Book review: The Four Agreements – How it can help with your trading

If you already know about the book, The Four Agreements, by Don Miguel Ruiz, you are probably thinking…”This isn’t a book about trading!”  And you are right.

If you aren’t familiar, this book has been a New York Times Bestseller (for over 10 years), translated into 40 languages, sold over 7 million copies in just the United States.

But yes, it is certainly not a book on trading.  

But this book can change the way you trade forever.

The Four Agreements is a life changing (and perhaps trade changing) book that advocates freedom from beliefs and agreements that we have made with ourselves and that society in-general has made, which creates limitations and unhappiness in our lives.

These limiting beliefs and behaviors affect how you think and act every minute of every day.

With trading, unless you buy a trading robot and let it run on its own, you are the one making the decisions.

You are the one who decides what system to use, what patterns to trade, what indicators to use, where to set your stop losses, how much to risk on each trade, etc.  And during all of this your thoughts and emotions definitely dictate the outcome of your trades.

Obviously, to be a successful  trader, it requires an basic understanding of charting patterns, understanding some of the major indicators, understanding support, resistance, pivot points, etc, etc.

That is true, but…

While these things are important, that is not what it truly takes to become a successful trader.

Most traders understand these basic fundamentals and still lose money.  That’s a fact.  Why is that?

It is much more important to focus on what is going on between your ears.  Your thoughts.  Your emotions.  Your beliefs and opinions.  Most traders lose money because most traders (and people in general) don’t have control of your own thoughts.

Think about this: When you aren’t talking to anyone, your brain is constantly talking to you.  And so often, much of what we are thinking in our heads is not helpful or productive.  Actually a majority is negative.

You might find yourself saying things to yourself like:

  • I’m ugly.
  • That guy is so mean.  I hate him.
  • You have never have been good at public speaking.
  • Why didn’t you sell when you had a profit? Now you have a loss.  I suck at trading.
  • I’m stupid.

If you become “the observer” of your thoughts, you will notice that you do this all day long.  There is a constant dialogue in your mind.

What The Four Agreements shows, is that pretty much everyone in the world uses beliefs, words and thoughts that can create so much pain and unhappiness.

With this book, you can be one of the few that takes control of your thoughts to turn your life (and for the purposes of why you and are on on this site…your trading!).

What are the Four Agreements and how can they help your trading?

The First Agreement: Be Impeccable With Your Word

The author states that this is the most important agreement.  Everything keys off of how you use word…how you talk to yourself, others and how others talk to you.  If you use self-defeating and limiting words, you are only hurting yourself.

Words can hurt you if you let them in and accept them.

When your mind asks a limiting question, such as, “Why do I suck at trading?” – just the way that question is phrased forces your mind to come up with all of the many, many reasons why you suck at trading.  Your brain can will not have any problem coming up with reasons why you suck at trading.

Also, if others say negative things to you such as:

“Do you really think you can make it as a trader? Most traders fail.  What makes you so different?” 

Those words can only hurt you if you let them in.  Actually hurt the person who says those things, not you.  They are not being impeccable with their word.  Those negative words won’t affect you if you don’t let them in.

The word IMPECCABLE comes from the Latin word pecatus, which means “sin.”  The IM, in impeccable means “without.”  So without-sin.

So use words without sin.

Here is how I relate this to trading…

If you are a discretionary trader (not using a robot or using a system where you take every single signal to buy new and sell existing positions) you are constantly talking to yourself, telling yourself that this lchart looks good, this stock option looks bad.

In short, you quickly form an opinion in your mind about a trade.

With trading, we need to literally watch ourselves.  Watch what we are saying to ourselves before, during and after a trade.

If you really pay attention, and become “the observer” of your own thoughts, you will start to see how much you talk to yourself.  Some of it is good, but much of it is bad.

As the “observer” of your thoughts make sure that:

  • Before you take a trade, monitor what you are saying to yourself?
  • When you are in a trade, what are you saying to yourself?
  • After a trade, what are you saying to yourself?

Are these thoughts rational?  Are you trying to protect your ego?  Are you entering or exiting a trade for the right reasons, or are you letting your negative words influence you?

For example, if a trade went against you, are you blaming everyone but yourself?  Or are you blaming the overall market, the nasty and corrupt market maker who is deliberately walking the price away from where it “truly” should be going?

When trading, try to monitor whether your thoughts are rational and helpful.  Make sure they appear rational to you.

Make sure you aren’t spinning  stories to yourself of the huge profits you will make if you hold and likewise, don’t overreact and send yourself into a downward spiral of beating yourself up over a few losing trades.

The Second Agreement: Don’t Take Anything Personally

If you say something to yourself, or someone says something to you…don’t take it personally.

It doesn’t matter whether you perceive it to be positive or negative.

Here is an interesting quote to get you started thinking about this…

Personal importance, or taking things personally, is the maximum expression of selfishness because we make the assumption that everything is about “me.”  We think we are responsible for everything.  Me, me, me, always me! – p. 48

When someone tells you that you are great…don’t take it personally.  That means that they are happy with you when they tell you that.  Whatever they think or say about you is about them, not you.

When someone tells you that you suck or are fat, or ugly…don’t take it personally.  That person is dealing with their own feelings, beliefs and opinions when they tell you that.

The point is, if you were to take what someone says (and most importantly, what you say to yourself) in and accept it, you are taking their (or your) poison.

If you eat the garbage that others tell you and you tell yourself, it now becomes YOUR garbage.

Think of how important this second agreement is as it relates to trading.

  • Don’t take losses personally. The market doesn’t know about you.  It doesn’t care about you.  The market is ALWAYS right.  You had a loss on this one trade.  Move on, you have thousands of future trades in your future.
  • Don’t take winning trades personally. If you have a winning trade, you pat yourself on the back and tell yourself how great you are, you are making a mistake.   As soon as you think you have it figured out, that you can do no wrong, you are then making decisions with your ego, with emotion and you are bound to crash.  Move on from the loss and let it go, you have thousands of future trades in your future.

If you think about it, the market is the net summary of everyone else’s opinions.  If you get wrapped up in the highs and lows and the opinions of others you won’t make it for long as a trader.

Why does it seem that so many traders buy at the peak and sell at the bottom?  Because they are taking things personally, trading with the crowd, just like everyone else.

That is probably why trading can be so difficult.  When you let the good and bad emotions of others and yourself in, and take things personally, the decisions you make aren’t always going to be the right ones.  More often than not, they are going to be wrong (buying high and selling low).

Watch what you say to yourself.  Watch what others say to you.

The decision needs to be:

  • Is what is being said correct?
  • Do I believe it?
  • Do I let it in and consume it, or is it poison?

The Third Agreement: Don’t Make Assumptions

We have the tendency to make assumptions about everything.  The problem with making assumptions is that we believe they are the truth.  We could swear they are real.  We make assumptions about what others are doing or thinking – we take it personally – then we blame them and react by sending emotional poison with or word.  That is why whenever we make assumptions, we’re asking for problems.  We make an assumptions, we misunderstand, we take it personally, and we wind up creating a whole big drama for nothing. -pg. 63

In life and in trading, there is so much information coming at us, we have to cope by making assumptions.

When we make assumptions, we see what we want to see.  We hear whatever we want to hear.

It is very interesting how the human mind works.  We have the need to justify everything, to explain and understand everything, in order to feel safe.  We have millions of questions that need answers because there are so many things that the reasoning mind cannot explain.  It is not important if the answer is correct; just the answer itself makes us feel safe.  That is why we make assumptions. -pg. 67

With trading, we need to be careful we aren’t falling into making assumptions.  When you are drawing trendlines on a chart, are you “forcing” them in such a way to fit a pattern that you are assuming exists?

When we enter a trade, we are absolutely making an assumption about what we expect to happen, aren’t we?  But what we do need to do is determine whether what we are saw that made us decide to enter a trade is correct.  You need to make sure that you didn’t make assumptions that might actually be incorrect.

What are some trading assumptions? (from a thought-provoking article from the Wall Street Journal…)

  • “Stocks on average give you a return of about 10% a year.”
  • “Investing in the stock market lets you participate in the growth of the economy.”
  • “If you want to earn higher returns, you have to take more risk.”

[Hint – these assumptions aren’t actually true]

Agreement Number Four: Always Do Your Best

Let’s face it, becoming successful at trading can be one of the hardest things to accomplish.  And when you are “successful”, it’s not as if you’ve suddenly made it to a mountaintop where from that point onward, everything becomes easy.

Trading is something you have to work on every day.  Markets change.  Your moods change.  The circumstances within your life changes.

With trading and life, you need to make sure that with every effort you’ve tried to do your best.  Look in the mirror and tell yourself if you truly, did the best that you could that day.  If the answer is no…then fine.  Try to do your best tomorrow.

Just do your best – in any circumstance in your life.  It doesn’t matter if you are sick or tired, if you always do your best there is no way you can judge yourself.  And if you don’t judge yourself there is no way you are going to suffer from guilt, blame, and self-punishment.  By always doing your best, you will break a big spell that you have been under. -pg 77

Isn’t that a refreshing quote?  If you try your  best at trading, you can’t beat yourself up and feel down about trading “mistakes.”

Here’s something else to think about…

Doing your best at trading, doesn’t mean you should judge whether your account size is growing by leaps and bounds.

  • Focusing on the money should not be the goal.
  • The goal is to make sure you are making the best decisions possible, following your trading plan (using sell stops, using proper position sizing, keeping your emotions in check, etc.).
  • The goal is to study and learn, read books, learn from your mistakes, spend time by putting the effort in your trading.

For example, most people go to work every day just thinking of payday, and the money they will get from the work they are doing.  They can hardly wait for Friday or Saturday, whatever day they receive their money and can take time off.  They are working for the reward, and as a result they resist work. -pg 79

Don’t trade just for the money. Sure it is a nice side benefit.  If you focus on trying your best, rather than the money, the money will follow as a side-result.  Take pride in what you are doing every day, working to develop your trading skills, rather than your account size.  Take pride in taking action every day, taking steps to becoming a successful trader.

If you take action just for the sake of doing it, without expecting a reward, you will find that you enjoy every action you do.  Rewards will come, but you are not attached to the reward.  You can even get more than you would have imagined for yourself without expecting a reward.  If we like what we do, if we always do our best, then we are really enjoying life.  We are having fun, we don’t get bored, we don’t have frustrations. -pg 80

After reading The Four Agreements I found it gave me a fresh outlook on trading and life.

There is much to like about the ideas within this book.

First of all, it really is so simple!

Just four things to remember, right?

Just four things to focus on in whatever you do in life, whether it’s trading stocks, interacting with co-workers, your family, the interaction you have with the person handing you your coffee at Starbucks…everything.

Try this challenge:

See if you can get through the day by focusing on these four agreements. 

Believe me, it’s a bit harder than you think.

You will find that your mind is always churning away with thoughts that are not productive.

  •  You will find yourself gossiping about others (you are not being impeccable with your word).
  • You will find that you are depressed about how you are in the middle of a drawdown with every trade going against you (you are taking things personally).
  • You will find that because you didn’t ask a question, you made a mistake at work (you made an assumption).
  • You will find yourself looking in the mirror at the end of the day and when you ask yourself whether you did your best and you didn’t (always do your best).

The key is to observe yourself.  Observe your thoughts.  Observe your actions.  Take action and remember the Four Agreements.

This can only help your trading…and your life!


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