Title: The Disciplined Trader
Author: Mark Douglas
Type: #litnote #book #todevelop
- Book Summary
- You need a new thinking methodology
- The market is always right
- There is unlimited potential for profit and loss
- Prices are in perpetual motion with no defined beginning or ending
- The market is unstructured environment
- In the market, the reasons are irrelevent
- The three stages of becoming a successful trader
- Execution of trades
- Building a framework for understanding ourselves
- Understanding the nature of mental environment
- How memories, associations, and beliefs manage environmental informations
- Stop trading out of fear
- There is so much to learn
- The dynamics of goal achievment
- Managing mental energy
- Techniques for Effecting change
- An exercise to develop self-discipline
- The Psychology of price movement
- Trading Rules:
There are underlying psychological blocks to good trading and money management. A good trader engages in more losing trades than winning ones.
Assess your trades: Start slowly. Question every trade. What motivated it? How was the trade managed? Was it successful? Why? Did you lose? Why?
If you are reading this your are fortunate because you are taking the time now before you made a serious mistake. The traders who take time to reflect and practice will survive and possibly prosper.
The market doesn't know about you neither cares about you. It neither wants to take money away from you, it neither wants give you money. It is neutral. It is a free environment.
It offers a completer freedom of exprssion with unlimited possibilites and risks. Many of us have learned to function in a structured environment where our behaviour was controlled by someone or something.
But in the market, you are free to act per your will. But you if you want to succeed as a trader you have to make rules and abide by them. You have to have discipline. If you don't, in attempt to make money, you will lose it.
To know the market, you need to know yourself.
Only a handful of traders make money. 90% of traders are losers. The difference between traders who make money consistently approach trading from the perspective of a mental discipline. Without self-discipline and emotional control, you can't make money in the market consistently.
Don't expect to become a successful trader if you have limited trading capital or if you are trading with money you can't afford to lose.
When you can't afford to loose money, you structure your mental environment such that you try to avoid losses at all costs. And in your desperate attempts to do so, you actually create them. You have to be willing to accept loss without guilt, frustration, and shame.'
You need a new thinking methodology
When you are stepping into trading as a beginner, you are moving into a completetly different environment than what you were trained for by the society.
Following are the thinking methodology that can be changed:
- Refusing to define a loss.
- Not liquidating a losing trade, even after you have acknowledged the trade's potential is greatly diminished.
- Getting locked into a specific opinion or belief about market direction. From a psychological perspective this is equivalent to trying to control the market with your expectation of what it will do: "I'm right, the market is wrong."
- Focusing on price and the monetary value of a trade, instead of the potential for the market to move based on its behavior and structure.
- Revenge-trading as if you were trying get back at the market for what it took away from you.
- Not reversing your position even when you clearly sense a change in market direction.
- Not following the rules of the trading system.
- Planning for a move or feeling one building, but then finding yourself immobilized to hit the bid or offer, and therefore denying yourself the opportunity to profit.
- Not acting on your instincts or intuition.
- Establishing a consistent pattern of trading success over a period of time, and then giving your winnings back to the market in one or two trades and starting the cycle over again.
Techniques and skills you need to acquire:
- Learning the dynamics of goal achievement so you can stay positively focused on what you want—not what you fear.
- Learning how to recognize the skills you need to progress as a trader and then stay focused on the development of those skills, instead of the money, which is merely a by-product of your skills.
- Learning how to adapt yourself to respond to fundamental changes in market conditions more readily.
- Identifying the amount of risk you are comfortable with— your "risk comfort level"—and then learn how to expand it in a way that is consistent with your ability to maintain an objective perspective of market activity.
- Learning how to execute your trades immediately upon your perception of an opportunity.
- Learning how to let the market tell you how much is enough, instead of assessing the potential from your personal value system of how much is enough.
- Learning how to structure your beliefs to control your perception of market movement.
- Learning how to achieve and maintain a state of objectivity.
- Learning how to recognize "true" intuitive information and then learning how to act on it consistently
Trading system is different than this. Trading system defines opportunitites and offer suggestion.
Believing trading is easy is a psychological trap that entices almost all traders. Trading looks simple enough, but most people will find it to be the most difficult endeavor they ever undertake.
Most people believe the market should or will do as they think. But the markets are way too big for one person to control. If you can't move the prices, you have to learn to go with the flow and constantly adapt to outer conditions.
"The market behaves as it does because of the interactions of hundreds of thousands of people. And sinceall these individuals are members of the human race, regardless of national origin, religious conviction, or what have you, they will all have one thing in common—the psychological structure of the human mind." This psychological structure behaves in certain highly predictable ways whenever it encounters stress or split-second decisions. In the market, the fear of losing one's fortune is every bit as intense as the fear of losing one's life from an attack by a wild animal.
Your success as a trader will be determined by a number of psychological factors that often have little or nothing to do with the markets.
It doesn't matter how good of a technical analyst you are until you master yourself, you can't make money in the market constantly.
There are three main reasons why most traders end up being losing money in the market:
- Lack of skills
- Limiting beliefs
- Lack of self-discipline
The market is always right
The current price is a reflection of the beliefs of all traders who choose to act as a force on prices by putting on a trade. In market, its not about being right or wrong, its about making money.
You may believe something to be of the highest quality, but if the market doesn't share the same belief as you, it doesn't matter how valuable or good your information is, the prices are going to move in the direction of strongest force.
The market is never wrong it what it does, it just is. Every movement in the market creates an opportunity to make money and making money is what trading is all about.
There is unlimited potential for profit and loss
Many people compare trading to gambling. But unlike gambling, there is unlimited potential for profit and loss.
For example: if you are in a losing trade, you have to do nothing to increase your potential loss. The market can go against your position indefinitely.
Prices are in perpetual motion with no defined beginning or ending
The market is always in motion. They never stop, only pause.
Entering a trade will involve all your beliefs about opportunity in relationship to risk, missing out, needing a sure thing, and not being wrong. Exiting a trade will involve all your beliefs about loss, greed, failure, and control.
Among many other factors, to make consistent money, you have to leran to let the market tell you what it may do next and how much is enough. If you trade with fear or greed, you can never sync with the market.
The market is unstructured environment
There are no rigid rules to follow in the market, you are free to express yourself in any way. It is unstructured and unlimited. Therefore it is essential to make rules to guide your behaviour.
A typical trader will do anything to avoid creating rules for himself to avoid responsibility for his trading. That's why 90% of the traders lose money. Because they try to avoid responsibility for the results of their action.
They follow herd mentality. They look for direction, assuming someone else must know something. If he makes money, he thinks he must have done something right, but he loses money, he can easily blame the market and other people.
In an unstructured environment with unlimited possibilites, the less structure you create for yourself, the more you easily you will be swept away by the stronger forces.
If you can't define your own behaviour and actions, you can't learn how to repeat your wins and prevent your losses. If you don't know what you did to win last time, obviously you won't know what you have to do next time to avoid losing next time.
When you start taking responsibility and attain some degree of self-control over yourself, you can then see how other traders are not in control of what happens to them.
Creating a structure and being accountable for yourself is a first step on the road to lasting success.
In the market, the reasons are irrelevent
The reasons traders give for their actions are irrelevent. Most traders don't know why they did what they did. But when the market reacts, they look for reasons as to why it happened.
All traders have the same goal to win i.e. to make money. The current price of something is always a reflection of what someone is willing to pay what someone is willing to sell in thatn moment.
If you want to learn to predict the price movement, you don't need to pay attention to reasons.
The three stages of becoming a successful trader
In the market environment, you have to make rules to the game, and then have the discipline to abide by these rules even when the market tempts you into believing you don't need to follwo your rules this time.
Execution of trades
Your ability to execute trades is a function of the amount of fear you generate or the lack of it. Many traders see opportunities but can't execute their trades properly. Because they have not yet released themselves from the memories of past painful trading experiences.
The markets can't do anything that you don't allow.
Building a framework for understanding ourselves
You can't manipulate the market but you can change yourself in a way that suits your needs.
Understanding the nature of mental environment
The mental environment is where our experiences of the outside world from into a complex belief structure about the nature of the physical environment and our relationship with it.
How memories, associations, and beliefs manage environmental informations
Our brains are wired in such a way to link similar forms of environmental information together automatically.
Learning to make distictions
A child can't make distinction between sppon and pencil until someone teaches him. You opening a computer will perceive differently from a technician opening it.
What we perceive is a function of distinctions that we have learned to make.
Most traders don't plan their traders. They act out of fear or out of greed. They don't want to take responsibility. So they are susceptible to acting out of emotions.
Being good at something means you can make distinction. The more you learn about the market, the more you can make distinction about the market.
The environment isn't creating the meaning as in a first-time encounter; the meaning is already inside of us, and in essence we create the experience by the way in which we perceive it, through our memories, distinctions, and associations.
The more distinctions we can make between the various components of the environment and how they act as a force on one another, the more information becomes available to us throught our perception.
The more we allow ourselves to learn, the bettter we become at distinction
This is the reason why a group of people can all be in the smae location, be expose to same environmental information, and they all will describe the event in a different way.
Stop trading out of fear
Fear narrows our focus of attention. Learning to ride is an perfect example of this. When you are learning to ride, all the environmental information is available and perceiveable but you don't notice it.
You reject the information becasue your attention is directed to the fear of falling. Once you become comfortable with learning to ride, you open yourself to perceive all other information.
The purpose of fear is to help us avoid situations or things in the environment that we have learned as threatning.
Fearing in the market causes you to block any information that might be threatning. It is a contradicting force that stifles our learning process.
You have to learn to trade without fear. You need to completel trust yourself and accept whatever information that market is offering about itself.
Just the same way you can't cross the street if you don't trust yourself. The market can create as much havoac as much as getting hit by car. To be successful trader, you need to believe that you can win without the absense of fear. It helps to make better assessment of the conditions and perceive more opportunities.
Release yourself from anything that causes you to narrow focus and block information from your awareness.
There is so much to learn
If you think you know everything, you will black what you haven't learned yet. But acknowledging something that there is something that you need to learn is not as easy as it sounds.
The more you allow yourself to learn the better you become at making assessments about the probabilities that exists in some future moment.
The know-it-all attitude is very dangerous in the market. It is easy to recognize in others but hard to assess in yourself.
The reason why you can't be in sync witht the market is because either you haven't learned to make appropriate distinctions or because the information is being blocked by your current set of beliefs.
The less we block the more we learn. The more we learn, the easier it is to anticipate how the market will respond under any given set of conditions.
Learning new something that is contradictary to our beliefs means we have to change and we are wired to resist change. We seem to refuse to do it.
The dynamics of goal achievment
You have to stop trying to change what is infront of you to suit the makeup your internal environment. What you actually need to do is to change the way you think about what is infront of you.
You can learn as much as you can about market and trading but what if you can't execute your trades properly the way you planned.
No matter how accurate or developed your trading strategy may be, the act of trading will still violate the beliefs that you have made throughout your life. You have to first change these beliefs if you want to act as a successful trader.
Managing mental energy
When you want to stay angry, you will refuse to listen to anything that might defures your anger. He doesn't want to listen to rational reasons. The reason why he does show is because he knows the information has the potential to change the way he feels about it.
Trading doesn't have to be painful and devoid of fun. We make it that way for ourselves because of our inflexibility and inabilit to adapt.
Techniques for Effecting change
You can use your thoughts to create a new identity if you want to. Each choice you make at a conscious level will start a neurological change in your brain. Your beliefs can't be change but they can be de-energized.
An exercise to develop self-discipline
Self-discipline is not a personality trait that you are born with. It is a conscious control of your actions. Deciding upon the smallest step and taking conscious action on it will develop self-discipline over time.
The Psychology of price movement
If you understand the psychological forces inherent within traders action, you can easily determine what they believe about the future by just observing what they do.
There's no getting-rich-quick scheme in trading. Falling in those traps will lead you only to a great deal of anxiety and frustration.
As an aspiring successful trader, it is more important to know that you will always follow the tules thanmkaing money. Whatever money you make in the market, you will eventually lose it, if you don't follow the rules.
The rules will change as your understanding and insights evolve.
Don't have FOMO because there is not anything to miss in the market. Market is always in motion and as long as price keeps changing, there will be another opportunity
- Predefine what a loss is in every potential trade. Confront the possibility of being wrong. If you don't you will generate fear which is what you are trying to avoid.
- Execute your losing trades immediately upon perception that they exist:
- Don't ues multiple systems: Become an expert at one market behaviour. More is not better. It only creates confusion and overload that will ultimately lead to losses.
- Learn to execute your trades flawlessly: It is easier to identify something in the market than it is to act upon it. Traders most of the time will generate so much fear that they won't be able to execute trades properly. Nothing is more frustrating that knowing what market is going to do next and doing nothing about it.
- Learn to monitor yourself: You need to start paying attention to what you are thinking abou and what market information you are focused on. Keep a diary on how you feel, how you trade and react on different situations.
If you want to succeed as a trader you need to make a strong commitment to trade your system exactly according to your rules.
You can make money with any trading system but only if you learn how to execute trades properly.
You have to constantly remind yourself that what you are learning is trading discipline and the skill of flawless execution. This is more important than making money right now. Because money will come eventually if you follow your system.