Phantom has indicated it is a combination of knowledge and behavior modification, which he learned over his trading career, that are 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 liked the approach of a professional on behavior modification but felt it was important to present the unique situations that 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.

Art Simpson (ALS): Phantom, you and I know that we are on 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 (POP): Yes, thank 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 changing your behavior to proper behavior for successful trading?

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 so we can 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 judgment as to what is correct for the situation.

Most situations are pretty obvious as to what a proper reaction should be. Most traders assume 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 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, because 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 dog's 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 the 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 react to an event, especially unexpected events, which a trader seldom is expecting? I think that, along with my two rules of trading, 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 (in the Futures Talk forum) 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 1 incorporates behavior modification by expressing the truth that trading is 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 behavior. 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 is to remove 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 as your body chemistry changes doesn't teach you anything about the proper behavior. 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 1 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. Because 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 2 with the behavior modification incorporated within the rule but let us leave something for the readers to interpret for themselves.

ALS: Okay, let us leave Rule 2 open to interpretation and reasoning for better understanding of one's own expertness, as you put it.

It's really strange how we start with this cheat sheet of an outline and never get to most of the points, and the ones we do, they seem 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 readers decide for themselves.

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 those waiting to get on the elevator to see what the behavior would be. We had two criteria: They would try to get on the elevator immediately or, second, 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?

Okay, we watched behavior and next we would tell the group of would-be traders they would have to stand back because the elevator would be packed with people getting off. They became so good 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 being financially fit to trade and understanding the disclosure documents that explain the risks but nothing occurring to the trading public flags them to learn about their behavior in situations.

You see, behavior modification is your responsibility and no one else's. You cannot dictate behavior to anyone. All I can do is tell you I feel it is not possible to succeed in trading at all 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 that address the proper observation of trading and the proper reaction of trading.

ALS: I have 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 some day. In fact, I have a diary in 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 with another good story and example.

In a basketball camp about 30 students were 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 free throw shooting.

This went on for three days of practice. On the fourth day all were given a chance to shoot 100 free throws. The outside group actually did better, even though they had not actually been able to shoot prior to the fourth day.

This was astonishing to the main coach, and he asked the outside group coach why his group did so well. He remarked, "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 am 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 cannot 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 behavior modification.

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 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 they can move more quickly than a big trader, and that is oftentimes an advantage provided 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, the point you want traders to remember?

POP: There are several but the one that is often missed or misunderstood is this: 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 had great admiration for over the years humbled me by pointing to others as the reason for success. I cannot say that about myself and that bothers me.

I cannot 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. It'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.