CLAUSULA PENAL

Of Success

Rules the Master Trader Lives By LAW #1: KNOW THYSELF

It is crucial for traders to know who they are and what they are. Because only then will they be able to know how they should play the market. You see, traders' styles of play should be based entirely on their tendencies, likes, desires, fears, etc. If traders are trying to fit into a style that goes against their psychological grain, if you will, the results could be disastrous. For instance, take the trader we know who is incredibly impatient. This trader may find it torturous to hold a stock for more than 10 days. In fact, even 5 days would seem like an eternity. So with this dominant trait firmly in place, taking on a long-term trade for 2 months or more would be a big mistake. The trader would, in effect, be fighting him or herself via the market. But knowing this, the trader would want to limit plays to those that potentially offer a faster, more immediate move. And while the frequency of loss would be greater, those types of plays would gel, be in sync with his or her personality, a whole lot better. And as a result, better decisions would be made. Get the point? Here are a few questions you should ask in order to find who, what, and where you are as a market player. Once you know the answers, it will be a lot easier to

1. Am I patient? If the answer is yes, you are a natural intermediate to long-term market player. If you are not patient by nature, a short-term trading approach would better complement your

emotional and psychological makeup.

2. Do I feel safe in the hands of time? Yes would mean you tend to think and trust that all things eventually work out with enough time. This would make you an intermediate to long-term

investor by nature. If you feel prone to beat time at its work, to fix problems faster than time can heal them, you are inherently a trader by nature.

3. Does the increase in time make me grow more nervous? If the second after initiating a trade you begin to feel a light nervousness, you are definitely a trader. If you grow more and more nervous in a trade (win or lose) as time goes by, short-term trading is right for you. If you can buy a stock, and immediately walk away, call a friend, grab a sandwich, or read the paper, or run an errand, you are not a trader.

Knowing the answers to the following questions will determine if you should primarily focus on the micro, short-term or intermediate to long-term time frames.

1. What is my comfort level for risk? If being down $250 on a trade makes you feel like a failure, your correct style of play is short term. If you can be down $1000 in a stock play, and still feel good about its prospects, playing longer time frames is best for you.

2. Am I one who is willing to take a bigger hit (loss) in exchange for potentially scoring bigger? If so, playing over longer time frames is better for you.

3. Do I tend to be more comfortable going after smaller, less significant price moves, while keeping my losses at a minimum? If the answer to this question is yes, you are a short-term trader by nature and playing the micro time frames will work best.

These questions will help the trader determine which techniques and tactics to focus on. 1. Am I a gambler?

2. Do I like to put my stake on the line in a big way?

3. Am I the type who likes to score in tiny bits and pieces? 4. Am I cheap?

5. Does price or quality mean the most to me? 6. Do I hate even small losses?

7. Is the thrill just as important as winning?

We can go on and on. But we're sure you get the point. LAW #2: KNOW THY ENEMY

While knowing yourself is the first order of the day for every trader, one must also be aware of who the enemy is. As we've mentioned on several occasions, trading is war. But with whom? As traders, our adversaries are mainly other traders and market players. Let's think about this for a minute. Each time you buy a stock, someone else is on the other side of the trade, selling it to you. In other words, someone else is getting rid of the very same stock you are buying, and using you to do it. And that someone, mind you, thinks he or she is smarter and more astute than you are. Do you know who that someone is? It's your enemy. Most market players miss this point. They somehow operate on the notion that they are buying from the market in general. They have a mental picture of some vague place or room where stockpiles of the issue they want are just sitting around for them to take. Wrong! Whenever you buy, you are buying the stock from someone. Conversely, whenever you sell a stock, someone else is buying it from you. The

question is, do you know that person? Do you understand that person's thinking, motives, beliefs, feelings, and current emotions? Because if you don't, how do you know he or she is not the one who's right?

It is important to realize that when you are trading stocks on the Nasdaq, you are typically

transacting with a market maker, the term used for members of the NASD who buy and sell stock for clients as well as their own accounts. Some of the major market makers are Goldman Sachs (GSCO), Merrill Lynch (MLCO), First Boston (FBCO), etc. Despite their respectable names, they're typically not your friends when transacting on the NASDAQ. These are the very players who are typically taking the other side of your trade. You're buying, while they're selling it to you. And vice-versa. Are they just being generous by giving you the stock you want? Heck no. They think that they're right, and you're wrong. They are betting against you, which makes them what? That' right, your enemy. But let us never forget that the biggest enemy of all is not some distant trader or market maker, it is us. We are our biggest enemy. We are the biggest

are the only ones who possess the power to conquer ourselves. All the psychological and

emotional demons that must be conquered are within us. They belong to us, and if we ever hope to become successful as a trader, this greatest of all enemies must be defeated, transformed, and reborn. But before we can conquer ourselves, we must first get to know ourselves. As

Shakespeare told us several centuries ago, “the fault lies not in the stars but in ourselves.’’ Here are a few ways to get to know thy enemy:

1. Never place a trade without first asking, “who's on the other side of my trade?” This question will keep you aware that the enemy always lies on the other side of your trade. Part of trading successfully is first getting to know the enemies on the other side of your trades, then learning how to outsmart them.

2. Never look beyond yourself when laying blame. If you are losing as a trader, you are the ultimate enemy behind those losses. While other traders and market makers serve as enemies they are really the minor ones. Traders who have conquered themselves (the emotional and psychological demons) have conquered all the rest. Trading mastering is the by product of self- mastery.