat equity on your part… and by the way your focus should be on training and growing your first few years, with the life-changing profits coming later (via scale)… how do you think that goes over? Like a lead brick, that’s how. For those still hooked on comfort at least. And yet, for those who have “taken their share of beatings” from markets… who have wrestled with the real pitfalls and challenges of trading… who have gained enough knowledge and seasoning as such that the “comforting lies” simply aren’t comforting anymore… the “unpleasant truths” become something different. The unpleasant becomes pleasant after all. How so? Because after passing through the “comforting lies” phase, for many (who are honest with themselves) there is a moment of confidence-shattering doubt. There is the question thrown out in despair: “Is it even possible to become a successful trader at all?” We’ve seen it on trader message boards. Maybe you have too: Call it “failure rage.” The trader who has burned up all his patience for the “comforting lies” stage, banged his head on the wall 500 times – or maybe 5,000 times – and has finally exploded, raging to anyone and everyone who comes across his posts that no, no, no, it can’t be done, you’re all full of shit, trading is all a bunch of lies… Except it can be done. And there is ample empirical proof of this. And theoretical proof, and overwhelming data. (For those not emotionally bound to blindness that is.) On progressing to a certain stage of maturity and readiness, the unpleasant truths become pleasant because they are revealed as the true path forward. The only path forward. Insanity has been defined as “doing the same thing over and over and expecting different results.” At a certain point in the struggle, for an honest few, the wake-up call comes. Then, with enough searching and questing, the path reveals itself.



And then comes the hard part. Morpheus to Neo: “There is a difference between knowing the path… and walking the path.” • First there is the false path (comforting lies). • Then there is discovery of the true path (unpleasant truths). • And then there is getting on it… becoming “the one” There is a scene in The Matrix where, after questioning Neo on being “the one,” The Oracle tells him: “Being the one is just like being in love. No one can tell you you’re in love, you just know it. Through and through. Balls to bones.” You can have that feeling as a trader. Not at first, and not automatically (just as Neo had to take some time, take some beatings, and learn to believe in himself). But having progressed far enough down the path of knowledge and experience and training, you can know you are “the one”… in the sense of having made it as a trader. You can wake up in the morning and know – not half-believe, or try to talk yourself into believing, but know – you are a master of your craft. That you have earned the right to call yourself a trader… and that the profit goals which you seek to achieve, will be achieved, short of a meteor striking you down. But you don’t get to this place through wishing or hoping or ginning up lots of enthusiasm. You get there by walking the path. The path of training and knowledge and experience. The path that is not months or weeks but years long… and in exchange provides freedom and benefits, financial and otherwise, that will last your entire life. This is an important point so we will indulge in all caps. Walking the path is a PHYSICAL FORWARD PROGRESSION. This is why enthusiasm is great as an ignition boost – a way to get started – but it won’t take you where you want to be. Progress along the path is NOT a self-esteem trick. It is NOT a “positive affirmation” thing. It is an actual physical progression. Memories have a literal physical presence in your brain. Connections between memories have physical presence in your brain, via the highways and byways of neurons and synapses. This means, as you progress along the path of knowledge and experience as a trader, you are ACTUALLY BUILDING SOMETHING. You are literally BUILDING THE NECESSARY CONNECTIONS within your PHYSICAL BRAIN. I shout (the all caps) because this is another reason the “comforting lies” are so obnoxiously stupid. Someone who suggests you can have the seasoning and training of an experienced trader quickly and easily might as well tell you it’s possible to build a skyscraper in two weeks with your bare hands. It takes time to build a structure… including a knowledge and experience and emotional reference structure, with physical three-dimensional presence within your own brain.



the martial arts paradigm In some ways trading is comparable to a martial art. If someone said “my system will take you from zero to black belt in three weeks,” you would laugh out loud. (Or at least I hope you would.) The notion of becoming a trained martial artist (on par with becoming a trained trader) without requisite time and effort applied – with zero time and effort, really – is beyond ludicrous. In fact it’s insulting. The prospect of becoming highly proficient and combat-trained over a period of years, however – via putting in the effort, with high quality feedback and instruction – has genuine merit. What you put in is what you get out. The martial arts / trading comparison is also apt in respect to the above and beyond benefits acquired by training. I’ve never heard of a serious martial arts practitioner who did it “just for the belt,” or solely to handle themselves in a fight, or to stay in good shape or some such thing. There are always reasons, and discovered benefits, that go much deeper, touching on things like personal philosophy… self-awareness and self-confidence… way of life. And so it is with trading… attuning the subconscious In the 1920s, a German philosopher named Eugen Herrigel went to Japan to study archery. Except he wasn’t really studying archery, he was studying Zen. Herrigel wanted to truly understand Zen from the inside out. He achieved his goal through a combination of theory and practice, over a six-year span of becoming proficient with the bow. Years later Herrigel wrote the amazing little book “Zen in the Art of Archery,” which contains the following observation (in the 1953 introduction) from D.T. Suzuki: “One of the most significant features we notice in the practice of archery, and in fact of all the arts as they are studied in Japan and probably also in other Far Eastern countries, is that they are not intended for utilitarian purposes only or for purely aesthetic enjoyments, but are meant to train the mind; indeed, to bring it into contact with the ultimate reality. Archery is, therefore, not practiced solely for hitting the target; the swordsman does not wield the sword simply for the sake of outdoing his opponent; the dancer does not dance just to perform certain rhythmical movements of the body. The mind has first to be attuned to the Unconscious.” “In the case of archery, the hitter and the hit are no longer two opposing objects, but are one reality. The archer ceases to be conscious of himself as the one who is engaged in hitting the bull’s-eye which confronts him. This state of unconsciousness is realized only when, completely empty and rid of the self, he becomes one with the perfecting of his technical skill, though there is something in it quite of a different order which cannot be attained by any progressive study of the art.”



What Suzuki calls the Unconscious, we know as the subconscious. When Suzuki speaks of an element “which cannot be attained by any progressive study of the art,” he speaks of training… the actual practicing and doing of the thing. This reveals another puzzle piece – more illumination as to why the 90 percent fail. Herrigel, based on his writings, was a devoted and attentive archery student. If it yet took Herrigel six years to fully master something as surface-level simple as “letting the arrow shoot itself” – i.e. gaining mastery-level proficiency at archery – can we expect less of trading? Can we really expect to take a mastery path measured in years, and compress it down to weeks or months (or no time at all), or otherwise count “time served” via flipping through books on weekends? No. This is another “unpleasant truth” to most ears, yet pleasant to those with ears to hear… because it highlights that the path, though extended and challenging, truly does exist. When you think there is an easy road, you don’t want your delusion taken away. When you realize the easy road was a lie, if you still burn with desire to achieve your goal, then the confirmed existence of a hard road is good news, not bad. (The hard road reality further explains why most do not walk it. Too long! Too much effort!) the ideal training scenario But returning to the trading vs martial arts comparison… let us say, for theory’s sake, you wanted to attain a black belt in a certain martial art. And not just any black belt, but a ninth-degree black belt from a world class teacher. How would you go about doing it? What would the ideal scenario be? The optimal setup, if you were dedicated enough, might be moving to a dojo in the rural wilderness of Japan – cut off from disturbances of the outside world – where you could train with a handful of fellow students. This would provide access to the instructor, whose insights are vital… access to proper knowledge, without which you might stumble for years in the dark… structured routine and motivation to train… and access to your fellow students, who would provide friendship, encouragement, and comparative notes along the way. In training to become a trader, something similar might be ideal. Going off to some remote setting, surrounded by fellow traders, wholly devoted on both an individual and group level to mastering the craft. If it’s going to be a long journey, you want guidance and friendship and shared milestones along the way. The “dojo in the wilderness” isn’t realistic, of course. But something comparable is…



the mercenary vision At Mercenary Trader, community is central to our vision. But we want to do more than just attract excellent traders to our community. We want to create them. To succeed in your ultimate growth path as a trader, you need training. And feedback. And camaraderie wouldn’t hurt either. Hardships go down easier when they are shared. Celebrations are better enjoyed in company too – the company of those who know the meaning of your victories and defeats, large or small, because they are fighting the same battles. Man is a social animal. Standing together as a group is better than standing alone. This is why the vision for the Trading Psychology Field Guide, and the Driver’s Manual to follow, has evolved on such a grand scale… The Trading Psychology Field Guide is designed, first, to break down misconceptions (and second to cognitively train). From our vantage point of experience, it is all too clear the degree to which this is needed. We will undoubtedly disappoint or “turn off” a whole lot of people, not least those who don’t like to read (or don’t like to think period). As such, we anticipate the following: • Over the next few years, a hundred thousand people – at least, if not more – will come across the Trading Psychology Field Guide. • Of that number, a much smaller number – somewhere in the tens of thousands – will actually read the whole thing. (It is shocking, and a little frightening, how many people don’t like to read beyond soundbites.) • Proceeding from there, a still smaller number – perhaps in the high thousands – will sign up for the full blown Driver’s Manual. • And then from there, a number smaller still… down to the hundreds now… will actually follow through on “walking the path” over a multi-year period… thus becoming the traders they were meant to be. Start with enough people to fill an NFL football stadium. Then finish, ultimately, with less than half a conference ballroom. That’s a serious winnowing. This isn’t meant to be pessimistic. It’s just a sober assessment of human nature. People, as a general rule, are flaky. People are undisciplined, unmotivated, and unfocused. People don’t follow through on things. By and large, people just don’t get it done.



Most people, that is. Not everyone. There is a small percentage – and it has always been a small percentage, and always will – who actually do follow through. Who actually do have the guts and the tenacity to follow through on a vision. Who have what it takes to stay on the path. It is that group… that few among the many… who we reach out to. For those who get on the path and stay on it – those vibrant few who seek to “go the distance,” or at least consider it – we are going to have: Monthly meetups. Mostly in Las Vegas (Mercenary HQ), but sometimes East Coast and sometimes cool crazy places. Highly informal, and free for anyone to attend. Kicking off Spring 2014 (stay tuned for dates). Quarterly Driver’s Manual Events. These will be multiple days (typically on a weekend) of formal discussion… informal hanging out… panel Q&A… food and drink… future Driver’s Manual development topics… and of course, getting to know fellow traders on the path. These events will again be free, for Driver’s Manual and Live Feed members. Deep Level Training. There is knowledge, and then there is deep knowledge. There is superficial understanding, and there is real understanding. You only go “deep” through a combination of study, contemplation, activity, and training. You only develop real skill through an effective juxtaposition of practice and feedback. The Driver’s Manual will create this… and you will participate in DM evolution (through events, and email communication, and interaction with fellow traders, and so on). What is the best way to do this? We’ve got some ideas. But we will find out 100% through interaction and feedback. From extensive modules (like this one), to workbook problems and quizzes, to trade demos, group exercises at quarterly meetings… bringing in cutting edge speakers on neuroscience and emotional control… whatever the optimal mix is, we will find it. And create it. And your interactive feedback will be integral in doing this. We will create a true community supported training experience to the best our capability. And our capability, as you probably sense, is pretty damn substantial. As far as we know, it will be like nothing that has ever been done… the closest comparison we can think of is the famous Richard Dennis “turtles” experiment of the early 1980s. But the turtles were trained in a matter of weeks, and focused on a rudimentary trend-following system (which was yet groundbreaking for its time). We’re gonna go much, much deeper… and create a true “band of brothers” (and sisters, no sexism here)… why are we doing this? So why do this? Why go to all the trouble? Is it because we are altruists? Because we just want to give back from the goodness of our hearts? Heck no. There are motives of sharing and giving back, of course, but they are merely the tip of the iceberg.



There are two big reasons why we’re more excited about the Field Guide and what will follow – and the community to be built around it – than anything we’ve ever done: • the value in finding – and training – great traders • the value of the Mercenary community itself Somewhere, in that NFL football stadium of people who will check out the Field Guide and DM over the next few years, there are at least a few hundred great traders in waiting… and a dozen or so super stars. If you are one of those traders waiting to break out, we want to find you… train you… and hire you. Or give you funds to manage. That all gets much easier via the DM. Trying to find a great trader, let alone a super star in the making, is like trying to find a needle in a building-sized haystack. Educational background has little to do with it. Nor do resumes for the most part. (In terms of job applications, resumes are just filtering mechanisms.) By creating comprehensive training materials, and sharing them with the entire Mercenary community, we don’t have to find you (the next great trader). Instead you can make yourself known to us. And we don’t just want to hire a new generation of great traders… we want to fund them. Turn them into hedge fund managers. And share in their success as the super stars break $100 million in AUM… and one day a billion… This will also save a lot of time and energy on our part. If you know how we think and act and approach markets – and you will know, 360 degrees backwards and forwards, over time – you will know what we look for and what we don’t. What is wheat and what is chaff. So ideas in general will significantly improve in quality. And as a result of that, the community itself will become hugely valuable… not just to us but to everyone who is a part of it… Most trading ideas are bad, just as most investing ideas are bad. They are typically poorly timed, poorly conceived, ill-thought out, ill-researched, or just fundamentally broken in some way. It’s mostly garbage out there. That’s just the way it is. But imagine being part of a community of highly trained traders, many of them talented and razor sharp… all sharing ideas rooted in the same language and base of understanding. The trading approach we teach (that the DM will teach) is diverse and non-liquidity constrained, with plenty of room for personal style influence… which means it only benefits from an abundance of high quality idea sources. As can everyone who participates in the community we create… This will save time in our hunt for future research analysts too. Instead of early stage training, we’ll just make comprehensive DM knowledge a prerequisite.



And then of course there’s the fun stuff… Maybe we’ll take off-road driving lessons at the Dirtfish Rally School in Snoqualmie, Washington. Or fill up a chalet for ski and snowboarding trips to Tahoe or Aspen or Whistler. Or meet up in Cabo San Lucas for some downtime on the beach. Or get together for a high stakes poker outing at the Aussie Millions down under. (Don’t get us started on poker opportunities. You’ll hear a LOT more on that to come.) damn hard, damn fun, why not Look. Trading is a damn hard road. You had to know that deep down, didn’t you? Those who break free in this world – who sample the victories and wealth and personal fulfillment that most only dream of – were able to do so by walking the hard road. By doing the hard thing. By showing guts and tenacity and vision. In this respect trading is no different than the many other paths up the mountain by which a determined individual can fulfill their dreams. And that’s how it should be.

We love the above graphic from Dr. Brett Steenbarger. It shows the attitude required. This is the case because the road is so hard. But we can have fun walking that hard road. Ridiculous amounts of fun. A community of traders learning and growing together. Keeping in touch, hanging out. Forming new friendships. Accessing excellent trading ideas, from sources with high quality training. And potentially making millions. And why not? Because another truth is that life is short. Even if you live to age 130 with excellent health thanks to the miracles of modern science, life will still be short. So go for that gusto. Carpe Diem with both hands. Seize the moment and don’t let go. If you’re excited about walking this path with us, guess what. You’re already on it. Keep moving forward… and stay tuned… Feedback: [email protected]


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