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Michael Martin has been tradingprofessionally for more than 20 years.For the past 12 years, he has been teachingand “paying it forward” by interviewing hismentors and making the interviews andpodcasts available for free at his blog,http://martinkronicle.com.“Some people trade and either don’t or can’t teach; some people teach and havenever traded; Michael Martin can teach extremely well and is an experienced trader.This rare combo is a necessity to those who want to succeed in the markets.Read and learn!”—Victor Sperandeo, Founder, Alpha Financial Technologies, LLC“The Inner Voice of Trading provides insights that may help both discretionaryand systematic traders adhere to their extensively researched and tested tradingprograms and be better insulated from their occasional emotional (fear, greed,pride, and so on) temptations to deviate into uncharted waters.”Martin started his trading career at a wire houseand has owned his own company since 1997.He has served as Associate Editor at TraderMonthly; as blogger at Huffington Post, TheMises Institute, and Business Insider; and asinstructor or speaker at UCLA Extension, andNYSSA, a member society of the CFA Institute.He has also been published in Barron’s.—John Del Vecchio, Portfolio Manager, AdvisorShares Active Bear ETFMartin currently offers a mentoring programand online courses with NYSSA for studentsseeking personalized guidance on the tradingtechniques best suited for them and masterclasses for intermediate-to-advanced traders.“Too many new and developing traders move from strategy to strategy in the hopeof improving their under performance. In The Inner Voice of Trading, Michael Martinhelps us understand how we first must work on ourselves before we can becomethe trader we want to be. Find a place in your trading library for this latestgift to the trading community.”—Bill Dunn, DUNN Capital Management“Michael Martin provides a toolbox to fortify the most important aspect ofsuccessful trading: the six inches between your ears. With fresh insightsfrom many of the market’s greatest traders, The Inner Voice of Tradingwill put you on the path to improving your profits and losses.”—Mike Bellafiore, Partner, SMB Capital,and Author of One Good TradeJacket design: Alan ClementsCover image: AND Inc. / shutterstock.comAuthor photo: Michael Hongwww.ftpress.com An imprint of PearsonInvestinghttp://martinkronicle.comISBN-13: com An imprint of Pearson9780132 6162565 2 6 9 9The Inner Voice of T r a d i n g—Ed Seykotama r t in“In The Inner Voice of Trading, Michael Martin recounts his own quest to becomea successful trader, illuminating his journey with engaging trading episodes.Join Martin at his trading desk as he provides important insights into the artand science of balancing thoughts and feelings—and catching the big one.”Mi c h a e lm a r t i nF o r e w o r d b y E d S e y k o taTheInner VoiceofTrading 26.99 U.S. / 27.99 CanadaTrading is 20% intellectual and 80% psychological.Success begins with the ancient Greek adage:know thyself. Rote, mechanical trading modelsset you up for failure. To succeed, you mustharmonize your trading systems with youremotions. By doing so, you can achieve theinner calm and confidence that translatesdirectly into better decisions—and higher profits.This book will help you find your inner voice asa trader, so you can act on what your analysissystems tell you and crisply execute winningstrategies without hesitation.Michael Martin examines your most commontrading decisions from an emotional standpoint,helping you “feel the feelings” driving youractions—feelings that often have nothing todo with money. Through compelling interviews,you’ll discover how legendary traders, suchas Ed Seykota and Michael Marcus, integratereason and emotion to make better tradesevery day—and how you can do it, too. T raders are humans firstHow your trades reflect the human propensityto pursue pleasure and avoid pain C hoosing strategies you can sustainover timeHow to find trading approaches you cantolerate—and consistently execute L etting go: You don’t need to be rightall the timeStop seeking validation from your trades—that’s not what they’re forE l i m i n at e t h e N o i s e , a n d P r o f i tf r o m t h e S t r at e g i e s T h atA r e Ri g h t f o r Y o u R educing your losses through self-disciplineand surrenderHow emotionally aware traders improveperformance by keeping their losses small
Praise forThe Inner Voice of Trading“Michael Martin has written an insightful book for both the expert and novice.His writing style is enjoyable, and the content is unforgettable.”—Anthony Scaramucci, Founder, SkyBridge Capital,and Author of Goodbye Gordon Gekko“I live by Michael Martin’s words. The first chapter of my investing book wastitled ‘Turn Off the TV.’ Now, with the social web, finding strategy mentors andlearning faster are all possible. Trading is a skill you can learn, and Martin’sbook is a great read for any trader.”—Howard Lindzon, Founder, StockTwits“In The Inner Voice of Trading, Michael Martin recounts his own quest tobecome a successful trader, illuminating his journey with engaging tradingepisodes. Join Martin at his trading desk as he provides important insights intothe art and science of balancing thoughts and feelings—and catching the bigone.”—Ed Seykota“Some people trade and either don’t or can’t teach; some people teach and havenever traded; Michael Martin can teach extremely well and is an experiencedtrader. This rare combo is a necessity to those who want to succeed in themarkets. Read and learn!”—Victor Sperandeo, Founder, Alpha Financial Technologies, LLC“The Inner Voice of Trading provides insights that may help both discretionaryand systematic traders adhere to their extensively researched and tested tradingprograms and be better insulated from their occasional emotional (fear, greed,pride, and so on) temptations to deviate into uncharted waters.”—Bill Dunn, DUNN Capital Management“Michael Martin provides a toolbox to fortify the most important aspect ofsuccessful trading: the six inches between your ears. With fresh insights frommany of the market’s greatest traders, The Inner Voice of Trading will put youon the path to improving your profits and losses.”—John Del Vecchio, Portfolio Manager, AdvisorShares Active Bear ETF“Too many new and developing traders move from strategy to strategy in thehope of improving their under performance. In The Inner Voice of Trading,Michael Martin helps us understand how we first must work on ourselves beforewe can become the trader we want to be. Find a place in your trading library forthis latest gift to the trading community.”—Mike Bellafiore, Partner, SMB Capital, and Author of One Good Trade
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The Inner Voiceof Trading
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The Inner Voiceof TradingEliminate the Noise,and Profit from the StrategiesThat Are Right for YouMichael Martin
Vice President, Publisher: Tim MooreAssociate Publisher and Director of Marketing: Amy NeidlingerExecutive Editor: Jim BoydDevelopment Editor: Russ HallSenior Marketing Manager: Julie PhiferAssistant Marketing Manager: Megan GraueCover Designer: Alan ClementsManaging Editor: Kristy HartProject Editors: Jess DeGabriele and Jovana San Nicolas-ShirleyCopy Editor: Krista Hansing Editorial Services, Inc.Proofreader: Water Crest Publishing, Inc.Senior Indexer: Cheryl LenserSenior Compositor: Gloria SchurickManufacturing Buyer: Dan Uhrig 2012 by Michael MartinPublishing as FT PressUpper Saddle River, New Jersey 07458This book is sold with the understanding that neither the author nor the publisher isengaged in rendering legal, accounting, or other professional services or advice by publishing this book. Each individual situation is unique. Thus, if legal or financial advice orother expert assistance is required in a specific situation, the services of a competent professional should be sought to ensure that the situation has been evaluated carefully andappropriately. The author and the publisher disclaim any liability, loss, or risk resultingdirectly or indirectly, from the use or application of any of the contents of this book.FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate andGovernment Sales, 1-800-382-3419, corpsales@pearsontechgroup.com. For sales outsidethe U.S., please contact International Sales at international@pearson.com.Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners.Inner Voice of Trading is a trademark of Gotham Commodity Corporation.All rights reserved. No part of this book may be reproduced, in any form or by anymeans, without permission in writing from the publisher.Printed in the United States of AmericaFirst Printing September 2011ISBN-10: 0-13-261625-4ISBN-13: onPearsonPearsonPearsonEducation LTD.Education Australia PTY, Limited.Education Singapore, Pte. Ltd.Education North Asia, Ltd.Education Canada, Ltd.Educatión de Mexico, S.A. de C.V.Education—JapanEducation Malaysia, Pte. Ltd.Library of Congress-in-Publication Data:Martin, Michael R. (Michael Robert), 1966The inner voice of trading : eliminate the noise, and profit from the system and strategies that are right for you / Michael R. Martin.p. cm.ISBN-13: 978-0-13-261625-6 (hardcover : alk. paper)ISBN-10: 0-13-261625-4 (hardcover : alk. paper)1. Floor traders (Finance)—United States—Psychology. 2. Futures market—UnitedStates—Psychological aspects. 3. Financial futures—United States—Psychological aspects.4. Investments—Psychological aspects. I. Title.HG4621.M38 2011332.64’5—dc232011023680
Dedicated to my parents,Robert J. Martin andAnne M. Martin
Table of ContentsChapter 1: Introduction .1Chapter 2: Surrender .17Chapter 3: My Tuition.35Chapter 4: Two Traders’ Paths .53Chapter 5: Conventional Wisdom/MarketTiming .71Chapter 6: Emotional Blind Spots .91Chapter 7: You Are the Black Box .105Chapter 8: Relative Value Trades .119Chapter 9: The Abundance of Losses .133Chapter 10: Becoming an EmotionalSpecialist .143Chapter 11: Listen to Your Inner Voice.155Endnotes .167Index .175
ForewordMichael Martin’s book, The Inner Voice of Trading, providesimportant insights about the art and science of balancingthoughts and feelings in trading.Traders tell wonderful stories about making phenomenalprofits by being in the zone, at one with the markets, living inthe moment of now. From there, trading seems effortless. Thetrick, then, is to stay in the now. If you get impatient orgreedy or fearful, you can break the spell and wind up backin the past and future. Fighting your feelings can be anathemato staying in the moment, hence to trading profitably.In The Inner Voice of Trading, Martin extends the literature on the art and science of staying clear and maintainingmental and emotional balance. He uses examples from hisown trading and others’ to illustrate his points—particularlythe importance of timely surrender.Traders know the essential principles of trading: ride yourwinners; cut your losers; manage your risk; use stops; stick toyour system and ignore the news. These principles work wellin trading and in life in general—when you follow them consistently. Many people, however, find that following rules isnot always a whole lot of fun.Living a principle-centric life takes character—lots of it.Buying highs, selling lows, and collecting seemingly endlessstrings of whipsaws may bring up unbearably uncomfortablefeelings. Martin deals directly with the important charactersuccess connection and illustrates the topic by wrapping it ina series of engaging trading episodes.One of the pleasures of mentoring traders through myTrading Tribe is that I get to meet, interact with, and shareexperiences with bright and willing people—and to watch
them grow and prosper. And that brings me to one Mr.Michael Martin who, many moons ago, joins my Tribe.At first I see an east-coast, street-wise hyper-mensch, across between a crusty old cabbie and a stand-up comic. Asthe group evolves, I witness his emergence as a brother whocomes to feel deeply and laugh and wince and cry and grievealong with the rest of us as we all struggle with the personalcalculus of our careers and intimate relationships.Over the course of our association I have the privilege ofwitnessing a softening of Michael—as he becomes moreporous, stronger, and more available to share his gifts withothers. Reading between the lines of Inner Voice, I feel thatMichael is still very much a man of the path and that he isnow coming into his own as a generous teacher, mentor, andwriter. I see him as a big inspiration for the new crop.It is my honor to accept Michael Martin’s invitation topen this forward to his book. I congratulate him for writingit—and you for reading it.Ed SeykotaAustin, Texas
AcknowledgmentsMichael Marcus, Ed Seykota, Jorgen Christiansson, AaronBrown, Peter Borish, Bill Dunn, Erich Schiffmann, TomBasso, BKS Iyengar, Linda Raschke, Victor Sperandeo, MikeBellafiore, Steve Spencer, Helmut Weymar, Larry Shover, JohnDel Vecchio, Willow Bay, Maria Russo, Richard Sandor,Carole Brookins.Thank YousMichael J. Rice, Eleanor Johnson, Harris Sperling, Tony “FatTony” Tardino, Pia Varma, Rich Blake, JJF, Manish Jain, ScottKaminski, Yasmine Ryckebusch, Erin FitzPatrick, Liz, Gabrielleand Mark LaMura, Stacy-Marie Ishmael, Maryanne Martin,Luc Eamon
Trading elImInate the noIse, and ProfIt from the strategIes that are rIght for You mIchael martIn foreword bY ed seYkota t he Inner v o I ce of Trading mart I n “In The Inner Voice of Trading, Michael Martin recounts his own quest to become a successful trader, illuminating his journey with engaging trading episodes. Join Martin at his trading desk as he provides important insights into the .
