Revised: 04/08
"Face the Trader Within"

By Chris Lori
CTA


Chris Lori is a Principal and proprietary trader for a private firm, Seaview Capital Inc, a
Commodity Trading Advisor registered with the CFTC and NFA. Chris manages client
funds based in Singapore and London.

Previous to his trading career, Chris has competed in four Olympic Winter Games and
was crowned Overall World Cup Champion in the sport of bobsleigh. Mr. Lori totaled
nine Crystal Globes for Overall World Cup final standings and accumulated twenty-two
World Cup Medals in an outstanding bobsledding career.

Chris feels his greatest sport achievement was not one particular event, rather fourteen
years of leading the Canadian Bobsleigh Team from low ranked relative obscurity to
becoming a leading nation in the sport.

Mr. Lori has maintained a keen interest in the financial markets since he was a teenager.
Later, he passionately turned his interest to trading in the forex market and now manages
a large fund on behalf of private investors and institutional clients. It is clear that Mr. Lori
successfully applies to his trading exploits the necessary psychological skills of
discipline, focus and planning, which he developed in his lengthy and outstanding athletic
career.


Equity Management

Equity management is the most critical discipline in all of trading. For the individual
trader, equity management is fairly straight forward, but the application of your equity
management parameters with consistency and discipline is a much greater challenge. It is
simple, if you do not employ strict equity management discipline, you will be closing
your account with less funds than what you had in your original deposit.

In forex, assuming 1% margin, or 100:1 leverage, one may place up to 7-10% of
available equity on a given trade (in the form of margin) and risk only 0.1% to 1.5% of
available equity, depending on the trade. The "risk" is the total realized capital loss if all
open positions are stopped out (-0.01% - -1.5% max). We trade managed funds in a range
of 3:1 to 1:3 gearing. Using simple round numbers, this means that if we have 1M in base
equity, the position size will range from three 100K lots per 100K of equity to one 100K
lot per every 300K cash.

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If you are winning on 50% of your trades using disciplined equity management you
should be profitable in a moderate to good market environment, but most importantly,
you will survive a string of losing trades in a very poor market environment.
Furthermore, the greatest percentage of capital growth over a twelve month period will
come from the smallest percentage of trades, catching the strongest performing currencies
for the year.

If you are a retail trader and you deposit 5K into a trading account and trade 100K lot
sizes, it will only be a matter of time before you lose. You must be willing to accept, and
calculate, that you will experience the maximum drawdown at the early stages. This
means the risk should be small, as mentioned above. The problem people have with small
risk is that on the opposite side of the trade, there will also be small profits, relative to
expectations. Most people want to make large profits fast, but end up taking large losses
fast. The nice profit typically results through disciplined trading for an extended period of
time when the compounding factor begins to take effect. A disciplined and effective
trading plan will see nice compounding effects in about 18 to 24 months of consistent
profitable trading.


Don't Average Down

Suppose you have put on a trade and the market has taken it against you. It moves about
half way to your equity management stop level and you say to yourself; "I'm sure the
market is going to move in my desired direction, so if I place another trade the same size
as the original order, then it only has to move half way back to my original entry to be
even, then I can get out without a loss." Let me ask you some questions:

! Does the addition of the new position remain within your equity management
parameters?
! Are you facing the evidence that the original position is moving against you?
! How much has probability shifted on your trade since original entry?
! Have you evaluated the current market condition with a fresh view and is the
decision to place another trade rational?

www.chrislori.com


Adding to Winning Positions

Adding to winning positions must be done skillfully within a specifically tailored equity
management plan to suit the strategy of your trade and to prevent exposing yourself to
giving away profits you have accumulated on the trade. Are you getting the idea that
equity management is important, yet?


Chasing the Market Movements


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I do not make many guarantees, but I assure you this; when you chase the market
movements in a highly leveraged instrument, like retail spot forex, there is no faster way
to donate money to the market! I can also say with a level of certainty that you will try it.

A novice forex trader will analyze the market and assess a level of probability in their
evaluation of whether the market will go up, down or sideways hoping the market will
invite you in at any time. You may be anxious to get into a trade for the "thrill" (more on
this later), because you just can't wait to make money, and decide to jump in when the
market appears to have decided on a direction. Now that you have committed to a
position, the market immediately moves against you.

When analyzing the market with a desire to get in a trade right now, you will seriously
consider the possibility of taking a long position or a short position and try to take a shot
at what you think the market will do and decide to place a trade. When your trade is on,
and the market appears to be moving against your position, you will recall that you
seriously considered the opposite direction at one point and that you would have been
correct if you placed your trade to go in that direction. Now that the market is currently
moving in the opposite direction and you've convinced yourself that you were right the
first time, you decide to dump the existing position at a loss and place a new order in
what you now believe to be your original and wise insight as to the profitable direction of
the market. Then, the market will continue its typical behavior by moving up, down and
sideways, causing you pain and confusion. Baffled by this, you lose any connection with
rational thought and decide that you do not want to take too much of a loss and end up
dumping the second position and incur a double loss.

Due to the high cost of transactions through a retail broker, you will likely find that their
may be a positive correlation between the number of trades you take and the equity in
your account. Unless you have a firm proven method that takes frequent trades, you are
likely to see your account equity fall if you are a gunslinger shooting at trades all day.

This is only one such scenario when you take on this manner of trading. If this profile
describes you, it is unlikely that you considered your equity management at any time
before or during this experience.

www.chrislori.com

The Probability Continuum

I closely watch the market price action on charts of multiple time frames. Using a variety
of charting tools I have a specific method that I apply to identify where an ideal entry and
exit point may occur. I am a pattern trader and trade patterns I have identified from years
in the fx market.

The market will often move in very identifiable and predictable patterns over the course
of time, which may offer excellent trading opportunities. On the opposite end of the
continuum, the market may take on a very erratic and indecisive behavior that does not
offer good trading possibilities. The market probabilities are continually sliding from one
end of the probability continuum to the other, offering very good trading opportunities at
one end, while moving to a poor trading environment on the opposite end of the

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continuum. The idea in trading is to wait until the market invites you in at the high
probability end of the continuum and to accept the invitation at precisely the correct time,
based on your method of analysis.

The above points are fairly obvious, but here is the problem. The market is often very
discreet! The market can move from one end of the probability continuum, when
attempting to determine an entry point, to the opposite end in a very smooth and subtle
fashion. The market will move from a level of high probability to a level of low
probability very rapidly without notice. As you gain experience in trading, it is critical
that you have the ability to identify the subtlety of these movements or it will trap you.

For example, you may be watching market price action and decide that it has reached an
optimal entry point for a trade you have been waiting for if using Chris Lori's "Big
Stones Entry Method". Then you sit and wait and try to decide whether or not you should
enter the trade. In the meantime, the market begins to move in the direction that your
analysis suggested it might go. After price rallies by 40 pips, you decide that you are
pretty smart, because after all, you knew it would rally from the point that it had, and it is
a good trade. The market has now moved from a level of high probability to a level of
lesser probability, but your mind still views the trade as high probability, while the price
level has shifted to a level of lesser probability at the time you finally decide to place a
trade. It is after you have placed the trade when you realize that the ideal entry price has
passed, but you think you may be able to still profit from the trade, "if only the market
will continue."

You have now entered a trade at a level where you could have already taken some profit
from the market had you entered at the high probability level. Further, you have now
entered a trade that requires a larger protective stop loss and creating more risk, while
offering less profit potential on your trade.

For ideal entries, you are required to be sensitive to the subtle movement along the
probability continuum.


A Fresh View

I have often seen traders experience a nice winning streak that resulted from skillful
analysis, well-planned trades and firm equity management. Not long afterward, the same
mind decides that, because they have now made a nice profit from a series of winning
trades, they are quite a good trader and arrive at a decision to now enter a trade in a low
probability environment. This is not entirely objectionable under the right circumstances,
but it would be wise to use an adjusted equity management parameter based on the
profitable period and the probability of the current trade, if it is truly a wise decision.

Whether a trader has experienced an extensive winning streak, losing streak, or has taken
a single win or loss on recent trades, you must always take a fresh, objective and
unbiased view of the current market condition. Remember, the shift in probabilities can
move very discreetly, so do not allow an emotional attachment to recent trade
success/failure cloud your view to what the market is really saying.


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A trader can become emotionally charged following a string of successful trades. You
may find it very helpful to stand aside for a while to allow your charged emotional state
of mind to settle down, so it does not obstruct your view on the next trade. This does not
only refer to a fresh view directed specifically to the market, but also the most critical
component of trading... equity management. A fresh view will reel back into reality your
overall equity status, as well as current market environment and price action.

This emotional charge can also generate a subconscious bias. If you bring to the market a
strong bias or specific expectation, whether consciously or subconsciously, rather than
taking an objective view, you will be exposed to a potentially dangerous experience.


Discipline

Discipline is an absolute requirement for successful trading. Trading has a multitude of
components that have to be managed when identifying opportunities and assessing risk,
for example; technical analysis, fundamental outlook and economic reports, geopolitical
environment, equity management, emotions, probability, etc. Each of these components
requires its own discipline and you must comprehend the weight of its value in any given
circumstance and how it may have influence on a possible trade.

Discipline is not a human characteristic that can be adapted overnight. Discipline is a
quality characteristic that must be developed over a period of time and refined through
experiences, hard lessons and a determined focus on a specific objective. Discipline has
to be developed for each specific aspect of your character. For example, you can be
disciplined in work habits, but not in health habits. Disciplined in family routines, but
undisciplined with fixing things around the house.

Discipline is a battle between the human flesh and knowing in your mind what is right
and good. Let's take the everyday life of a human being, for example; it is a known fact
that refined sugar is very harmful to ones health. We know that refined sugar consumed
over a lengthy period of time can cause a long list of physical health problems. Most
human beings will consume large amounts of sugar in a lifetime, because it satisfies the
flesh here and now! People will not even consider the long-term health effects when they
are sloshing back that banana split. Yet, after 30 years of slurpies and French fries, the
lack of discipline begins to take its toll and a host of health issues begin to express
themselves, as they get older.

When human beings come face to face with a life or death health concern, the first thing
they will do is ask why this is happening to them. People will look in all directions for a
solution and deny or discount that their personal eating habits, or other, are the root of the
problem. Then the doctor will tell them they have to change their habits and employ some
discipline where the problem is concerned. This is a major, almost unacceptable,
adjustment for most people if they are not accustomed to a discipline of this manner,
because it requires a life/habit change, which is a stretch for most.

Successful traders know this process very well, because they have taken hold of the
ability to discipline themselves accordingly. However, every successful trader has been
through the process of being disciplined by the market and has learned from it.

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Furthermore, you can be more disciplined in one area over another, which requires
recognition of the shortcoming followed by a successful effort to fill the void in order to
improve your psychological profile as a trader. Every successful trader has been slapped,
beaten, bruised and had their butt handed to them before becoming consistently profitable
as a result of learning how to be disciplined.

Personally, I experienced an excruciatingly unwelcome, but healthy, grind while working
to build my team from the lowest World Cup rank to the highest. As unpleasant as it was,
at times, I am thankful for the experiences, which I now draw upon in my fund
management, and the underlying psychological aspects that were developed in the
process of achievement in sport.


Denial = Debit

Many traders enter the market like a gunslinger trying to pick off every empty beer can in
sight. The majority of novice traders are undisciplined, without a clear plan and under the
emotional influence of greed while looking for a home run trade. When a novice trader
decides to enter the "game," they will be confronted with the realities of trading and
likely experience some loss of equity at onset. At this point, when their grandiose plans
of getting rich quick begins to appear faint; the novice trader has to make a decision. The
fact that they realize they have to make a decision is the first step. It's kind of like
admitting, "I am an alcoholic." The trader has to admit they have not fully equipped
themselves to participate in the market and take a step back to evaluate what needs to be
done to participate profitably. Alternatively, a trader will deny that they do not have the
necessary skills to trade profitably in the market. This will result in a continuation of
erratic, undisciplined placement of orders and consistent losses to compound the problem
they deny they have.

This denial behavior will result in the balance of your account offering a direct wire
transfer into the account of an experienced trader, while leaving a host of debit
transactions in the account summary.


Who Are You?

Many people take time away from the real world to go off to "find out who they are."
People believe that traveling the world, going to Whistler and becoming a ski bum, or
leaving their girl/boyfriends, spouses and families will help them on their journey to
discovering "who they are."

Personally, I believe if you ask God, He will be happy to show you who you really are. If
that does not interest you, then have a go at trading in the financial markets. If you are in
a hurry, intraday trading in the spot forex market with high leverage will even accelerate
the process and you will have to look no further.

Trading the financial markets will expose many truthful characteristics about you, for
example:


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Are you disciplined?
Do you deny truths about yourself?
Can you follow rules?
Are you submissive and admissive when you should be?
Do you easily become emotionally charged and irrational?
How do you react when you are emotionally charged?
Do you react without thinking?
Are you a planner?
Are you flexible, or rigid in your thinking?
Are you prideful or humble?
Are you objective, or opinionated?

Do you hold a bias, or can you consider facts in an unbiased manner?
Are you stubborn and have to be right all the time?
Are you greedy?
Do you act/do things beyond your means?
Are you willing to change?
And the list continues...

There is a saying:

"If you know the market and know yourself, you will consistently profit. If you know the
market but not yourself, your success will be random. If you do not know the market or
yourself, you will consistently lose money."

Success in the market is not just about the market; it is also about knowing how you
react to fear and greed.

A trader will continue to struggle if they are unwilling to identify true characteristics
about themselves, regardless of how undesirable they may seem. Further, the process of
knowing yourself as a trader and a person will never end, so do not delay.


Patience Pays

Our young friend, the gunslinger, goes hunting with his dad who has 30 years experience
carefully stalking his prey and hunting them down. As the two of them head out toward
the forest, gunslinger says to his dad; "Hey dad! Let's run into the forest and shoot us a
deer"!
Dad replies; "No, gunslinger; let's quietly walk into the forest, hide ourselves, and wait
for the deer to come out, once they are in perfect position, we shoot them all".

Patience is a key discipline of trading. It is ideal to wait for the market to move to a level
of high probability to enter a trade, but waiting for the market to arrive at your
prospective entry point can be no fun, unless you use "Chris Lori's Big Stones Entry
Method."



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The human mind views making money as an enjoyable experience, because it inspires
dreams of all the things one can have and do if they make a lot of money. For some
reason, trading is considered an easy, or convenient, way to make a lot of money, but
people do not resolve themselves to the fact that it is neither convenient, nor easy. In fact,
people may find it so inconvenient, combined with their greedy desires to make money;
they will frequently put on a trade without premise, because they are unwilling to wait for
the proper time to enter a trade. They want to run into the bush and shoot at the first deer,
regardless of what the probability is of hitting it.

I can assure you that this approach to trading will cause great pain, suffering and financial
loss. Although the wait may seem agonizing at the time, I would prefer to endure a
lengthy period of stalking a decisively good trade, rather than taking a shot in the dark
and have to suffer through the pain of a poor decision. An irrational shot in the dark trade
typically results from focusing on greed and the thrill of making money, rather than
possibility of loss and pain, but more importantly, a clearly planned trade.

The markets will often go through a long period of consolidation or indecisive price
action, which does not lend to good trading opportunities. If you do not have the ability to
recognize and admit to the reality that the conditions for trading are undesirable, you will
probably lose. If the price movements do not make sense to you, then stay out! On the
contrary, the ability to wait through market indecision can pay very well when one side of
the market begins to take control. You will end up with a twofold benefit; you will save
from losing money in the choppy conditions, and you may reap considerable benefit
when the market breaks out.

If you run into the market like a gunslinger and begin to shoot at anything that moves,
you will probably have run out of bullets when a prime target walks right in front of you.


Overtrade Underpaid

Over-trading relates to the fact that you are unwilling to wait.

At the end of each day/week/month, go through your trading account summary and
evaluate whether you have made good or bad decisions. The following are some signs
and considerations to help determine if an account is overtraded.

! Frequent trades relative to the time period
! Frequent trades on the same instrument taking the opposite direction on
subsequent trades
! Re-entering a position after taking profit on a completed trade, because you think
you got out too soon and the market will continue in your direction and you will
miss out on the rest of the move
! Take a look at the number of trades you have made in a day or week. If you have
a long list of losers, than you are probably overtrading and chasing the market.
! See "Chasing the Market Movements" above


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Remember, this is a numbers game. Most novice traders have the tendency to take small
profits and large losses for the reasons stated in this document. Therefore, the more trades
you make, the more you will lose.

www.chrislori.com

Use a Filter

I have a spectrum of resources in my overall trading regime that I use to acquaint myself
with the current foreign exchange trading environment. I access price quotes from
multiple sources, view charts, read news feeds, bank analysts reports, and listen to
financial news broadcasts.

I trade using a combination of fundamentals and technical analysis, but rely most heavily
on my view of the price patterns identified in the charts. On a side note, while my trading
is successful, I do not hold a holy grail, nor does anyone, so stop looking! Charts do not
lie. Although the additional resources are important to have a pulse on the market, be
very careful what you allow to influence your analysis and view of any opportunities to
trade.

Some months ago, countless authorities were predicting the GBP/USD to hit certain
milestone while the pair was experiencing a significant rally. I specifically recall
watching a string of currency strategists on Bloomberg unanimously calling for the
GBP/USD to continue to rally to a named figure.

Technically, it appeared on the charts that the currency had just completed a distinct
reversal pattern suggesting it may experience some pullback, at least for the time being.
Furthermore, there were some fundamental undertones that hinted of weakness. While all
other strategists were bullish GBP/USD, one lonely sole sat in a chair at the Bloomberg
studio and plainly said, "The Pound is done." Within 5 days, the GBP/USD dropped 800
pips. Be careful of allowing trading buddies or other "advisors" to influence your
decisions, because their view will have been established from their own unique
perceptions of time and price, which will be quite different from your own.

You will miss some very good trades listening to other's opinions. Trust in your own
methods, which you have tested, understand and have a clear knowledge of the rules that
guide your decisions. Independent Thinking and market knowledge is key to success
in any market!

Do not consider any other trader's commentary when you are already in a position with a
defined exit plan.

There is no other person in the world that knows your mind, emotion and will. How can a
separate mind possibly tell you how and when to enter and exit a trade if they have no
understanding of the foundation your trade is based on?

The market environment is constantly changing, so an opinion or insight one hour can
completely change course in the next hour. In this case, as the saying goes, "all bets are
off!"

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If you do not filter the opinions of other analysts and traders, you may end up very
confused and never make a trade, because every opinion will be pointing in different
directions for different reasons with different plans and timeframe. Listening to others
will keep you out of good trades, put you into bad trades and talk you out of a good
position you are in. It is likely that your trading results will improve when you become an
independent thinker and acquire sufficient market knowledge.

You must believe and trust in yourself and your own methods.


Dear God, Please Help Me!

I call this the foxhole trade. When an army on the battlefield is losing and the enemy
approaching, the soldier in the foxhole has nothing left to do but pray.

As you develop as a trader, there will likely come a day when you will cry out; "Dear
God, please help me!" That day will be when you have not enforced proper equity
management discipline and allowed a position to move to a point of considerable loss and
you don't know what to do. You cannot have the trade back. There is not a "do-over"
option. Your position is in a loss and there is nothing you can do, right now, to get the
money back. This scenario is likely to happen if you do not practice strict equity
management.

In such a case ego has likely placed itself between you and reality, and you and actual
market fact. If you are unwilling to submit to what is actually happening in the market,
because of your ego and your need to be right, and careless enough to dismiss good
equity management, then cut your losses and close your trading account, now!


Traders vs. Academics

Academics are an interesting breed. A true academic is commonly a person that is very
well researched and has acquired a plethora of knowledge in many areas. An academic
has the ability to understand and retain volumes of information and use that information
to engage in deep discussions on a large range of topics.

An academic who is introduced to trading will embark on unforeseen challenges. Sure, an
academic can understand the concepts and methods of trading with relative ease.
However, there is a characteristic required in trading that stands as a great obstacle before
them.

Allow me to classify a common characteristic you will find when trying to understand an
academic. On a large range of subjects, an academic often becomes accustomed to
engaging in conversation/discussion/arguments and has the distinguished ability to firmly
make their point to the other (often less knowledgeable) participant in the discussion.
Over time, the academic begins to consider themselves as superiors when dealing in
intellectual contests, and this may result in a prominent development of one's ego. Now,

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Document Outline

•  
• Equity Management
• ﾿
• Adding to Winning Positions
• The Probability Continuum
• A Fresh View
• Discipline
• Denial = Debit
• Patience Pays
• Overtrade Underpaid
• Use a Filter
• Dear God, Please Help Me!
• Traders vs. Academics
• The Candlestick Watcher
  • Training Fear
    • Fight For Every Dollar
      • Winners and Losers
        • Traders possess a plethora of methods to analyze the financial markets with a well-defined process to discern a winning trade opportunity. Traders will bend, mould and shape the use of their tools to help them assess high probability opportunities that will become profitable trades.
• The Cost of Education
  • Poem
    • Author Unknown

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