Market Manifesto

We speak here about fear, and how one learns to over­come it, and about how one learns in gen­er­al.

As my friend Char­lie says, “fear is the prod­uct of an undis­ci­plined mind.” There­fore it can be elim­i­nat­ed through the appli­ca­tion of dis­ci­pline. If you always have per­fect dis­ci­pline, you can stop read­ing now. End of sto­ry.

But since nobody does, let’s think about fear objec­tive­ly. Since we’re not scared about any­thing right at this moment, we sup­pose that is pos­si­ble.

Most traders have at least a pass­ing acquain­tance with fear and for some it is their dai­ly com­pan­ion.

Fear is a nat­ur­al instinct. We come into the world hard-wired for fear, as do all ani­mals.

Fear serves us by plac­ing us on full alert when our sens­es tell us dan­ger is about. Fear is prompt­ed by dan­ger per­ceived and alerts us to the fur­ther pos­si­bil­i­ty of dan­ger and pre­pares us for instant action. It is inevitable that we will expe­ri­ence fear from time to time; we are famil­iar with it and we are rarely sur­prised by the fact of its exis­tence, though its sud­den appear­ance may be unex­pect­ed.

But no mat­ter how com­fort­able or com­mon fear is, we are cer­tain of one thing. If you expe­ri­ence fear while you are trad­ing you are doing some­thing wrong.

Like oth­er emo­tion­al reac­tions, fear is inap­pro­pri­ate to trad­ing. It plays no con­struc­tive role there. Fear dis­torts per­cep­tion, caus­es you to freeze, and can push you into some extreme­ly bad deci­sions.

You can learn to rid your­self of fear, and to over­come it, or to con­trol it. Fear in trad­ing belongs packed away in the box of things that you have left behind in your past, like your baby teeth, or your belief in San­ta Claus. Prop­er­ly dealt with, fear can be reduced to an occa­sion­al appear­ance in the guise of its weak cousin, mild anx­i­ety, and in that form is a use­ful adjunct to main­tain­ing an alert state of mind.

Fear can be over­come when one has the tools and the knowl­edge and the expe­ri­ence to take the threat out of a trad­ing sit­u­a­tion. When the sit­u­a­tion has lit­tle threat, you are not like­ly to be total­ly unaware. You are unlike­ly to be under the total con­trol of your emo­tions. There­fore you can take action to deal with your emo­tion­al sit­u­a­tion, as you are con­stant­ly mon­i­tor­ing your­self. And as we know, mon­i­tor­ing is what lets you get a han­dle on what is going on at all times.

What kinds of fear exist?

Gen­er­al­ly speak­ing, fear is the intense wor­ry that some­thing impor­tant to you will be lost, some­thing that you are not ready to give up. It may be fear for your life, it may be fear of a finan­cial loss. Some­times we speak of “fear of success” which is real­ly a fear of los­ing those parts of your life that are famil­iar to you as you change and become more suc­cess­ful. To avoid those psy­chic loss­es you arrange not to make too much mon­ey. The most com­mon fear in trad­ing may be the fear of los­ing more mon­ey than you planned to lose. Mark Dou­glas points out that many traders also expe­ri­ence fear of being wrong, or a fear of miss­ing out on a move, or a fear of leav­ing mon­ey on the table. To be sure, all of these fears are real.

What about the “freeze”?

The freeze is fear that makes you immo­bile. Most traders have expe­ri­enced the freeze some­time in their trad­ing career. The metaphor comes from the deer frozen in the head­lights, over­whelmed with fear, stuck and unable to take action while the huge 18-wheel­er bears down on the deer at 70 miles an hour. In trad­ing the freeze usu­al­ly comes over the trad­er who has not antic­i­pat­ed that the mar­ket could move again him, or move against him to the degree or with the speed with which it just has. The deer freezes before the oncom­ing truck because he has a stim­u­lus for which he has not planned and has no nat­u­ral­ly pre­pared action in response; he can’t decide what to do and so he just shuts down and gets creamed by the truck. Bye-bye Bam­bi.

The trad­er in the midst of a freeze has the same eti­ol­o­gy. He has not antic­i­pat­ed the sit­u­a­tion, is sud­den­ly in over his finan­cial head, has no plan of escape, can’t process the infor­ma­tion, and just sits there like a big dumb klutz until the mar­ket takes suf­fi­cient blood out of his back­side that a pan­icked and dam­ag­ing exit ensues.

How might we han­dle sit­u­a­tions like this?

Fear that is intense is real­ly a mild fear writ large. It is the same ani­mal, just big­ger. There are in fact many tech­niques for han­dling fear as a trad­er. We offer the fol­low­ing as a mix-and-match menu for those who wish to take up a peri­od of res­i­dence in the Fear Rehab Clin­ic.

Fear can­not grow in an envi­ron­ment that you ful­ly under­stand. If you have planned for every con­tin­gency, you have visu­al­ized all of the pos­si­ble moves that the mar­ket can make for or against you. If you envi­sion all pos­si­ble sce­nar­ios and review your antic­i­pat­ed response to those sce­nar­ios, then no mat­ter what hap­pens you will know what to do. This has a salu­tary effect on fear. In fact, it elim­i­nates it.

If you are a less expe­ri­enced trad­er you can also phys­i­cal­ly rehearse your actions in addi­tion to run­ning through them in your mind. It seems strange to think that one can ben­e­fit from phys­i­cal­ly rehears­ing the action of pick­ing up and dial­ing the tele­phone, or of plac­ing an order quick­ly on your com­put­er, but there you have it. Under con­di­tions of fear your abil­i­ty to do nor­mal things is impaired, and you can­not afford impair­ment in the mar­kets.

Don’t let the men­tal nature of trad­ing car­ry over into phys­i­cal pas­siv­i­ty dur­ing trad­ing hours. In oth­er words, don’t just sit and look at the screen. You can become hyp­no­tized and tem­porar­i­ly par­a­lyzed. Don’t lean back and become sta­t­ic. Get up and walk around. Wash your face, spit three glass­es of water in the sink. Make a lit­tle noise or a big noise. Move, be active, don’t let your­self fall back into a pas­sive mode where thoughts can run in cir­cles and the cir­cles run you.

Fear is nur­tured by greed. Fear flour­ish­es when traders step beyond their mon­ey-man­age­ment rules and try to make a killing. When over-lever­aged and mar­gin­ed-up with­in an inch of his life, the trad­er has made him­self vul­ner­a­ble to a slight mar­ket reverse. If the mar­ket moves the against him, the trad­er finds that he or she is los­ing much, much more mon­ey than he or she antic­i­pat­ed and fear blos­soms out like an explod­ing drum of diesel fuel.

Fear can­not exist if you trade with­in your means, by which we mean that any loss pos­si­ble is a loss you can with­stand with equa­nim­i­ty and aplomb. I have more to say about such things in the essays about mon­ey man­age­ment but for the moment just con­sid­er: if you have a mil­lion dol­lars of risk cap­i­tal and you lose $5,000, you are not dis­turbed, your men­tal health remains unaf­fect­ed. If you have risk cap­i­tal of $12,000 and you lose $5,000, you men­tal health is like­ly on the rocks for a while, and when you start to trade again you will be more, not less, sus­cep­ti­ble to fear. If you wish to be free of fear, arrange your trad­ing such that the largest pos­si­ble loss you can expe­ri­ence is one or two per­cent of your risk cap­i­tal, and your risk cap­i­tal is 30 per­cent or less of your net worth. This is the road to wealth with­out anx­i­ety.

Fear is a corol­lary of igno­rance. The ene­mies of fear are knowl­edge, insight, and prepa­ra­tion. If you wish to be free of fear, learn all about the thing that you fear, remove the con­di­tions which per­mit it to take hold, and prac­tice and pre­pare for those moves which take you out of dan­ger.

We learn about fear the same way we learn about any­thing else — in bite sized chunks. When you were a stu­dent you doubt­less groaned upon occa­sion when you first under­stood that dur­ing the course you had to mas­ter five or six hun­dred pages of tech­ni­cal detail. But how much loud­er would you have groaned if you were pre­sent­ed with all that infor­ma­tion all at once, and had to mas­ter it in a sin­gle day? Bite-size chunks can tame the most fear­ful chal­lenge.

Courage is help­ful when deal­ing with fear. We do not mean “nerves of steel” and oth­er light-weight descrip­tions of what non-traders think trad­ing is all about. Instead we mean that it can take a bit of courage to open­ly iden­ti­fy and work through our fears, so that they are van­quished and put away in that box with our mem­o­ries of San­ta Claus and our baby teeth. First we must face up to our fears, and then we must face them down. This is best done bit by bit, steadi­ly, over time, with care­ful focus on what we are doing, and why. Two of the great ancient apho­risms are applic­a­ble here : “Know Yourself,” and “Verify Every­thing for Yourself.”

Fear is a spe­cial case of neg­a­tive thoughts, and can be dealt with using the same tech­niques I dis­cussed in anoth­er essay – exag­ger­a­tion, cut­ting off, mak­ing fun of, and so forth.

All of the above tech­niques have been test­ed by many and are not offered as casu­al nos­trums but as prag­mat­ic, spe­cif­ic, and nec­es­sary meth­ods for elim­i­nat­ing fear in your trad­ing.

Fear is an expen­sive com­pan­ion. Fear is a leach that will feed upon your prof­its. You can dis-invite this expen­sive stow-away by apply­ing dis­ci­plined and thought­ful self-exam­i­na­tion, and tak­ing the appro­pri­ate steps. And most of all, by trad­ing with­in your means.

We know of a woman who lived with two great fears all of her life. For what­ev­er rea­son, pre­sum­ably some deeply expe­ri­enced but now for­got­ten child­hood event, she was death­ly afraid of worms. And she was deeply fear­ful of large bod­ies of water – lakes and rivers and oceans and such. This woman worked as an emer­gency room nurse and could keep her cool in the midst of mul­ti­ple car-crash trau­ma vic­tims, mas­sive gun shot wounds, heart attacks, bloody and life-threat­en­ing emer­gen­cies of every nature and com­plex­i­ty. But the thought of worms brought on a pan­ic attack, as did the thought of get­ting in a boat and mov­ing away from the dock.

She deter­mined in mid­dle age to over­come her fears, to face up to them and then to face them down. She broke her fears down into their small­est com­po­nents, and then attacked each sec­tion one by one. Slow­ly, over a peri­od of time, she turned her fear of open water into swim­ming, and then into boat­ing, and then into scu­ba div­ing, and then into div­ing into ship­wrecks and into holes and coral reefs and tight places where she had to pull her body on a rope down against the cur­rent, and then into div­ing into wrecks at night. The key? Tak­ing things step by step, and not try­ing to over­come the phobia/fear all at once.

With this fear con­quered, she tack­led the fear of worms by repet­i­tive dives in and among eels in the trop­i­cal seas off Bahrain. At first she dove dur­ing the day, and then at night, let­ting the slimy crea­tures brush against her, and she not able to see where they were and what they were doing dur­ing the whole time.

The point is, if you take things step by step, you can face up to things at their worst, that is the very worst that you can imag­ine. Step by step, we face up to things by putting our head down and push­ing right on through to the oth­er side (to mix a heady metaphor). Fears can­not stand being embraced.

So embrace your fear, live with it, stick your head in the stink­ing mouth of death and laugh at it, because your fear is only fear and it is an emo­tion which can be de-fanged and weak­ened. The object that is feared will still be there – the eels are real, after all, and water can be dan­ger­ous, and yes, peo­ple do drown some­times. But the debil­i­tat­ing emo­tion of the fear will not be there, only the rem­nants of it, the ash­es if you will. You can get rid of many if not most pan­ics, fears, inhi­bi­tions, reluc­tance, and so forth by “walking through the wall of fire” and prov­ing to your­self the irra­tional­i­ty of the fear.

Of course some fears are based deep in uncon­scious expe­ri­ences and are not sus­cep­ti­ble to these tech­niques and it is in these sit­u­a­tions where psy­chi­a­trists can help under­stand and over­come deep-root­ed con­flicts and neu­roses. Skilled pro­fes­sion­als can be immense­ly help­ful in some cas­es, but do guard against becom­ing depen­dent on them. It’s bad for trad­ing.