Today's Quote: “The weakness of the enemy makes our strength.” American Indian Proverb, Cherokee.

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

“12 Trading Laws of Success” –

LAW #2: KNOW THY ENEMY

While knowing yourself is the first order of the day for every trader, one must also be aware of who the enemy is. As we've mentioned on several occasions, trading is war. But with whom? As traders, our adversaries are mainly other traders and market players. Let's think about this for a minute. Each time you buy a stock, someone else is on the other side of the trade, selling it to you. In other words, someone else is getting rid of the very same stock you are buying, and using you to do it. And that someone, mind you, thinks he or she is smarter and more astute than you are. Do you know who that someone is? It's your enemy. Most market players miss this point. They somehow operate on the notion that they are buying from the market in general. They have a mental picture of some vague place or room where stockpiles of the issue they want are just sitting around for them to take. Wrong! Whenever you buy, you are buying the stock from someone. Conversely, whenever you sell a stock, someone else is buying it from you. The question is, do you know that person? Do you understand that person's thinking, motives, beliefs, feelings, and current emotions? Because if you don't, how do you know he or she is not the one who's right?

It is important to realize that when you are trading stocks on the Nasdaq, you are typically transacting with a market maker, the term used for members of the NASD who buy and sell stock for clients as well as their own accounts. Some of the major market makers are Goldman Sachs (GSCO), Merrill Lynch (MLCO), First Boston (FBCO), etc. Despite their respectable names, they're typically not your friends when transacting on the NASDAQ. These are the very players who are typically taking the other side of your trade. You're buying, while they're selling it to you. And vice-versa. Are they just being generous by giving you the stock you want? Heck no. They think that they're right, and you're wrong. They are betting against you, which makes them what? That's right, your enemy. But let us never forget that the biggest enemy of all is not some distant trader or market maker, it is us. We are our biggest enemy. We are the biggest impediment to our progress and success, and we are the only ones who possess the power to conquer ourselves. All the psychological and emotional demons that must be conquered are within us. They belong to us, and if we ever hope to become successful as a trader, this greatest of all enemies must be defeated, transformed, and reborn. But before we can conquer ourselves, we must first get to know ourselves. As Shakespeare told us several centuries ago, "the fault lies not in the stars but in ourselves." Here are a few ways to get to know thy enemy:

1. Never place a trade without first asking, "who's on the other side of my trade?" This question will keep you aware that the enemy always lies on the other side of your trade. Part of trading successfully is first getting to know the enemies on the other side of your trades, then learning how to outsmart them.

2. Never look beyond yourself when laying blame. If you are losing as a trader, you are the ultimate enemy behind those losses.

While other traders and market makers serve as enemies they are really the minor ones. Traders who have conquered themselves (the emotional and psychological demons) have conquered all the rest. Trading mastering is the by product of self-mastery.