A friend started out as a floor clerk and struggled for eight years before his trading took off. Now he is a world-famous money manager, and many of those who knew him when he was a beginner like to reminisce about how he clerked on one of the smaller exchanges in New York, taught classes, and struggled to make ends meet. An old trader

said to me, "I knew him then, and I thought he would succeed. He had the right combination of being very careful and having this optimism you need to get up in the morning and believe you're going to make money trading the markets like George Soros or Jesse Livermore."

To succeed in trading, you need both confidence and caution. Having only one is dangerous. If you're confident but not cautious, you'll be arrogant, and that's a deadly trait for traders. If, on the other hand, you are cautious but have no confidence, you will not be able to pull the trigger.

You need confidence to say, "This stock is going up, my indicators say it will continue to rise, I am going to get long and ride this trend." At the same time, you need to be humble enough to put on trades whose size will not endanger your account. You have to accept the uncertainty of the markets and be ready to take a small loss without quibbling.

When you feel a surge of confidence in a new trade, it is hard to think of the downside risk, but if you don't do it, you cannot protect yourself. When the market goes against you and hits your predefined exit level, you have to humbly exit, no matter how confident you feel about that trade. You need both confidence and humility. The ability to be aware of two conflicting feelings at the same time is one of the hallmarks of emotional maturity.

I have a client in New York who came to several seminars and bought books and videos from my firm but kept struggling for years as a trader. He'd get ahead, fall behind, get ahead again, then lose money and get a job to make ends meet. He often seemed on the verge of success, but kept bouncing around breakeven. Then one day, I ran into him at a conference and saw a changed man. He was doing supremely well, managing about $80 million, with terrific grades from the rating agencies. A few weeks later I stopped by his office.

He had continued using the same trading system, developed years ago and derived from Triple Screen. He had made only one change. Instead of second-guessing the system, he came to see himself as a clerk. He imagined he had a boss who went to Tahiti and left him to trade the system. The boss will return and give him a bonus, depending not on profits, but on how faithfully he followed the system. My client stopped trying to be a hot-shot trader and moved into a position of humility and discipline. That's when he rose to sweeping success.

Second-guessing a system is a terrible error that creates a huge level of uncertainty. Tom Basso, a prominent money manager, says that it is hard enough to figure out what the market is going to do; if you do not know what you're going to do, the game is lost.

Choose your system, set up your money management rules, test everything. Run the system each night, write down its signals, and read those messages to your broker in the morning. Do not improvise when quotes flash in front of your face because they hypnotize you and prompt you to put on impulsive trades.

What if the markets change and your system starts missing good moves or chewing up equity? Well, you should have tested it over a long enough stretch of data to feel confident about its long-term per formance. Your money management rules will help you ride out a rough stretch. Be very conservative with an existing system. If you're feeling restless, design a new system and trade it in a different account-leave what works alone.

Trading demands discipline, but, paradoxically, attracts impulsive people. Trading requires practice, humility, and perseverance. Success ful traders are strong but humble people, open to new ideas. Beginners like to brag, experts like to listen.

Ten Points

When a beginner puts on a trade too big for his account, and it starts to swing, it floods him with adrenaline. An upswing gives him enough money to dream about moving to easy street. Feeling elated, he misses the signals of a top and gets caught in a downside reversal. A down swing puts him into such a state of fear that he misses the signals of a bottom and sells out right near the lows. Beginners pay more attention to their emotions than to the reality of the markets.

Once you begin to develop discipline, you start seeing much more clearly what happens outside of your little account and in the great big making money trading market out there. When you see the market freeze in a flat trading range or explode in a vertical rally, you know what the masses of traders feel, because you have been there. When a market goes flat, and amateurs lose interest, you know that a breakout is coming. You were once that amateur, you overlooked breakouts because you got bored and stopped watching the markets. Now, when the market goes flat, you recognize the way you used to be, and are ready to act.

The market surges to a new high, pauses for a day, and goes vertical. The newspapers, radio, and TV are screaming about the new bull market. If you are a disciplined trader, you remember how, years ago, you bought within a few ticks of the top. This time is different. You reach for the phone and start taking profits on positions acquired when the market looked boring and flat. Understanding yourself and the path you have traveled allows you to read the market and beat your competitors.

How do you know that you are becoming a disciplined trader?

You keep accurate records. You maintain the minimum of four records-a trader's spreadsheet, an equity curve, a trader's diary, and an action plan. You scrupulously keep your records up to date and study them to learn from your experiences.

Your equity curve shows a steady uptrend with shallow drawdowns. The performance standard for professional money managers is 25% annual gain on the account, with no drawdowns of more than 10% from peak equity. If you can match or exceed that, you are far ahead of the game.

You make your own investors trading stock market plans. Even when you get a terrificsounding tip from a friend, you do not get swept up in the excitement. You either ignore it or put it through your own decision-making screens.

You do not chat about your trading. You may discuss a technical point or a closed trade with a trusted friend, but you never ask for advice on an open trade. You do not disclose your positions so as not to expose yourself to unwanted advice or tie up your ego in the process.

You learn all you can about the market you're trading. You have a good grasp of the main technical, fundamental, intermarket, and polit ical factors that may impact your trading stock or a future.

You grade yourself on the adherence to your written plan. Imagine you are an employee, and the boss has left on an extended vacation, leaving you to manage his money by following his plan. When he re turns he will reward or punish you based on how faithfully you fol lowed his plan.

You allot a certain amount of time to the markets each day. You download data each day, put it through your battery of tests and screens, and write down the results and plans for tomorrow. You allo cate time in your daily schedule to make trading a regular activity and not something you do catch as catch can.

You monitor selected markets daily, regardless of their activity. You avoid the typical beginners' error of monitoring markets only when they are active and "interesting." You know that strong moves spring from periods of relative inactivity.

You learn and are open to new ideas, but are skeptical of claims. You read market books and magazines, attend conferences, participate in online forums, but you do not accept any ideas without testing them on your own data.

You follow your money management rules as if your life depended on them-because your financial life does. If you have good money management, most decent trading systems will make you money in the long run.