The Trend Dynamics Trading Course -- Providing ideas, insights and training
for professional stock index & futures traders since 1994

Being the Hunter, Not the Hunted

by George Peacock and Jesse Thompson

In April of 2001, I was on the phone with a long-time Trend Dynamics subscriber and good friend, George Peacock, when he remarked: “Once a trader reaches a certain level of market understanding and has developed a well-thought out trading plan, the only obstacles separating him from attaining his ultimate trading goals are psychological”. As Pogo the cartoon character says: "We have met the enemy, and he is us."

We continued to explore this topic at length over a series of enlightening conversations, and in this issue George describes how he overcame many of the psychological hurdles to trading. He’s quick to point out that these techniques may not provide the best solutions for everyone, but they worked for him. --Editor..

Editor: What is your background and how did you evolve into a S&P 500 futures trader?
George Peacock: My first love was flying, I soloed in 1965 shortly after my sixteenth birthday and worked as a flight instructor and charter pilot during college. After graduating I flew as a charter pilot and later as a corporate pilot until 1976 when I started my financial career with Merrill Lynch as a stockbroker. I remained a broker for eleven years until 1987 when I became a Registered Investment Advisor (money manager).

As a money manager, I earned my clients a decent return in the stock market using traditional fundamental analysis, but always felt somehow drawn to trading. In 1990, while reading Market Wizards by Jack Schwager,  I became fascinated by the stories of successful traders who were compounding money at incredible rates. Although I had never even seen a successful trader in fourteen years “in the business”, the evidence presented in the book was compelling.I soon opened a futures account and began a personal quest to see if I could discover the knowledge and techniques that would allow me to become a successful trader.

Over the next three and one-half years I spent countless hours and many thousands of dollars on books, trading courses, seminars, and systems. Unfortunately, I found only two items that provided anything of value; one had more risk to the stop point than I could trade in the futures market and the other had good concepts, but was too general and vague to provide the methodology and techniques that I was looking for.

Fortunately, in January of 1994, I received a letter from Trend Dynamics. It described a trading course that promised to "cut years off your learning curve", and show one how to analyze and trade price action by understanding supply and demand through a knowledge of market principles and the laws of Trend Dynamics. The wording in this letter addressed concerns that I knew only a very knowledgeable trader would even know existed. It struck an immediate chord with me and I can honestly say that it was the best financial decision that I have ever made! Without the knowledge and principles provided in this course very few of the successful trades that I have made since that time would have been possible.  

In 1996, I started managing a commodity pool. I specialize exclusively in daytrading the S&P 500 futures, but I often hold positions for higher timeframe potentials.

Q: What part of the Course has been the most useful to you?
A: The laws of Trend Dynamics are just incredible. By studying those laws I was soon able to place myself in a position where I could see and study the markets in such a way that the markets themselves became my teacher; and that allowed me to develop a trading plan based on market principles.

I also think the idea of duality that Hart teaches is a really important concept. When price approaches an inflection point, like a POC, for example, many conventional approaches to trading presume a particular outcome, whereas Trend Dynamics teaches you that there is a duality, a dual-potential at that point -- that we’ll either get a trend change or trend continuation (RePo). Keeping this duality in mind around important price areas helps me to stay formless and let price action tell me in which direction the duality will be resolved.

Q: After you developed a workable trading plan, how did you tackle the psychological impediments to executing that plan?
A: I can’t tell you how to fix psychological issues that other people face, but I can tell how I tackled some of these issues. While I read scores of technical books, I also found value in a few publications on trading psychology, such as those authored by Van Tharp, Richard McCall, Ruth Roosevelt (audio tapes), Mark Douglas, and Robert Koppel. Ialso found Justin Mamis’ book The Nature of Risk helpful.

Core Beliefs

In studying Van Tharp’s material, I came across a concept that helped me to realize how important it is to conduct my life in a way that was supportive of the trading process. As a broker for eleven years, I had the opportunity to observe many people who invested, yet only a handful made money in the markets. Even though they knew nothing of technical analysis, those few knew a lot about themselves. They tended to be really solid citizens with a reservoir of life experiences. People whose lives were in order and who were well-capitalized. The money they invested was not play money, it was serious capital and they treated their capital in a serious way.

I learned from these people, as well as less fortunate investors, that capital is precious, and that once it’s gone it’s not easily recovered. From this I concluded that if you don't know who you are, the markets are a bad place to find out. I realized that in order to perform at my best, I must have as much of my life in order as possible, and eliminate as many distractions and internal, as well as external, conflicts.

Unconscious Competence

Q: You once described four levels of competency, can you explain how these are analogous to a trader’s progress?
A: The four levels are unconscious incompetence, conscious incompetence, conscious competence, and unconscious competence. An unconscious incompetent, cannot perform very well, but he is not aware of his incompetence. A conscious incompetent, has progressed to the level where he recognizes his incompetence -- that he is not able to perform his desired skill. Many traders end their quest here convinced that pursuing trading beyond this point is too costly in terms of money, opportunity cost or time.

A conscious competent, has acquired a skill, but is still operating in a mechanical fashion. When we first learn Trend Dynamics, many of us step into this level of trading, but the masterful traders tend to trade at a level of unconscious competence and this is the level of trading that I strive for.

Unconscious competence, is operating with fluidity, without having to think about every single part of the process, such as the way an experienced driver operates an automobile. While unconscious competence is only one step away from conscious competence, the gap between the two is large and not easy to bridge.

Q: What has helped you to try to bridge the gap between the conscious competence of a mechanical trader and the unconscious competence of a trader in the flow?
A: Developing a trading plan where my trades were rooted in many of the market principles stated in the laws of Trend Dynamics. In terms of analysis, I rank the quality of a trade by the number of market principles present across multiple timeframes, and estimate the probability of a potential trade around inflection points.

Q: But, I think most Trend Dynamics traders already feel they are developing a trading plan rooted in market principles. Unconscious competence must involve more than that.
A: Well, its the process of living with the data flow day-after-day as it unfolds over multiple timeframes in real-time, it’s experiencing the data and interpreting it dynamically through market principles that brings you closer to a state of unconscious competence as a trader. s

Be the Hunter, Not the Hunted

Q: In the February 1997 issue of Trend Dynamics Applied, we published an article titled Being Intelligent vs. Being Effective, what do you do to be an effective trader?
A: To be an effective trader, I want to be the hunter, and not the hunted.  Here are some things I do to accomplish this:

First, I consider the risk-reward and the probabilities of each trade I do. I keep a loose three-dimensional matrix in my head that can be simply described by this formula: 1 divided by the number of points of risk X the probability of the trade working X the potential reward. For example, if I see a trade that has 8 points of risk, a 40% probability and a 20 point potential that produces a value for that trade of 1 point (1/8 X .4 X  20). If I can take that same trade with a 2 point risk, the value of that trade increases to 4 and the trade becomes a lot more viable. Notice a difference of a few points of  risk can have a major impact on how viable a trade is. After years of experience I've evolved to a point where I do this instincively, rather than mechanically. However, it may work in an opposite way around higher timeframe entries where there may be huge opportunity cost.

A second thing I do is to really work to get good trade location, missing a trade would favor a lock entry. this with good trade location I’m a much stronger trader, while poor trade formula/technique is most applicable to daytrading location puts me into the category of being the hunted. But remember, good trade location can come in a variety of ways, it may be structural (the way most tend to think of structure) or it can be in the early stages of a breakout through a POC.

Third, I apply the First Law to minimize my equity’s exposure to time in unprofitable situations and maximize my equity’s exposure to time when things are working. If you use leverage, by exposing profitable trades to time and minimizing the amount of time you are exposed to unprofitable trades your account has to grow. In other words I try to think about the equity in my account, just like I think about the First Law of Trend Dynamics as applied to price action on the charts. By using lower timeframe entries, stop loss orders and by taking quick partial profits I reduce and minimize my exposure in terms of time to unprofitable situations.

On the other hand, if a trade is working out, I’ve probably taken partial profits to offset much of my risk, and I try to give it more time to work and not move my stop too quickly.

Fourth, I use money management rules that aim to overcome subconscious fears, such as the fear of losing my trading capital. Our subconscious mind (the survival and self-preservation instinct) is more powerful than our conscious mind, just as fear is more powerful than greed. I have a three consecutive loss rule and a weekly percentage loss rule. If I have three consecutive losses in a row, where I’m just plain wrong three consecutive times I stop trading that day. I also have a weekly loss cutoff so that if I hit a certain percentage drawdown for a week I stop trading for that week.

These rules are rarely hit, but they provide a safety net so that my subconscious mind is comforted by the fact that only a small percentage of my trading capital is at risk. This drastically reduces the fear component of trading for me which, in turn, keeps me a hunter making rational decisions.

Re-training the Subconscious Mind

When I first developed an effective trading plan my subconscious mind kept trying to sabotage my trades because it had experienced several years of futures losses. It erroneously thought that by keeping me from taking my trades it was somehow protecting my trading capital. It took a while for me to re-train my subconscious mind to where it finally realized that I knew what I was doing.

There is a transitional area between being a losing trader and a winning trader, where you hesitate and second-guess yourself. Back-testing specific trading ideas was really important, because it helped me to internalize the probabilities of a particular trade into my subconscious so that when it comes to executing that trade there is no hesitation.

During this period there were also certain rules that helped me work through that. For example, I allocated a certain percentage of my capital to be put at risk for each coming week and I made myself take every trade that I considered part of my trading plan unless/until that certain percentage of equity was lost. Of course, you can’t take every trade unless you are sure your plan works so you have to work out all the weak links and contingencies in your plan, it has to be really well-thought out.

Viewing losing trades as payments for exposing potential conflicts and weaknesses in your plan is a helpful way to stay positive and mentally strong. [Hart calls these “lesson trades--Ed.]

“Feeling good” about not taking a trade in your plan that lost money; or “feeling bad” because a trade in your plan made money, but you didn’t take it, directs you down a path where you begin to feel good when your plan does not work and bad when it does. This is the opposite of the kind of psychological reinforcement your subconscious mind needs to support successful trading. I call it “backward thinking” and it’s really harmful to your psyche.

C: Yes, that’s a really good point, Hart has been adamant about.

Q: Any other money management guidelines?
Since I get paid on an incentive basis, to me its important to not get in the hole early in a time period. I tend to play things very tight and close to the vest early in the quarter and the week. Once I get into a strong position with profits, I then become more aggressive, if the market allows that.

Q: What do you do, if anything, to prepare yourself psychologically before each trading day?
A: If I’m not adequately prepared before the opening, my subconscious knows this and it along with my imagination and the markets will try to defeat me by causing me to hesitate instead of executing and by letting doubt creep in. My imagination may then takeover and expand that doubt until the trade no longer exists. So I must be prepared which means I must do my homework at night. I need to get a good nights sleep and in the morning before the opening, study the overnight price action. I then take some quiet time to collect my thoughts and think through various contingencies and how I want to play them. Then, I’m ready to take a trade if one sets up properly, I’m ready for A-C-T-I-O-N.

Richard McCall wrote a book titled, The Way of the Warrior, and he talks about the psychology of the Samurai warrior. A-C-T-I-O-N is an acronym that he uses that’s useful to establish the proper mindset for trading.

You can watch George trade the S&P 500 in live markets at Trader-Alert.com