Chapter 13 – Behavior Modification
over his trading career that, was the important elements in correct trading. We will go into some of
the observed behavior modification insights Phantom has seen and used over the years.
Phantom felt he liked the approach of a professional on behavior modification but that it was
important to present the unique situations which trading presents to traders. Phantom is not a
professional in behavior modification and wanted to make sure that was known before we began
any conversation on the subject.
ALS – Phantom, you and I know that we have some thin ice when we talk about behavior
modification. You are only qualified to give examples of what you have seen and used over your
career in and out of the Pits!
Phantom of the Pits – Yes, thanks you for being alert on that point. Your point is important, as my
methods are unscientific to say the least.
ALS – Where do you start in order to change your behavior to proper behavior for successful
POP – It goes back to History class. Not everyone liked History but it was a way of understanding
prior behavior and events in order to plan for the future. It is the same in trading. We must
understand our present behavior in order to judge what we need to do to make changes in our
trading style if any at all.
A person will make the same mistake again and again if there is not a properly learned reaction to a
particular consequence of an event. We must know the right and wrong reaction before we can
make any judgement as to what is correct for the situation.
Most situations are pretty obvious as to what a proper reaction should be. Most traders assume that
their reaction is proper in the consequence of what the market has done. Some traders are better at
knowing the correct behavior than others. The correct behavior is a learned process and not one that
is always obvious.
Animals are easier to study than humans and I think that perhaps is a good reason for studying
animal behavior. Take a simple action-reaction event for any animal and see what results come
about. Let us say that your family dog has never known what hot meant. In the old days when
stoves burned coal and cobs, my Grandfather would pick up the stove lid to put corn shucks and
cobs in the stove to get the fire to flame a bit.
This would ignite the other coals better. He would lay the stove lid down on a fire-protected
material on the floor-stove board. Well since the dog liked warmth, it would come over to lie near
the stove. When the dog lay on the stove lid, he let out a yip you could hear on the trading floor.
The dog learned behavior modification by instinct. The dog would never lie on a stove lid again.
Now was this correct behavior modification?
ALS – I’ve heard this one before. The dog never would lie on a cold stove lid either. I suppose it
saved the dog from getting burnt again. In the dogs case I would say it was proper learned behavior.
It is the same when your brother threw the hot horseshoe on the ground. He would never pick up
another horseshoe again.
POP – Yes, but you see traders learn that way too. They take a big loss and they will never take that
signal to position again or perhaps just won’t take it next time. Now that is not proper learned
behavior. It is learned behavior by instinct due to a consequence of an event. This is just one of the
examples I mean for you to understand when I say behavior modification is one of the most
important aspects in becoming successful in trading.
How can a trader expect to be successful unless the trader knows the proper behavior to a reaction
of an event, especially unexpected events, which a trader seldom is expecting. I think that along
with my two rules of trading that a trader must have a good inventory of what behavior they need to
survive and succeed in trading. Something that has been missed on my rules up to this point by
traders is that the two rules incorporate behavior modification within the rules.
ALS – Explain how behavior modification is in your first rule!
POP – Look at what the rule states!
IN A LOSING GAME SUCH AS TRADING . . . WE SHALL START AGAINST THE
MAJORITY AND ASSUME – WE ARE WRONG UNTIL PROVEN CORRECT! POSITIONS
ESTABLISHED MUST BE REDUCED AND REMOVED UNTIL OR UNLESS THE MARKET
PROVES THE POSITION CORRECT. (We do not assume we are correct until proven wrong. We
allow the market to verify correct positions not incorrect positions.)
Rule one incorporates behavior modification by expressing the truth of trading as a losing game and
that we start against the majority and assume we are wrong until proven correct.
ALS – Sort of like the IRS, huh?
POP – (Smiles) I think their behavior modification is going to be changed but that is another
example. I am not sure we even want this example.
By stating that trading is a losing game, we think differently each time we position. By also stating
we shall start against the majority and assume we are wrong until proven correct, we also change
our thinking. We should not trade under false assumptions for if we think most everyone wins in
trading, our behavior is going to be based on winning protection rather than losing protection.
In other words our focus will be on when to take our gains without thought on taking a loss much
less a quick loss. We need that correct assumption to be able to correctly incorporate the proper
behavior when we have positioned. With the proper assumption we can now include the proper
We are going to concentrate on protecting what we have rather than what we expect to make first.
That is behavior modification. This above all else is just as important in trading as any plan for
entry and exit.
Next we know from the rule the proper behavior for protecting our positions by removing them
unless the market proves them correct. This is the proper behavior instead of letting the market tell
you that you are losing money.
When the market tells you that you’re losing money, your reaction to get out is not by instinct
because nothing really physical happens to you except that maybe you get a sick feeling in your
stomach. That sick feeling or your body chemistry changes don’t teach you anything about the
It is a fact that you will become braver when your body chemistry changes as that is a protection,
which is natural. This is not the behavior you want to learn. Actually you never want to get to the
point of a market move making you sick. It is destructive and you won’t react properly without
learned behavior modification.
Rule one is designed to protect you from ever being in a situation of distress. In distress you will
make the wrong decision in trading most of the time. There are always exceptions but not at first.
Since all traders must start somewhere, why not learn properly as soon as possible.
ALS – I can see some Psychology majors challenging you on your thoughts.
POP – Yes, they are the experts on psychology and not on trading. I am not expert on either subject.
I am only an expert on myself. That is what I trade with today, expertness of oneself!
I could give you the reasoning behind rule two with the behavior modification incorporated within
rule two but let us leave something for the readers to interpret for themselves.
ALS – Ok, let us leave rule two open to interpretation and reasoning for better understanding of
ones own expertness as you put it.
It’s really strange how we start with this cheat sheet of an outline and we never get to most of the
points and the ones we do, they seems out of order. It goes to show that we really don’t have a
followed plan in such a widely interpretable field such as trading.
I don’t think you are stepping on anyone’s feet, as you were concerned about earlier in your efforts.
How about discussing some examples of observed behavior and behavior modification?
POP – There are so many possibilities and every trader could come up with better ones than I am
going to use here. I will start with the elevator behavior data.
It was my desire to learn how most people thought in certain situations. It was important to compare
ordinary people and then traders. I wanted to see if they thought differently and reacted differently
to situations such as getting on an elevator.
Pretty simple but yet complex enough that we had enough variables to group data. It was not
scientific but it did give me good insight. Rather than give the exact results, I’ll just give the
particulars and let anyone decide for him or herself.
We took an observation at a building away from the trading district at an elevator on the top floor of
the elevator ride. We watched as those waiting to get on the elevator to see what the behavior would
be. We had two criteria.
The first criteria were that they would try to get on the elevator immediately and the second criteria
were that they would stand back. This gave us a better-computed programming input by using
binary input of one of two states.
The second group we observed was in the trading exchange at the top elevator floor. We assumed
most were traders but did not know without trading jackets, which were off floor traders. It was
important to find out about would-be traders also so we included a third group, which we took to
the top floor to observe without their knowing our reason for the tour at that level.
The results were rather surprising. Most of the people would approach the elevator as soon as it
arrived on the top floor. They had no thought that there could be anyone getting off the elevator.
Some would even get on the elevator before all the people on the elevator got off.
This was strange but most who got on the elevator before those on the elevator got off apparently
did not recognize the situation of the elevator being on the top floor and that all who were on the
elevator would get off on the top floor. Others blocked the door when the elevator arrived.
A small minority of people would stand back and anticipate the elevator would not go down before
all were off loaded, new people back on and the door closed. They would wait to get in last and they
were the first to get off on the way down. I won’t tell you which group did the best because you will
have to decide for yourself how you would react.
This little experiment was important because trading is not so different from the elevator. Markets
go up and down and trends take off, stall and fall. And then they do nothing for a period of time.
Behavior modification for the elevator riders didn’t occur to most of the people. It is the same with
trading. Who would teach you this?
Ok we watched behavior and next we would tell the group of would-be traders that they would have
to stand back because the elevator would be packed with people getting off. They became so good
that they didn’t even care to anticipate which elevator would be up first. Now we had our behavior
modification but was it correct behavior modification for the would-be traders? In this case it
worked for them because it is what they were told.
Again, not to repeat myself but it is necessary to say it is the same in trading. Traders mostly change
their behavior by what they are told. Is this the proper behavior modification for traders? The
answer of course is no, not at all.
A trader must learn from research what the proper behavior modification is in all possible situations.
This takes lots of inner soul searching and market data to understand what behavior takes them to
the threshold of successful behavior in trading.
You are most likely seeing my reason for stating that knowledge and behavior modification are
required for successful trading. It never is an addressed issue in trading when a trader opens an
account as to what their behavior might be.
They are qualified as to financially fit to trade, understanding the disclosure documents which
explain the risks but never anything occurring to the trading public that flags them to learn about
their behavior in situations.
You see behavior modification is your responsibility and no one else’s. You can not dictate behavior
to anyone. All I can do is to tell you that I feel it is not possible at all to succeed in trading without
some sort of plan for proper behavior modification. I could never have survived without it.
Behavior modification can take many directions for traders and can be defined differently by
experts. All successful plans have some sort of behavior modification built into the plan. I feel the
best plans are those, which address the proper observation of trading, and the proper reaction of
ALS – I’ve other examples we have jotted on our sheet here. It might be interesting to give the
readers ideas for their own research.
POP – I don’t really think we could give them ideas greater than their own. But I understand they
might be interested in some of mine. If we get to a few that is fine. We have really made the point
of behavior modification to the readers I feel. That is my concern. We can give them a total book on
it but that is not going to help them search their own souls for their trading.
ALS – I hear what you are trying to say. Are there any people in the field of behavior modification
who you regard as impressive?
POP – Yes, there is this one genius whom I have always admired and have felt is the only one who I
can honestly say has every point in successful trading covered. If I were to tell you who it is, it
would disappoint a lot of deserving people who are pretty close to being exact. Especially when
exact is almost impossible to maintain for long.
Changes mean changing behavior in trading constantly. I don’t know everyone’s trading
characteristics and besides whom am I to judge. I am but an observer and only an expert at
observing my own trading.
I really wish I could give you his name but it isn’t fair. I shall tell that person someday. In fact I
have a diary which I include the accomplishments of great people and that person is certainly in it. I
am not even in it. I don’t think I will ever be.
ALS – I think the readers are interested in your view on how they can imitate or change their
behavior to be a successful trader.
POP – You are going to get me into trouble with someone. I’ll drive around the outside of the track
here. I have another good story and example. In a basketball camp there were about 30 students
trying to improve their shooting.
Half were taken outside and told to sit down and practice shooting free throws. The other half
stayed in the gym to practice real basket free throw shooting. This went on for three days of practice.
On the fourth day all were given one hundred shots at free throws. The outside group actually did
better even though they had not actually been able to shoot prior.
This was astonishing to the main coach and he asked the outside group coach why his group did so
well. His remarks were “Most of my boys were shooting at the basket and not above it so I called
out their name each day and told them to shoot the ball higher above the rim instead of at the basket.
My boys improved on the last day as they never missed a single shot in their own minds.”
Now I not going to paint a picture of the head coach’s face but you can imagine his mouth hanging
open and shaking his head. It didn’t make sense that this could even occur to the head coach. It is
the same with trading. You can not rule out any possibility but must have proper behavior to
address any situation once it happens. This takes forethought.
You see what the outside basketball coach did was to incorporate his knowledge of why most free
throws are missed. It is usually because the ball never clears the rim getting to the basket. He told
his students to shoot the ball higher above the rim. Even though they had not shot a single basket,
they were able to improve their behavior through knowledge. They go together, knowledge and
I want to give you a well-known statement and it is effective in trading too. You have to think it
before you can act it!
I am a believer in the small trader. We just need to point out that they must shoot higher above the
rim to have better odds. Behavior modification learned from knowledge is what they must research
in their trading careers if they expect to succeed.
It shall happen in the future that the small trader will learn that they can move quicker than a big
trader and that is often times an advantage provide they know how to use it. To make it happen they
have to know the rules. Not my rules specifically but their own interpretation of what is required.
ALS – What is the most important point of this chapter on behavior modification, which you want
traders to remember?
POP – There are several but the one that is often missed or misunderstood is that TRADING IS A
LOSING GAME AND THE BEST LOSER IS THE BIG WINNER!
ALS – Thanks again for your insight Phantom. I know it’s meant as a gift and you are not selling
anything or trying to show up the experts. Surely you are expecting some kind of reward here?
POP – Every day I am surprised by a reward. Today an editor whom I consider the greatest editor of
all times and whom I have great admiration for over the years humbled me by pointing to others as
the reason for success. I can not say that about myself and that bothers me.
I can not point to others yet in my life and say that. It is not because I am selfish. It is because to be
a successful trader we must walk alone in our days and do it alone. I feel it’s very sad until you
actually can point to others as your reason for success. It says a lot about a person who can expand
his or her horizons by including others. Trading isn’t that type of business. Is’s almost a solo flight at
all times. It’s you and the markets.
I shall look forward to my day that I too can say, “any credit for whatever I did belongs to a lot of
people.” When that day comes I can walk taller and I can reach the heavens! Until that day I can
only pass along my insights of trading.
” Today an editor whom I consider the greatest editor of all times and whom I have great
admiration for over the years humbled me by pointing to others as the reason for success. “—POP