Stocks & Commodities V. 4:5 (169-171): Left brain/right brain, reality and trading the markets by R.E.

McMaster, Jr.

Left brain/right brain, reality and trading the

markets
by R.E. McMaster, Jr.

T he starting point for success in trading the markets profitably is to perceive market reality accurately.
While this may sound obvious enough, most traders enter the marketplace with preconceptions, biases
and incorrect perceptions of market reality. They soon learn, however, that the market is a ruthless
taskmaster. You either line up with the market's reality, or you lose money.
The market's consciousness, it seems, justifies itself in its harshness, as it points out to traders that there
are only three realities possible in the marketplace. Markets can either move up, move down, or drift
sideways. This simple recognition or, perhaps, the not so simple recognition of which of these three
realities is active at any particular time is all that is necessary to trade successfully. All of our analyses of
the markets are supposedly for the purpose of bringing our focus on the market reality so we can trade
profitably.
Increasingly, as technicians dominate the trading marketplace, we find a predominance of left
brain-oriented traders. Our brain is divided into two hemispheres, the left hemisphere (left brain) and the
right hemisphere (right brain). On the surface, this revelation appears to be a modern scientific discovery.
But in truth, the 17th century French theologian, philosopher, and scientist, Blaise Pascal, noted that men
are either mathematics, accounting and science-oriented or are geared toward art, theology, literature,
music, etc. This is effectively left brain and right brain activity respectively. The left brain is the logical
side of our minds, and the right brain is the creative, artistic side. Modern scientific research has
confirmed Pascal's observations.
The key to true success in the marketplace is to use both the left brain and the right brain in consonance.
This is the success principle of synergy, the concept that the whole is greater than the sum of its parts.
One plus one does not equal two; one plus one equals three. Indeed, there is a sheath, a bundle of fibers
called the corpus callosum, which bridges the area between the left brain and the right brain. This sheath

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Stocks & Commodities V. 4:5 (169-171): Left brain/right brain, reality and trading the markets by R.E. McMaster, Jr.

physically expands and strengthens as a person uses both sides of his brain.
Technicians are primarily left brain-oriented. They are logical, analytical, and make widespread use of
computers. But trading is an art, not a science, and art is right brain activity. True enough, an investor can
hypothetically trade using only the left brain. There are such animals as pure technicians. But pure
technicians are like mechanics. When something gets out of sync that is unexplainable or unexpected, out
of routine, a mechanic will become flustered. In a like manner, a purely technical trader is often lost when
the market doesn't go his preconceived way.
Question: Where do the spiritual values of discipline and patience so necessary for successful trading
come from? The right brain? What happens when we have a "feel" for the market? From what source is
derived all that work which is filtered down into the subconscious and then one day springs forth by way
of an intuitive trade, a trade that an investor surely knows is a money maker?
Our subconscious is a storehouse of information. It is like a gangling youth, filled with raw knowledge
and power, but undisciplined. It needs direction. We literally have to tell our subconscious what we
desire from it. We literally have to talk to our mind, reflect, pray about it, sleep on it. When we do so,
creativity springs forth from the subconscious into the right brain as a result of careful reflection. The
sequence is important. Hard work, left brain activity, results in information being built up in the
computer banks of the subconscious mind. This in turn filters up into the right brain (if we let it in) and
springs forth by way of creativity, which then cycles back and integrates with the left brain.

You either line up with the market's reality, or you lose money.
All of us fall short when it comes to blocking the use of our analytical techniques, technical skills, and
trading approaches to the marketplace. We are our own worst enemies. Put differently, in the marketplace
we all have to kill our own snakes. We all have our own methods of blocking reality and not acting on it.
Dr. Michael S. Gazzaniga, professor of psychology in neurology at Cornell University Medical Center,
writing in the November, 1985 Psychology Today declared, "I think, the subconscious notion of linear,
unified conscious experience is dead wrong.
"What I am suggesting is that the normal human is called upon to interpret real actions and to construct a
theory as to why they have occurred. That would be a trivial matter if everything we did was the product
of verbal conscious action; in that case the source of behavior is known before the action occurs. I argue
that the normal person does not possess a unitary conscious mechanism where the conscious system is
privy to the sources of all his or her actions. I think that the normal brain is organized into modules and
that most of these modules are capable of actions, moods, and responses. All except one work in
nonverbal ways such that their method of expression is solely through overt behavior or more covert
emotional reactions."
In other words, by nature, none of us have it together. And the struggle to be successful, particularly
trading in such a difficult arena as the markets, is that we must have it together if we are to trade
successfully. This is unfortunately a harsh truth which is too often lost today in the world of technical
analysis and computer systems where the pursuit of the illusion of the technical Holy Grail persists.

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Stocks & Commodities V. 4:5 (169-171): Left brain/right brain, reality and trading the markets by R.E. McMaster, Jr.

The key to true success in the marketplace is to use both the left
brain and the right brain in consonance.
Dr. Gazzaniga went on to write, "The two hemispheres operate as two separate mental systems, each with
its own capacity to learn, remember, feel emotion, and behave. The left hemisphere almost always
controls language, while the right hemisphere controls certain nonverbal processes, such as pattern
discrimination."
Pattern discrimination? Isn't that exactly what bar chart analysis is all about? Doesn't bar chart analysis
involve the recognition of triangles, flags, pennants, head and shoulders formations, etc? Isn't trading an
art rather than a science? So, if we are to have it all together in the marketplace, we must have it all
together personally, which means our left brain and right brain must be in harmony. Perhaps this is the
real reason why so many traders lose in the marketplace. Few traders have it together personally.
Isn't this key to success exactly the same in all businesses? Studies of chief executive officers of major
corporations reveal that their primary decision making methodology is intuitive. They gather the
information, reflect on it, let it filter down into their subconscious, and then let it come back up by way of
an intuitive decision in their right brain, which they can then verify by left brain thinking. Chief executive
officers, then, by the very nature of their positions (a reflection of their mentality and thinking processes)
have it all together. They perceive reality accurately, act on it, and as a result their corporations are
profitable. As Napoleon Hill wrote, "Think and grow rich."
I firmly believe that a man can be the greatest technician in the world, but if he doesn't have it all together
personally, he'll eventually fail in the marketplace. And great technicians, great mathematical geniuses in
the marketplace, have been notorious for stumbling in such areas as greed and fear, plunging, poor money
management, and in not using protective stops.
How do we focus and act on market reality? There are at least four important keys: 1) humility, 2)
patience, 3) discipline, and 4) courage.
Humility requires us to listen to the marketplace, to lose ourselves, to be empathetic, to focus on reality.
In this sense then, the meek, the humble, do inherit the earth. Strength comes out of weakness. Should
our losses hurt us? No. Losses are simply the cost of doing business. They are learning experiences. If our
losses hurt us emotionally, then by definition we are subjective. And subjectivity never focuses accurately
on reality.
We need the patience to wait for a setup. A successful setup in the market place will involve harmony
between the left brain technical and fundamental analysis, with right brain psychological analysis,
integrated by timing techniques bridging the gap across the corpus callosum, as it were. So in effect, the
nature of a successful setup in the marketplace is identical in pattern and sequence to the way the human
mind should work.
We need discipline to overcome fear and greed. Fear and greed are emotional aspects of the right brain.
We must discipline them rationally (left brain) through our spiritual growth (subconscious).
We need two types of courage in the marketplace: the courage to act on a trade when we have a setup,
and the courage to stay out of the market, to miss a move, when a setup does not exist or when we're too
late to enter the market.

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Stocks & Commodities V. 4:5 (169-171): Left brain/right brain, reality and trading the markets by R.E. McMaster, Jr.

When we apply these four values—humility, patience, discipline, and courage—to our trading activity,
then our hard work will pay off. Recall that there are only two times to trade: 1) when the markets are
moving, when we have a setup (left brain activity), and 2) when we are ready to trade (right brain based).
This reflects the fact that there are only two types of capital—finance capital and psychological capital.
We must preserve both. If we use up either, we will fail in the marketplace. A trader who has no money
cannot trade. A trader who is under psychological pressure or stress, physically ill, and/or mentally ill
will lose money as well. He will not be able to focus clearly on reality. Insanity, by definition, is being
out of touch with reality.
Money (left brain) is an emotional (right brain) subject for nearly everyone. Why? Because money is so
closely tied to our very physical survival today. We need money to buy food, clothing, and shelter.
Therefore, money pressures can bring on stress like little else can. And when you add leverage to money
in the fast moving futures market, well there you have it, an avalanche of potential stress.
Too many traders make the mistake of attempting to isolate, and in effect kill, their right brain activity
and build up a huge callous like an ice water-veined Las Vegas poker player. We don't want part of
ourselves to die inside in order to survive in the markets. We just want to make better use of our right
brain.
The key is to put it to work for us. We must use the creativity inherent in our right brain, which so much
of the public school system has squashed out. Trading is an art, not a science. We should strive to
develop a feel for the marketplace. We must learn the joy of trading. And we must always remember that,
paradoxically, a feel for the market only comes through hard work (left brain) and getting it together
personally (right brain). We have to build a base of information and then let it drift down into our
subconscious so that our right brain can work and act on it when it comes back up. It thus takes humility,
patience, discipline, and courage to put our thoughts to work.
I find it helpful to arise early in the day, before the family gets up, before the markets open, and give
myself a spiritual, mental, psychological, and physical checkup. If I'm out of sync, I prefer not to trade, or
I trade very lightly. Again there are only two times when we should trade—when the markets are set up
for us, and when we're personally fine-tuned, ready to trade. Then and only then can we increase the
probability of perceiving and acting on market reality successfully.
I have learned that if I have done all my homework, and I have had time to clearly focus and reflect on
the marketplace, and there are no outside distractions, then I can literally fly through the charts and/or
watch the tape and a trade will simply hit me. It will come welling up from my subconscious into my
right brain's creative realm. These are my best trades, and after they hit, I can list 35 or 40 reasons (left
brain) why this particular trade made sense.
How does all of this work? It comes from 15 years of experience, from looking at and analyzing
thousands of charts. It comes from being relaxed, comfortable, unstressed, and unpressured. (This means
we must have peace at home, at work, and with our broker.) It wells forth from years of confidence built
by successful trading. It has reached the point that if I have to work too hard mentally to make a trade, if I
have to rationalize it and justify it (left brain), it nearly always is a difficult trade, a break even trade, or a
loss.
We hear a lot preached to traders today about the importance of money management and stop losses.
Money management and stop loss techniques are heralded as necessary as hedges against disaster. But
really, with good money management and careful protective stop losses, we are really hedging against our

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own limitations, our imperfect knowledge about all factors affecting price action in the marketplace, and
against our personal limitations such as greed. But what are money management and protective stop loss
techniques, really? They are hedges against our being out of touch with realityÑ market reality or
personal reality.
When I boil it all down, there are only four categories of variables I survey when I analyze markets
(following, of course, an overall market view). These four variables are: 1) fundamentals, 2) technicals,
3) psychological factors, and 4) timing indicators. Fundamental and technical analyses are left brain
activities. Psychological analysis is a right brain activity, and timing indicators pull these left brain and
right brain variables together.
However, before I delve into the specifics of these four areas in my analysis of the marketplace, I first
want to develop an overall feel for the economic and market environment in which I am working. I want
to know if the economic environment of the marketplace is inflationary or disinflationary. Where are we
in the economic cycle? Where are futures generally in their own cycles? Is the overall market bullish or
bearish? Is there a key market, a Trojan horse, that is strongly influencing the price action in all other
markets? What is its character? Who are the other players involved? I want to feel comfortable that I
have an overall grasp of the trading environment in which I am operating.
The six basic categories of fundamentals that I follow in analyzing the marketplace are: weather, warfare,
world trade, inflation, interest rates, and oil. If we get a heavy freeze in Florida in January, then that
specific weather event will usually result in a bull market in orange juice. If we experience a drought in
the Midwest in the summer, we should expect a bull market in corn and soybeans. If war breaks out in
the Middle East, we should expect a bull market in commodities. Wars are always inflationary because
they have to be financed. Inflation, as well as the use of commodities in war, send the futures prices
higher. The level of world trade has a critical impact on futures prices. World trade involves buying and
selling commodities. If the Third World is in a slump, for example, those nations can buy less U.S.
foodstuffs. Therefore, U.S. farm exports decline, which pressures grain futures prices.
Inflation speaks of monetary policy. Inflation is bullish for futures, just as disinflation is bearish. The
level of interest rates as it impacts the economy and the velocity of money (which, in turn, influences
inflation) has a critical impact on futures prices. Indeed, we slipped from inflation to disinflation in 1980
when real interest rates went from being below the rate of inflation to being above the rate of inflation.
And oil is the energy that drives the world's economic system.
In fact, in terms of the land and labor economic equation, the energy systems with regard to these
fundamentals on the land side of the equation are oil and weather. The energy systems on the labor side
of the economic equation are interest rates (money), inflation, world trade and warfare.
With regard to technical analytical techniques, a good technician is an artist. He literally has a technical
toolbox. There is an art involved in choosing which tool to use in a particular market at a particular time.
Often technical indicators that are out of favor and not the latest fad have the most validity. This contrary
opinion approach, for example, applies presently to moving averages, one of the oldest and most reliable
technical analytical tools known. And yet, moving averages are seldom followed today.
A good technical trading program will be tailor-made to match the left brain activity of a trader with his
psychological make-up (right brain). In other words, we can't trade successfully using a technical method
that is not "us." We have to be in harmony with ourselves.

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Stocks & Commodities V. 4:5 (169-171): Left brain/right brain, reality and trading the markets by R.E. McMaster, Jr.

We can't trade successfully using a technical method that is not

'us.'
In terms of psychological indicators, market sentiment as published by The Bullish Consensus is
invaluable. Judging the overbought (better than 80 percent) or oversold (less than 20 percent) nature of
the marketplace in conjunction with open interest and volumes studied usually provides invaluable clues
as to market trend, reversals, or continuations.
There are other measures of market sentiment. The headlines in the financial press or on magazine covers
often inform us when a trend reversal is about to occur. If we think about it, when everyone has bought
all they can buy in a market (better than 80 percent), then there is no one left to buy, and a market falls of
its own weight. So, too, when the financial press, in sheep-like fashion, finally begins to focus on an
investment, information about that investment is widely known, which substantially lowers the apparent
risk and truly heightens the real risk, thereby setting up that investment for a drop.
Timing indicators bring it all together and tell us when to implement the integration of our fundamental,
technical, and psychological work.
Linear and cyclical squaring of price and time work, seasonal analysis (wheat bottoming in August),
conventional cycle work, high to low and low to high swing counts, overbalance and under balance of
price and time work, the squaring of ranges, the squaring of highs and lows—all these timing indicators
aid us in knowing when to implement the trades generated by our fundamental, technical, and
psychological analyses.
The entire kit and caboodle is what I call an integrated setup, where everything is working together. This
is an art. It involves the left brain and right brain coming together to better understand, focus on, and act
upon the reality of the marketplace. As far as the market is concerned, we are all totally unimportant. But
what is important is our response to the market's reality. And paradoxically, one of the most important
realities is that perceptions move markets.
This article was abstracted from the November 14, 1985 issue of The Reaper, Mr. McMaster's newsletter
(800-528-0559)

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