Now let’s assume that you heeded my advice in Law #1. You’ve gone and mastered the domains of knowledge that you need to know.
You’ve got options strategies and the ability to read tape in your brain. Now what?
It’s time to get into the game, and that means you have to engage with various systems, technologies, and sources of information.
We’ll collectively call these your Environment.
Law #2 demands that you master your relationship to this Environment.
We’ll start with engaging with the market itself. I’m not just talking about clicking buttons on your trading platform.
You have to mentally connect with the market— this unfathomably large, man-made, constantly evolving ecosystem. From now on, about 50% of your mental capacity will be devoted to figuring out what the hell this thing is doing and why it’s doing it, so it’s important that you understand what it really is: a product of perception.
That market is shaped by perception. Let me say it again. Perception.
(I know I said in Law #1 that it’s a product of supply and demand. That’s true. What do you think causes changes in that supply and demand? Changes in perception.)
The degree to which perception governs the market environment is a hard concept for a lot of people to wrap their minds around. It’s difficult for us to let go of the way we think things should be (rational, predictable) and accept the way things are (unpredictable, irrational).
Humans aren’t logical, and the market is just the sum of millions of decisions made by humans (including the algorithms they program).
The “Herd mentality” that you saw me discuss in the video above is just one manifestation of this fact.
The impact of a random news story illustrates this point better than any. Take Tesla for example. Elon Musk goes on Joe Rogan’s podcast and smokes a joint. Not a single thing has changed about the company’s financials. But the perception of the man running it has, and that’s what determines price.
The stock tanked 6%.
Now, here’s where things get tricky.
A lot of us say to ourselves, “Okay, it’s all about having my finger on the pulse. I have to figure out what people are thinking. If I’m always scanning what people are saying and doing, then I’ll have a good gauge on what they’re perceiving.”
So we start compiling different sources of information. Twitter. A few chatrooms. A few data feeds and alert services. News, 24/7. Might as well throw in the Uber driver and our drunk uncle proudly proclaiming they know when the next recession is going to hit.
All of these are new elements in your External Environment… and your External Environment just got a lot noisier.
Once you’re immersed in that much noise, it becomes damn-near impossible to separate what you’re thinking from what you’re hearing. Sooner or later, you start getting pulled into the same thinking as the masses. And that is not where you want to be.
I learned that my brain was easily influenced by the information I exposed it to, and that meant I needed to be very particular about what I fed it.
Mastering my External Environment became a constant process of cultivating my sources of information.
All those indicators that MAYBE, someday could give me the slightest edge? Gone.
Guy on Twitter who calls for all time highs once a day? Gone.
Forex Discord group full of a bunch of people I don’t know and can’t trust? Gone.
I started paying attention to my physical environment as well. Some traders think they need 12 screens, a Bloomberg terminal, a catheter, and a coconut water IV. The truth is, everyone’s setup is personal, and the more you customize it for your needs, the closer you are to mastering your External Environment.
Maybe you’re like Ron Friedman—one of the best traders I know and teacher in the Master Course—and you use a different laptop for each of your three accounts. Maybe you know you concentrate better with noise-canceling headphones on.
My point is, you have to understand the nature of every piece of your External Environment, the value it adds to your trading, and the impact it has on your thinking.
Otherwise, you’ll end up swimming in a sea of noise, and your own perception won’t be worth a damn thing.