Phantom of the Pits

Smart Next Actions

Continue to train and programme your trading psychology and habitual actions to be the same as the best traders in the world.
Remember, trading requires making many small losses so continue to practice losing brilliantly (Best Losers Win).
Continue to focus on assets that move (volatile) fast when trading.
Continue building your unique approach to learning how to trade (Involgize Capital – 7 Step Trading Process).
Continue to not advise others to trade unless they have done their homework on the tremendous difficulty of the business.
Continue your rare approach to developing your trading brain (3^rd Brain and Trading Gallery) everyday.
Consider buying the ‘The Art of War’ or the ‘Art of War for Traders and Investors’.
Continue to learn from the people you admire the most.
Remember, by design, the majority of traders do not have the discipline and emotional control to carry out Involgize Capital’s 7 Step Trading Process.
Continue to always scale in to trading position assuming your entry level may be wrong.
Continue to exit your trades immediately when the market reveals that your entry level is wrong.
Scale in at, no more than, 50% of your position, then use the 3:2:1 add on ratio (Rule 2).
Continue to use the Ichimoku lagging span to apply trading Rule 1 and Rule 2.
Continue to avoid trading slow moving assets.
Let Melvin know about the book ‘Thinking in Systems’ as soon as possible.
Consider reviewing the book ‘Thinking in Systems’.
Continue to close add on positions if necessary.
Remember, super success will always be about psychological and emotional control (EQ) rather than the highest levels of IQ.
Continue to prepare as best as you can for unforeseen events and emergencies.
Consider buying a book that will teach you about Order Flow in detail.
Continue investing in others in the knowledge that they will probably result in becoming your greatest trades.

Smart Learning Points

(Elaboration)

I can now see in ‘Phantom of the Pits’ where the writer of the book the ‘Best Loser Wins’ got many of his powerful insight about trading from. Within ‘Best Loser Wins’, the writer argues that being good at technical analysis will still keep a trader among 90% of the majority of traders whom fail. What separate the minority of successful traders from everybody else is that they work consistently on their psychology in order to change their habitual trading behaviour.
“Being wrong is what trading is all about.”
Reminded of the importance of trading things that move. If the asset is not moving, then no matter how promising the possible movement, trade an asset that has already shown great liquidity.
Phantom of the Pits recommends that traders avoid learning trading mistakes with costly firsthand experience. Rather, Phantom directs that traders observe the mistake of others as one of the most important approaches to learning how to make millions.
As I had done over a 10 year period, this text mentions the primary importance of adequately preparing one’s self to become a trader before actually trading anything.
Reminded that the price action of asset will often go back and forth (range) without actually going anywhere. So if you find that the price action has not moved as anticipated, and continues to not do so for a prolonged period, this may act as a strong signal for you to exit your position immediately.
‘Best Loser Wins’ got the following everyday trading preparation from this book such as going for a morning run (exercise), giving thanks to a higher power, and envisioning trading success and what you are going to do with the profits. Specifically, this reminds me to continue building my trading 3^rd brain, and to continue constructing and mentally digesting my trading gallery.
Consider buying the ‘The Art of Warship’ (Sun Tzu) or Sun Tzu’s Art of War for Traders and Investors, as it is Phantom’s favourite book for resetting his mind after experiencing trading losses. He would read this book for 10 minutes only in order to successfully adjust his feelings, suggesting that it must be really good.
“There is a great deal to learn from the person you admire the most,” raising the question for me: who do I admire most? Currently, I would say that Nipsey Hussle is the person that I look up to more than any other due to the extent, and nature, of his achievements and authentic character. It is hope that in my lifetime, I too would be able to inspire others to the similar degree (if not more) in which Nipsey has inspired me.
Most traders lose because, when they enter into a trade, they don’t plan for what will happen if the trade goes wrong. It is such a simple reason, yet the majority of traders fall foul of this rule. I guess it is because living up to this rule requires emotional control. Also, the trader would need a high level of discipline to, always, think about the bigger picture before entering a trade, and would need to keep good and consistent trading records. In hindsight, therefore, it actually makes perfect sense that the majority of traders will not be able to think about what happens if their trade do not go as planned.
Scaling in, you should always assume your entry position is wrong. However, if the market confirms to you that it was correct, then you should hold the position. And as long as the market does not reveal to you that the position is wrong, you should continue to hold your position. But as soon as the market indicates that your position is wrong, you should exit immediately.
Likewise, when adding additional capital, you should scale in at 50% of your original position only, assume that your addition will be wrong. If the market confirms that you are correct, then you should continue to hold the position until, ideally, Rule 2 can be implemented.
On reflection, I never fall foul of Phantom’s Rule 1 because I use the Ichimoku lagging span on the 4 hour timeframe to ascertain when the market is revealing that my position is right or wrong. As soon as the lagging span changes direction on the 4 hour timeframe (such as breaking through a diagonal trendline), then I will exit my position immediately. Therefore, generally, I never intentionally hold my positions until my stop loss is triggered per se. This text has reminded me that, trading in this way, I have side-stepped the mistakes of the majority of traders automatically.
I was reminded of the importance of getting out of a trade, as soon as possible, if the price action is not moving according to plan. For me, this often means that if the price action of the asset in concern does not move as vigorously as the broader market, or leading asset, then I should get out as soon as I can, and consider trading something else that does.
Learning about the importance of Rule 2 was probably the most valuable thing that I have taken from this book. In agreement with Phantom, my little trading experience seems to, wholly, support his claim. That without knowing how to press our winners successfully we will find that “…trading isn’t even a 50/50 game.” The ‘Best Loser Wins’ emphasised the significance of Rule 2 more in line with the argument that adding to trades is something that the majority of traders cannot do because of the fear of losing their existing profits. However, the true reason for this rule is that, generally, without it, a person cannot become a profitable trader (never underestimate the power of reading the right books).
When applying Rule 2, Phantom instructs us to apply the 3:2:1 ratio, which means that we would add additional capital three times, and have doubled the original entry amount.
I completely agree with Phantom that trading is difficult for the reason that it is hard to apply Rule 1 and 2. Therefore, I will only be recommending this book, and trading in general, to anyone who is fully committed to becoming or being a millionaire trader.
It is really all about being willing to be wrong with our first entry level. Because, as long as we exit immediately, this is most likely going to setup our next correct entry, as we will be intimately analysing the movement of the price action.
Phantom argues that we are not going to look up to anyone more than we look up to ourselves because of the following: “trading must be the most important thing in your life for it to be possible for you to become the trader you know you are capable of being.”
Phantom states that the faster the markets become, then the more appropriate Rule 1 and 2 become also.
General speaking, Phantom is right. Bullish price action will provide more opportunity to apply Rule 2, than bearish price declines, as falling prices happen faster. In contrast, bullish price action builds steadily as more traders jump onboard gradually.
Intriguingly, this book suggests that there can never be an over-aching Rule 3 concerning when best to take profits, because it will all come down to the specific trading plan, and the relevant market conditions.
The story about the mouse and the maze reminded me of the importance of system thinking or the book ‘Thinking in Systems’. Ideally, I wished I had reviewed ‘Thinking in Systems’ already, which is probably a sign that I should consider doing so. In the meantime, immediately draw Melvin’s attention to the existence of the text.
Essentially, Phantom is making the point that trading requires a person to think in systems. Because trading is like a maze, an approach can be devised to come out on the other side (become a millionaire trader). A system thinking trader will see that their approach must concern the consequences of all of their thoughts and action in regard to the trading maze. The key question will be: will our thoughts and action allow us to eventually escape the trading maze and become a millionaire trader? We will have to understand, therefore, how doing one small thing in one place may have an intended or unintended consequence in another.
Learned that we should remove add on position just like we would close a trade if the price action does not move as planned or anticipated.
Phantom mentions that after three add on he looks to take full profits (get out on the 14^th floor as opposed to continuing to ride to the 18^thfloor). Essentially, he is making the point that there is no hard and fast Rule 3 for taking profits. Us traders will have to use our judgment, which should be based on the nature of asset and its typical price action movement.
It is true that the reality of trading is not what everybody thinks it is. As opposed to being all about money, maths, and reading charts and price movements, trading is about perfecting ‘thinking in systems’ with the highest levels of psychological and emotional control (EQ).
This text drew my attention to the fact that when trading the 9 to 5 financial markets, if the price action closes with what looks like an obvious short or long opportunity, then be very, very cautious. This is because when the markets re-open the next day, the market maker, and other big players, are incentivised to carry out a violent stop-loss hunt, causing the price action to move in the opposite direction (exactly what happened in regard to my recent FDX trade).
I learned that when learning to fly, pilots are always practicing emergency landings. I guess the same applies to us, we should always be practicing how to handle emergencies and unforeseen situations as best as we can.
At some point, to improve my all round trading knowledge, it may make sense to learn more about Order Flow in detail, even though I do not intend on carrying out any day trading activities.
The greatest trades we will make is when we invest something small in others and they go on to become highly influential or phenomenal off the back of that initial small investment (the Christmas Eve story and the orphanage).

Key Strategic Sentences and Paragraphs from ‘Phantom of the Pits’

Preface

“Most traders think the important element in success is knowledge. In my trading career I have found that correct knowledge and the ability to change behavior are the most important parts of successful trading. Correct knowledge without behavior modification projects improper execution of an otherwise perfect trading plan (p 1).”

Chapter 1: Phantom’s Insight

“It was almost 30 years ago that I had first met him. I didn’t see him as a tall man until years later. Over the years he had grown taller than I had imagined possible — not in height but in his confidence, his manner of thought, his gestures, his speech and all the characteristics you would expect of a hero. I met him in the pits in Chicago on even ground. We were trading the same futures. I got the best of him that day but just one lesson he taught me by week’s end showed that the market is more than a day! (p 3)”

“Phantom is dedicated to giving knowledge to those who have open minds and a desire to learn. Your part is knowing that, in trading, you can do it, too! It is not an untraveled road . . . only a lonely one! (p 3).”

Chapter 2: Your Book (Or “Why Give Everything Away?”)

“POP: I have, but they have all seemed to become outdated because knowledge is quicker in coming than in writing. I always wanted to have it exact. I have made mistakes, and to give my mistakes to others seemed to be admitting I was wrong often. It has taken years to understand that being wrong is what trading is all about (p 4).”

“POP: Behavior modification, without doubt, is the key to trading success — not only in how we think but also how we act in certain situations. We must adapt to changing situations over which we have no control. We must change the situations over which we do have control (p 4).”

Chapter 3: A Little History

“I never forgot that statement she would make. Losing never stopped her from staying with her plan as she knew how to lose small and go with her program (p 6).”

“POP: I started to play games with my trades. Actually the funds do it now. It is so artificial but they fall for it. It worked like this: If I had a position and I wanted to take profits, I would pretend I wanted to add to my positions. So I would bid the market instead of offer. I had enough people following me that they, too, would bid the market. Then I would turn and, instead, hit the bid and sell my positions (p 6).”

“POP: You know the only answer I am going to give you! Anything that moved! By that I mean movement has less risk. You wouldn’t think so ordinarily, but in a move you can have a smaller position and make a better return. In a dead market you tend to position too large and then, wham, a news story runs the market and you weren’t prepared (p 7).”

“POP: You look on the floor and you see it is a young person’s game out there. I am not saying that is the route to success now because it is more than youth in this business that makes you a successful trader. I trade upstairs because I understand the markets better at a distance and can trade more markets (p 7).”

“Being on the floor is limiting as a trader. A floor trader is more of a scalper than a position trader is. I like the latitude of being able to set up various criteria for different markets and not depend on my own execution in the pit to position (p 7).”

“POP: No, I can’t ever remember any advice. I don’t mean to be ungrateful to all my many friends and colleagues, but I really don’t remember any advice. In fact, that is part of the reason I want to pay a debt to other traders. I don’t think anyone ever gives much advice because they feel it is putting them at a disadvantage. Of course, it isn’t the case but most traders’ behavior is determined early in their lives. That is why I feel behavior modification is critical (p 7).”

“POP: This is exactly where we want to be. No promises, no requirements, no false hopes and no undue influences. Exactly the way it should be. Traders must make their own millions. I only need to be responsible for keeping them in the game forever (p 8).”

“A trained trader understands success as “You lose good and you’re wrong small.” Trading is called coming out on the small losers’ side and being rewarded with knowing how good you have been wrong (p 8).”

“POP: Most important, they must learn that they don’t have to make SELF-LEARNED mistakes. They are always better off to learn from OBSERVED MISTAKES. It can be pretty costly to make mistakes in this business. You cannot really tell someone what to do, but often if you guide him or her, they will be more receptive to making the right decision (p 8).”

Chapter 4: Preparation for Trading

“It’s a step everyone must go through to get to where traders want to be in trading. To prepare oneself for trading is just as important as any aspect. Without it, a trader does not have the foundation to continue in trading. Where does a trader start to prepare to be a successful trader? (p 10).”

“POP: Too many beginning traders — and established traders as well — take the easy route and expect the markets to be cut and dry of what is required of them in their trading careers. They will paper trade and have fairly good success.

This in no way prepares them for trading. They must be prepared in every way. That means mentally as well as physically and emotionally. Priorities must be in the proper place including family, friends and environments (p 10).”

“First, in your trading career you will find that the markets go back and forth without going anywhere a lot of the time. Your slider rocker chair will remind you of this every time you use it. That step is important to drill into your thinking. Your chair will not move around the room but will rock back and forth (p 10).”

“Your trading position will oftentimes need to be stopped. It must become second nature to automatically do it at times. This simple symbolic gesture for your office will save you lots of distress in your trading (p 11).”

“It’s another symbolic point to start behavior modification. You see, we remember things well when we associate them with something else. Memory experts will tell you this also. When the time announces itself, you must realize you are required to work with your positions and not let the market work on your positions. You must always act promptly and deliberately within your plan. The clock can be used to reinforce your thinking and behavior (p 11).”

“POP: You must establish a routine to set up the environment of each trading day. Allow at least one hour prior to the opening of your market. In this hour you should exercise from 10 to 20 minutes. This really does keep your mind sharper.

The next thing after your shower you should spend one or two minutes giving thanks to your higher power and explain what you are going to do with the funds you earn. Don’t be selfish about it. This actually gives your subconscious a reason for being a successful trader. Last of all, face the north and acknowledge you actually know which way is up. This gives you a better sense of well-being by confirming to yourself that you are in total control. You will need that total control when you follow your trading plan (p 11).”

“The next thing I suggest is to get a favorite book to read. The last thing I suggest is to pick out a person you admire most in your life for their accomplishments (p 12).”

“ALS: What would your favorite book be?

POP: I shall tell you of a suggestion from a very brilliant trader. His suggestion is “The Art of Warship” (the U.S. title might be totally different) by Sun Tzu. The book was written about 2,500 years ago and forgotten for a long time. Because it was in Chinese, there are different translations.

The best one is with a word from James Clavell. He based his noble house saga characteristics on that book. The book discusses rules for war in ancient times but can be translated into business -life, private relations and even trading. Sun Tzu’s rules have been alive for 2,500 years now and still fit perfectly (p 12).”

“ALS: Why is a book important?

POP: On bad days, instead of coulda-woulda-shoulda, you must expel your feelings of defeat as soon as possible because, if you

don’t, it will affect your next day’s trading. Read that book if just for 10 minutes. Make it a routine (p 12).”

“POP: There is a great deal to be learned from the person you admire most. You will need to understand your ability to become an admired person if only in your own mind. I have changed my most-admired over the years, and now that person is younger than I am.

There are many reasons I admire my choice. I’ll give you the most important reasons. She gives and gives of herself each and every day. She is not selfish, and she truly cares about her fellow men, women, children and all life on this planet. I admire that so much. I hold her responsible for showing me the light. She is the only Oprah I know (p 12).”

Chapter 5: Rule Number 1

“It is sad anytime a person’s heart gets pulled from their dreams but even worse when they lose money, too. Sometimes they lose a fortune in such a little period of time. It has happened to every trader. It happened to me when I was smarter than the market. Why does it happen? Mostly because a trader’s plan doesn’t consider, “What if I am wrong?” Their thoughts are always expecting to be right (p 14).”

“In trading, if you have bad luck, you will eventually have to stop trading. To be prepared for that bad luck is a requirement in trading. You will not survive if you do not plan for bad luck. My first steps in trading remove the bad luck altogether (p 15).”

“Most traders plan only for the probability side and that, to them, is always what they consider the winning side. This is the biggest mistake you can make in trading. Instead, you must plan for the losing side (p 15).”

“Trading is not a favorable game in most circumstances, and that is what we must use as our assumption in trading. The big mistake made by traders is thinking and expecting trading to be a favorable game (p 16).”

“The correct way to control positions is to only hold them once they prove to be correct. Let the market tell you your position is proven correct, but never let the market tell you that your position is wrong. You, as a good trader, must always be in command of knowing and telling yourself when your position is bad (p 16).”

“So here is Rule Number One:

In a losing game such as trading, we shall start against the majority and assume we are wrong until proven correct! (We do not assume we are correct until proven wrong.)

Positions established must be reduced and removed until or unless the market proves the position correct! (We allow the market to verify correct positions.) (p 16).”

“What makes this strategy more comfortable is that you must take action without exception if the market does not prove the position correct. Most traders do it the opposite by doing nothing unless they get stopped out, and then it isn’t their decision to get out at all — it is the market’s decision to get you out (p 17).”

“A person’s thinking when the market proves a trade to be bad is counter to what is productive. By using the rule properly, you are productive and don’t have to face the demoralizing effect of the market when you have a proven wrong position. This enables you to continue to trade with the proper frame of mind. You are more objective in your trading this way than letting a negative reinforce your thinking. This way you only let good trading reinforce your thinking and actions (p 17).”

“Then last night, in a restless sleep thinking about my trading, an inspiration came to me (don’t laugh too hard). A lot of my losses had come after I had been in a trade for an hour or longer, where price action was mostly flat but my stop point was never touched. I realized I would have been better off if I had just gotten out in the first 15 minutes. It would have been a loss, but it would not have been as much of a loss as my chart stop point would give me. Then I realized that is what Phantom means. My position was not confirmed in those first 15 minutes! It wasn’t violated according to the nuances of my plan, but it also was NOT confirmed. Get out (p 18).”

“The theorem now is to assume your position is wrong until the market proves what you positioned is correct. Keep your losses quick and small. Don’t ever let the market tell you you’re wrong. Always let the market tell you when your position is correct (p 19).”

Chapter 6: Rule Number 2

Press your winners correctly without exception

“Sounds pretty elementary but correctly is the key. What you hear quoted most of the time is “cut your losses.” Cutting you losses is only one side of the coin. Without Rule 2, you will find that trading still isn’t even a 50/50 game. Without a correct method to press your correct positions, you will never recover much beyond your losses. You need rule two to ensure you have a larger position when you are correct. You always want a larger position when you get a great move or trending market than when your position isn’t correct (p 20).”

“Rule 2 does not mean just because you have a position in your favor that you must now add to that position. “Correctly” in Rule 2 means you must have a qualified plan of adding to your position once a trend has established itself. The proper criteria for adding positions depends on your time frame of expectations in your trade plan….

“You might be a day-trader just trading back and forth, a short -term trader, weekly trader, monthly trader or trend trader only . The add criteria will be different for each trade plan. The important point of Rule 2 is to point out the rule is established so you can make the most gain with the least drawdown expectations. You must also use Rule 1 properly (p 20).”

“Correctly adding to a proven position must be done so that a pyramid isn’t established that will hurt the trader in a minor reversal. Each add onto an original position should be done in smaller and smaller steps. As an example, if you put six contracts on as your initial position, you should use four contracts for your first add and two contracts for your next add. This gives you twice the original position when all three positions are in place. This is a 3:2:1 ratio in establishing three levels of positioning (p 20).”

“One correct way for a day-trader is to see that the position is proven correct and then add at a proper retracement. This will not be the case for a trend trader. A trend trader would most likely have at least one add at a breakout or breakaway gap. It all depends on your trade plan. Your method of adding must be validated by your trade plan (p 21).”

“I use to watch a very good trader put a big position on and take it off until it proved to be correct. He made good trades and ended up with bigger gains by doing it that way than by adding after being proven right (p 21).”

“True, you should be at least twice as big or larger when right than when wrong, but you must work that position into your trading plan. You never risk it all on the initial position being correct or you are defeating the rule. You are trading more like a day-trader if you put it all on at once (p 23).”

“There are several good aspects to the rule. We have discussed a couple of them previously. The fact that reinforcing a correct position actually keeps you thinking correctly is one of the important reasons for Rule 2. Another aspect is that, of course, you will be with a larger position when you are correct (p 23).”

“This is your enemy . . . to love to be right. Your motivation must be to love to do the right thing in trading by either reinforcing correctly your position or removing it should it not prove to be correct (p 23).”

“You will become the best trader you can be by being wrong small, not right small! Get that in your mind now. You are going to have to press your winners if you really consider yourself to have the ability to make a living or extra income from trading. Otherwise, face the truth that you are only playing to break even (p 23).”

“It isn’t an obvious thought to think that, even before you trade, you must have a plan to be bigger when the market is going your way. The first thought is always what size position to take to reach your goal (p 24).”

“I cannot help you with over-trading or being under-margined. You must correct that situation before you can ever expect to be on even ground with the big funds. You must at all times be able to put only a portion of your expected position on at entry and be able to at least double your size somewhere along the route of an expected move (p 24).”

“What the traders have failed to see is that, to correctly use Rule 2, they never put the entire desired position on until or unless Rule 2 needs to be used along the way. Am I correct so far? (p 25).”

“Keep in mind that trading is always a losing game unless you change the odds. With Rule 1 and more so with Rule 2, you are changing what you can in trading to your advantage. If any position is taken without forethought about adding to it later when it has been a proven correct position, you are in a 50/50 game at best (p 25).”

Chapter 7: Trading with Rules 1 and 2

“What I am going to say next is something usually learned not by observation but by making the assumption itself. Most of your money from trading is going to come from trades that take off rather quickly from when you put them on. That is the reason Rule 2 is so important. Just look at most starting trends and the good runs you have once a market turns. The chop-chop markets aren’t going to give you good income (p 26).”

“What you can do is to eliminate your reactions to what the market does to you. You do this by not giving the market the power to control your position or emotions with adverse market moves. You start out expecting the adverse market moves and plan your action based on those outcomes (p 27).”

“Now that we have your attention, I think it is clear to see how just two simple rules can be exploited. You can’t help but understand why trading can be so difficult. You want to be a knowledgeable trader, and you need to take all of the difficulty out of your daily trading when the market is closed (p 29).”

“POP: You may end up a better writer than you think. It’s perfect as the best time to learn about trading is when the market is closed. Most traders only learn when the market is open, and what a mistake that can be! It can be costly and emotional. Both are wrong sides of the coin (p 30).”

Chapter 8: Day-Trading

“POP: That is something I want to discuss with you. There is no big profit in writing unless you can really write. I can’t and don’t want to write except for my own keeping. You can make more money trading than writing (p 32).”

“Just as each programmer came up with a different style and program, not everyone was correct for what I wanted. It is the same in trading. The common ground here is that we are all after the ability to not ever having to stop trading, and we are all after the ability to make more than we lose (p 33).”

“Day-trading is good for some traders, as this is the only way they know to keep risk smaller because of shorter time frames. There are those traders who do not want to put up the margin to carry overnight positions and have the risk (better known as under-funded traders who don’t have the money in the first place and should not be trading such size). Whatever the reason for day-trading, it is a valid method of expressing my Rule 1. The only exception is that they usually expect their position to be right (p 35).”

“Day-trading is a psychology study of the last few days. If you use Rule 1, you stand a better chance of being up in the long run. It is not exact, and as long as that is understood and losses are kept low, it is a possible moneymaker in the long run. If you like the odds, you can be satisfied if you do everything correctly, regardless of the outcome (p 35).”

Chapter 9: Options

“… “An option can get bigger than its original size if all goes well for the trader. It can also melt with predictability.” Phantom of the Pits (p 37).”

“Without getting into specific programs, we’ll discuss the fact there are certain option positions that work with my rules. Extensive options understanding is beyond the scope of what I am trying to teach you. I only want to show you how you can incorporate options trading into a good method of trading while using Rules 1 and 2 to protect your drawdown (p 38).”

Chapter 10: Cloud Hopping

“My charting is based on knowing what the signals of each type indicate to other trades more so than to myself. I am always looking to find what is the edge to me. I don’t care about what the charts indicate if they are not my tools, but because others do use them, I must be aware of those indicators. I need to know what other traders are thinking (p 41).”

“Do your research! Do it again! Learn what different outlook charting can do for your trading plan. I have given ideas of what my criteria is in trading certain situations so that an understanding of where I am coming from shows up. Vary your data times. Use 15 minutes, half an hour, half day, first hour and other time frames (p 42).”

“Don’t ever think that no one ever cared whether you learned anything in trading. I do care and I insist you take full responsibility to learn the correct knowledge. That knowledge must be not only criteria for trading but also the correct method of changing your behavior to that which is required to be successful in the long run. Your trading career should be a long-term expectation on your part. A short time frame is not acceptable in trading. I am not saying that short-term trades are not acceptable but that you must look beyond one day in your trading career….

“Some of the best traders started out broke! And then they got more broke. Until success! (p 44).”

Chapter 11: Behavior Modification

“A person will make the same mistake again and again if there is not a properly learned reaction to a particular consequence of an event. We must know the right and wrong reaction before we can make any judgment as to what is correct for the situation….

“Most situations are pretty obvious as to what a proper reaction should be. Most traders assume their reaction is proper in the consequence of what the market has done. Some traders are better at knowing the correct behavior than others. The correct behavior is a learned process and not one that is always obvious (45).”

“We need that correct assumption to be able to correctly incorporate the proper behavior when we have positioned. With the proper assumption we can now include the proper behavior. We are going to concentrate on protecting what we have rather than what we expect to make first. That is behavior modification. This, above all else, is just as important in trading as any plan for entry and exit (p 46).”

“POP: Yes, they are the experts on psychology and not on trading. I am not expert on either subject. I am only an expert on myself….

“That is what I trade with today — expertness of oneself! (p 47).”

“You see, behavior modification is your responsibility and no one else’s. You cannot dictate behavior to anyone. All I can do is tell you I feel it is not possible to succeed in trading at all without some sort of plan for proper behavior modification. I could never have survived without it….

“Behavior modification can take many directions for traders and can be defined differently by experts. All successful plans have some sort of behavior modification built into the plan. I feel the best plans are those that address the proper observation of trading and the proper reaction of trading (p 47).”

Chapter 12: A Wink is as Good As a Nod To a Blind Horse

Chapter 13: Quicker Than the Eye

“That feeling of better-than-average probabilities is self-defeating because, with that feeling alone, it is possible to miss the big moves by being wrong first (p 54).”

“The most important point of a newly established position is to understand that the initial entry of a trade is only a small part of the expected process of trading your position. Look at it as if you are going to make a series of trades anytime you get a signal. You must have the latitude of knowing and doing what it takes to correctly end up with a position that reaches to your goal. Your goal is the important part and not the trade you have just entered (p54).”

“If I were to tell you that your signal to enter a market has the criteria that you must also be swift in protecting that position and correcting that position as quickly as you can, would you be able to reverse your position as many as three or four times. You would be more agreeable to that prospect by being alert to the possibility of having to reverse your original position. That thinking would make it easier for you to make the needed adjustments to your position. This is what you must do anytime you enter a position. You must know that the initial entered position is just the beginning of your trade….

“Rather than taking a position and letting emotion enter the picture, you must understand that position does not justify any emotional modification of your thoughts. Stop that position before emotion even enters the trade by removing the position. You can re-enter the position correctly again and again until you have no emotional effect from that position. If your position brings emotion into the picture, it is usually wrong or the wrong way (p 55).”

“The edge you have over everyone else’s thinking is that you know you are quicker than the eye. You can remove your positions quickly because you are alert to the idea of knowing you can re-enter immediately quicker than the eye. A bad or incorrect position is the best opportunity to do the correct thing. You are going to always do the correct thing. Be swift! You can stop this emotional feeling of always getting in at the wrong place immediately, and it will soon become second nature to you….

“If you find that you feel you are wrong as soon as you enter, remove that position because you are right (in removing that position!) Why do I know this works? I know that some of my best days and trades are when I started out wrong with a position. Learn to understand that an existing wrong position is the best excuse to get a good position (p 55).”

“What you do immediately upon entry of a trade determines whether you will be a good loser and the best winner you can be….

“ALS: I have often heard traders make the statement they should just do the opposite of what they think and they would trader better. What do you think of that statement? (p 56).”

“After all three waves of orders are filled, you still have your stragglers who take positions upon learning the news. This could take a day and a half to enter the market. The news is seen on TV, heard on radio and read in the newspaper after the market is closed. That is part of my day-and-a-half theory on news items and events. Upon the conclusion of a day and a half of response and reaction to data or a critical news remark, the market usually comes to a plateau of understanding of equilibrium (p 57).”

Chapter 14: Your Comeback After a Big Drawdown

“Who I am is always going to be more important to myself than anyone else in the field of trading. It must be that way in order not to interfere with my duties of success. It isn’t a selfish thing; it is just that we must be in control first. You see, trading must be the most important thing in your life for it to be possible for you to become the trader you know you are capable of being (p 59).”

“I can tell you that our experience has opened our eyes and unlocked our hearts because of what has happened to us by being a part of the Futures forum. What a step forward it has been to see the speed of thought in our lives today. I believe, because of the faster speed of communications, the markets are quicker today and my rules are even more appropriate (p 59).”

“Place the bearish and non-trending market charts aside for this day and pick them up again tomorrow to see if any changes have been noticed in behavior. You are going to concentrate on the bullish established trends at this time (p 63).”

“Also bull markets tend to spend more time going up than bear markets do going down. Markets, that go up give us more time to increase volatility as open interest builds and interest increases. Bear markets tend to lose traders’ interest. Or do they? Do your research! (p 64).”

Chapter 15: Is the Market Always Correct?

“The fact is that, when the markets are thin, a trader’s chance is greater of being stopped out of a good position (p 68).”

“POP, what I THINK you are telling us is that Rule 3 pertains to volume. Volume = Liquidity. If a market rises on low volume, the market is incorrect, and a short order would be the best way to enter a trade. If the market rises on large volume, the market is correct, and a long trade would be the best route. This pattern would be reversed on a market that goes down. Open interest would be another factor in Rule 3. If open interest decreases in an up market, shorts are covering their losses. I think that’s right . . . not quite sure . . . (p 71).”

Chapter 16: Rule 3, You Say?

“Phantom of the Pits (POP): I am afraid I have let them down, Art! I don’t have a Rule 3 as such. What the traders are asking of me is more automatic for me than a rule. When to take profits is not an easy and clear-cut rule….

“You see, my rules have been set up to address the nature of trading as a losing game and to keep losses small. This is the most important aspect of trading and to add to correct positions when correct. To have a rule on taking profits is to have a rule that is second nature most of the time (p 73).”

“In my younger years at a great university I learned the maze answer by watching a mouse going through a maze. The mouse was released to move around the maze, and we were to learn what the mouse would do. To my surprise, a low-intelligence mouse had a system to get to the other end, and it didn’t really take long….

“What the mouse did was always turn to the right whenever possible until it had progressed through the entire maze and was out the other end. While this wasn’t always the fastest way to get through the maze, it certainly accomplished the object of the study by ending at the other end (p 75).”

“Isn’t that what trading presents to us also? A maze where we never really know which way to turn but must have some kind of system to keep us from retracing our steps and extending the amount of time required to get to our goals….

“In trading, you can never really know at each important point what the correct move is until you look backwards. Therefore, you must have a method that is systematic with what your goal is. The goal in trading is to get to the point of the least amount of loss in the journey. In a maze you cannot have the exact path, but you can totally eliminate the unnecessary steps by using a well- devised system. In trading, you cannot make the exact moves each time you trade, but you can devise a system that prevents you from unnecessary steps. The unnecessary steps are usually costly losses in trading (p 75).”

“But, for profit-taking sake, all positions would have to be removed to have a profit. Otherwise, it would just be using Rule 1 to assume the last add-on position was not proven correct, but Rule 1 would not be used properly, mainly because using the adverse movement to remove the position was the criteria for removing the position….

“I want the last add-on removed if the position’s criteria does not prove correct rather than because of an adverse move after entry. Of course, if there is an adverse move, it certainly wasn’t proven correct either so it is still right to remove the position. Don’t get me wrong, as sometimes the adverse move takes place immediately and you must remove the position because of it. But you are removing because the position didn’t prove correct (p 76).”

“POP: Yes, that is basically how I end with most of my positions. But there are times when I get a reverse or topping or bottoming signal where I remove my positions without Rule 1. That is where the traders are correct in thinking there should be a Rule 3. The more I think about it, the more I see this as a qualifier rule to remove positions and take a profit at the time. But it could also be a qualifier to remove a position without a profit also at those times (p 77).”

“POP: My trade programs allow me to take profits after three adds upon a third wave of movement. The third wave usually is the strongest, and that is where I get out of the elevator on the 14th floor rather than ride to the 18th floor if it seems to move rather fast. I know it is going to stop eventually. The only question in traders’ minds, I think, is do we get out at the 14th floor on the way up or the way down (p 77).”

Chapter 17: The Third Rule

“Sure, this was a short time frame and few knew to get out until it was too late, but many situations do flag you that you are looking at a special price level (p 80).”

“Traders will see the validity of watching for extreme volume days. Their use of the third rule will become second nature. They will see the thin markets better and know what not to do in those situations. The third rule is a good rule! (p 80).”

“I would like to leave you with one last thought: Trading is not as we had all thought. The sooner you learn that what you imagined about trading is far from reality and that you must change your thoughts on that reality, the better trader you shall become (p 81).”

Chapter 18: Tie Ribbons on Your Trading

“I’ve always said to pick a range and not a price. The exact price cannot be done with consistency. A range is easier to pick and position when you have your signals (p 83).”

“As an example, if there are 1,000 day -traders in a market, you can almost be certain they have positioned by the last hour of the day. If the market is up, what do you think their position is most likely to be? Same if the market is down. What is their most probable position to be? Long or short? (p 84).”

Trading and Three Accidents

“You can know that Phantom didn’t sleep that night and kept the midnight oil burning. I guess there is a time and place for all thought. We must let it flow and not restrict thought at those times. That point is another Phantom has taught me (p 88).”

“In our lives and in our trading lives, we come upon a situation sooner or later where we have little or no control. We must at all times plan for that time. When a pilot learns to fly, they are always practicing emergency landings. In trading we must practice those same landings (p 88).”

“Phantom indicated the most critical time of a trade is immediately after you have just entered the position. This is the time you must be most sensitive to news and events. How many traders are most comfortable upon entry because they know they are protected by stops? How many surprises are there in trading? How about the time the unemployment report was a surprise and your stop gave you the biggest slippage you ever thought was possible? Listen to Phantom! It happens. Don’t let an unproven position set you up for a downfall….

“Phantom asked why is it so difficult for traders to understand that bad trades get worse? They get worse until the unexpected takes place. The unexpected is always your downfall in a bad position getting worse. Get a lead on your trades or throw them out (p 89).”

My Order Was Filled . . . Where?

“I remember when beans had gone above $4.44 for the first time in history, and I fed orders to the floor to sell out my longs as they hit $4.44. My fill was at 4.32. I did my research and checked all time and sales and price quotes that day. When I get a bad fill, I know why today and everyday. It has never been because of the broker not being alert. It has always been because I was not in the pit and did not know what was going on for anywhere from two to ten minutes before my order was filled (p 92).”

“Well, bad fills all have a good reason. Every time I check to see the reason for my bad fill, I have verified the circumstance that it has indeed been at my own hand that I got a bad fill. I didn’t know at the time when I placed my order that I didn’t have the timely news or what the liquidity was at the time. How can we always know the situation at all times? We can’t! (p 93).”

“On tracing orders, most of the time you can get time and sales, but the true event is that your order, if a market order, can be filled anywhere within a time limit of say two minutes. Now, have you ever seen a market move in two minutes? Of course you have! A market can move quite a lot in two minutes (p 93).”

“POP: No, I don’t as I think it is research that every trader must make on their own, and I cannot give them the results of their ideas of bad fills. They must slay that situation themselves to have the confidence of putting it behind them (p 94).”

Your Trade Program

“Okay, if it isn’t difficult to make money, why don’t you understand before you make money that you must keep all money at whatever cost you can create with the word small. The biggest loser I ever saw was a trader who had a few outstanding months of trading in a trending market. You may have heard of the Hunt silver slide. It can happen to anyone who does not respect the reward of a SMALL LOSS! You must see the reward of a small loss. Don’t let it be your forgotten advice (p 96).”

“Getting back to the third way a market can move is not the way many think in picking tops and bottoms. It is not picking tops and bottoms. Third way moves are your acknowledgements of what the market is telling you about the existing trend. It is finding lack of continuance and is going to reverse somewhere along the trend. It is usually after the support or resistance of the trend has been flirted with and broken. Be aware of your support and resistance points in your plan each day (p 98).”

“I have liked the three add-on points. Use your own ideas (p 99).”

Phantom’s Christmas Gift

“My trader friend had tears in his eyes as the ship left, and he thought of the starving children and his small participation on Christmas Eve. He had just been presented with a gift for trading his time in this event. He would see many years later it was one of the best TRADES he would ever make (p 101).”

“Fifteen years later in October 1994 my trader friend was once again on a ship, and his wife had just been in a life-threatening event. Being on a ship and away from family presents impossible resolve in helping anyone….

“My trader friend searched the ship for a Bible, and for some reason none existed on this ship. The ship made weekly trips from Puerto Rico to New York and was in New York on a Saturday. After the ship had been properly secured to the dock, a man walked on the ship with permission to do so and approached my trader friend….

“The man held out his hand and said, “My name is Mr. Wohn. Here is the Bible you wanted!”….

“My friend asked him how he had decided to dedicate himself to helping others….

“I was 10 years old and my sister was 6 and the only family I had. We were both orphans and lived in an orphanage in Ulsan, Korea. I first met God in my life on Christmas Eve in 1979. It was a cold Christmas Eve, and it was a sad time in our lives for we never had enough food to eat and we would always be hungry when we went to bed….

“At about 9 or 10 that night, our housemother awakened us and told us to come with her. We went to our lunchroom and sat at one of the tables. It was cold so my sister and I sat nearest to the stove to get warm….

“Two men were in the room, and I thought we would see a magic trick as one of the men pulled a sack out of bag. The men started to eat a piece of food, and it looked strange to us. They gave us some and motioned for us to eat the same way as them. One man put it up to his mouth and took a bite of the food. So my sister and I did the same. It smelled good and really was wonderful. It was fried chicken. It was the first time we ever ate fried chicken….

“Well, I remember the kindness of the two men to this day, and that is how I decided I would help others….

“On that Christmas Eve, our housemother let us stay up late as this was different from the other nights. I was the oldest in the group of children, and I wanted to know who brought the food for us. I asked our housemother, and she said God and Jesus had brought us the food. My sister looked at the two men and wouldn’t take her eyes off of them when she heard the housemother’s explanation of where the food had come from. She had heard of them and wanted to know more. My sister asked how they had gotten to their orphanage, and she was told they had come on a big ship in the water….

“The two men left before we went to bed, and all the children talked about the wonderful food and happiness of that night. Our housemother told us it would soon be Jesus’ birthday the next day….

“I was excited the next morning, and my sister was more excited as she wanted to go down to the ocean to see the big ship that God and Jesus had come on to give them food….

“I will never forget the disappointment in my sister’s eyes when there was no ship. Can you imagine that? We had just seen God and Jesus in our eyes, but there was no ship there at all. How had they gotten to us?….

“I began to lose faith that it was God and Jesus who had brought us food. My sister said yes, it was them and she knew it was and wouldn’t change her mind. She was so dear to me and all I had in life. So I let myself have the same faith, and I promised God I would spread the same kindness to man….

“My little sister talked of meeting God and Jesus when she died and of living with them. She would ask me if I would come with her. I would cry at nights because I knew I would soon lose her.”….

“Mr. Wohn told my trader friend of his sister’s death when she was eight….

“Mr. Wohn indicated that perhaps he had seen God and Jesus that Christmas Eve in 1979. As he walked down the gangway, my trader friend called to him but didn’t know what to say. He could only think of that Christmas Eve away from home and loved ones when he had walked a cold night’s walk with heavy sacks of food from the ship to an orphanage in a Korean town….

“My trader friend yelled to Mr. Wohn, “Mr. Wohn, God uses people to accomplish his wishes at times.” Mr. Wohn yelled back, “Yeah, I know! Would you thank your friend for that Christmas Eve in ’79 for me?”….

“Talking to my trader friend’s wife, I have found a deep gift. She says it is one of the most powerful gifts her husband cherishes. To trade a part of his life and to see it come back everyday when he looks at that Bible is the greatest Christmas gift he will ever need….

“It was a great trade my friend made in 1979, and to see it come back amplified 15 years later is what I consider a great trade of a great trader. There are great traders among you, and I see this of you, too!….

“I hope you can see the true meaning of being a great trader. This one Christmas story of a ship’s chief cook and an officer is just the beginning of your great future in your trading career. There shall be more along the journey, and I wish to share them with you. It’s all about YOU! (p 103).”

Time to Reflect on God’s Rules

When We Lose One of Our Own

About the author

“Arthur L. Simpson is an independent trader and has been a member of the Chicago Open Board of Trade and (now) the MidAmerica Commodity Exchange continuously since 1971. He is a registered floor broker with the National Futures Association (p 110).”

“Art lives in Indiana with his wife Karen and their family of pets. His interests include trading, flying, amateur radio, computer programming, music and world travel (p 110).”