Title: Trading in the Zone
Author: Mark Douglas
Type: #litnote #book #todevelop
- Mental Analysis
- Accepting the risk
- The Dangers of Trading
- Unwillingness to create rules
- Failure to take responsibility
- Addiction to Random rewards
- External versus Internal control
- Trading is a zero-sum game
- Taking Responsibility
- Accepting the risk
- Studying the market
- Fundamental Characteristics of Market
- The Market can express itself in almost infinite combination of ways
- Anything can happen
- Every moment is unique
- Thinking Like a Trader
- The Role of Self-discipline
- Principles of consistency
- Trading is a probability game
- Final Note
Experts and professionals in other fields enter trading with a view of making money. But the majority of these people who are extremely successful in trading fail miserably as traders. They go on to learn all the trading strategies and even purchase books and courses eventually losing money again.
This book was written with the following objectives in mind
- To prove to the trader that better market analysis is not the solution to lack of success in trading
- To convince the trader that his attitude and ‘state of mind’ determines his results
- To provide specific beliefs and attitudes that are necessary to build a winners mindset
This book is not about showing you a trading system that works but showing you how to think if you want to be a successful trader. Your primary goal has to be to learn to think like a consistently successful trader.
The consistently successful trader that you want to become doesn’t exist yet. You must create a new version of yourself, just as a sculptor creates a likeness of a model.
Mark Douglas in his book, trading in the zone says, an individual needs to acquire a trader’s mindset if he/ she wants to succeed in trading. Consistent winners think differently from everyone else.
All the skills and beliefs we have developed in our lifetime are inappropriate for trading. We must surrender these skills and acquire a trader’s mindset if we want to be consistent & successful traders.
The successful traders don’t fear the erratic behavior of the market.
You predicted a stock price to go up but you did nothing except watch it go up and think about all the money you could have made. There’s a huge difference between predicting something and actually getting in and out of trades. This difference, the author calls the ‘psychological gap‘. This is one of the reasons why trading can be one of the most difficult endeavors.
Trading is simple. All you need is to click on the ‘buy’ or ‘sell’ button. But if you compare the characteristics of a handful of consistent traders and most other traders, you will find they are as different as day and night.
At some point, every trader learns something about the market that indicates when opportunities exist. But learning how to identify opportunities doesn’t mean one can think like a consistent trader.
Instead of learning to think like traders, they think about how they can make more money by learning about the markets. It’s almost impossible not to fall into this trap.
Attitude produces better overall results than analysis or technique. If you have the right attitude—the right mindset—then everything else about trading will be relatively easy, even simple, and certainly a lot more fun.
Consistent traders have a mindset, that allows them to be disciplined, focused, and confident in spite of the adverse conditions.
Emotional pain and financial disaster are common among most traders because they don’t start with proper guidance. This occurs because many of the principles and attitudes that would otherwise make perfect sense in our daily lives have exactly the opposite effect in the trading environment.
Accepting the risk
Learning to accept the risk is the most important skill you can learn.
The best traders aren’t afraid. They have mental flexibility that allows them to flow in and out of trades based on what the market is telling them. But most people are afraid. And when they are afraid, they can’t perceive any other possibilities than what they already believe.
Most people believe that if only they could learn more about markets, they’d be consistent. But this is a trap that most traders fall into.
No matter how much you learn about the market’s behavior, no matter how brilliant an analyst you become, you will never learn enough to anticipate every possible way that the market can make you wrong or cause you to lose money.
The reality is that every trade has an uncertain outcome. If you don’t accept the uncertainty of trade you might subject yourself to self-generated errors.
You for sure need a trading methodology that provides you an edge but it doesn’t solve the problem of problems created by lack of discipline, confidence, and improper focus.
When you have the right attitude, you can remain confident in the face of constant uncertainty which makes it as easy and as simple as you probably thought it was when you first started out.
The Dangers of Trading
Unwillingness to create rules
The trading environment provides us the freedom of creative expressions that we have been denied most of our lives. That’s what lures most people to trading. But if you don’t create an internal mental structure in the form of mental discipline and develop appropriate attitudes, you invite financial disaster in your life.
Failure to take responsibility
The market is neutral. It neither wants you to lose nor wants you to win. All of your results are a result of your own thinking and action. If you want to create consistency in your trades, you have to accept that you are solely responsible for the outcome no matter what.
Addiction to Random rewards
When we experience unexpected pleasant surprises, euphoria-inducing chemicals are released in our brains. Addiction to these random rewards is troublesome for traders. It acts as resistance to creating a mental structure.
External versus Internal control
We can’t depend on the market to do anything for us. It is impossible to manipulate the market unless you are a very large trader. Instead of trying to control our surroundings so they conform to our idea of the way things should be, we have to learn to control ourselves.
Trading is a zero-sum game
The only way you can benefit as a trader is only if some other trader loses. Your goal is to extract money from the market while the market’s sole goal is to extract money from you. Yes, but at the same time market also provides you endless opportunities for you to make money from it. You have to learn how to get what you want out of the market and the first step of this process is taking complete and absolute responsibility.
The consistently successful trader that you want to become doesn’t exist yet. You must create a new version of yourself, just as a sculptor creates a likeness of a model. You have to restructure your mental environment and install new beliefs and attitudes that help you to achieve your ultimate goal.
Losing or being wrong are inevitable realities of trading. You can not just avoid it. In a market that’s too erratic, it’s impossible for any trader to be right every time.
If you want to see the reality of the market, your mind should be relatively free of fear, anger, regret betrayal, disappointment, and all other emotions. Emotions deceive you to see the actual reality of the market.
You are not responsible for what the market does or doesn’t do, but it’s your sole responsibility for everything that results from your trading activities.
You have to stop expecting the market to do something for you. Because the market, it’s neutral. You have to take responsibility for your activities.
Winning a few trades can convince you that trading is easy. But why do 90-95% of traders lose money then?
Accepting the risk
When you accept the risks of a trade, you accept the consequences of your trades without any emotional discomfort related to it. But how do you remain confident and pain-free when you are absolutely certain you can be proved wrong, lose money, or have beautiful opportunities. Any degree of emotional response in trading will most certainly cause a trading error or diminish your results.
What’s important is that you understand it is completely possible to think the way the professionals do to trade without fear, even though your experience would argue otherwise.
With this new thinking, you can create a new relationship with the reality of the market that’s free from any emotion.
Studying the market
The market doesn’t generate good or bad information. From the market’s perspective, it’s simply information. If you want to trade like a consistent professional trader, you must be able to see the market from an objective perspective without any distortion.
There’s a popular saying, “People see what they want to see”. But the author has put it in a new way. People see what they’ve learned to see and everything else is invisible until they learn how to counteract the energy that blocks their awareness of whatever is unlearned.
Almost all of our fear is irrational because this “now moment” opportunity has absolutely nothing to do with your last trade. Each trade is simply an edge with a probable outcome and is statistically independent of every other trade.
But our minds have an inherent design characteristic that causes us to associate and link anything that exists in the external environment that is similar in quality, characteristics, properties, or traits to anything that already exists in our mental environment as memory or distinction.
Your basic objective as a trader is to perceive the opportunities as available. You have to stay focused on the opportunities.
Fundamental Characteristics of Market
You might be already aware of some of the fundamental natures of trading. But being aware and understanding of the principles doesn’t mean the same.
The Market can express itself in almost infinite combination of ways
The market can do anything at any time. If only traders believed this, there’d be very few losers and more consistent winners. Not predefining your risk, not cutting your losses, or not systematically taking profits are three of the most common—and usually the most costly—trading errors you can make. Only the best traders have eliminated these errors from their trading.
Anything can happen
There are so many unknown forces operating in the market at a time. It only takes a traders somewhere to prove you wrong. Any expectations you have will cause to not perceive market information as it is.
You don’t need to know what’s going to happen next to make money.
There is random distribution between wins and losses. When you truly believe that the market is a probability game, the win and lose will no longer have any significance. This helps your expectations to be in harmony with the possibilities. All you need to make money from market is this:
- The odds are in your favor before you put on a trade.
- How much it’s going to cost to find out if the trade is going to work.
You don’t need to know what’s going to happen next to make money on that trade; and
Anything can happen.
There is a random distribution between wins and losses for any given set of variables that define an edge.
With the state of mind in fear and euphoria, you can’t produce consistent results. And if you want to avoid these emotions, you have to learn this important rule.
An edge is nothing more than an indication of a higher probability of one thing happening over another
There’s too many variables in the market and you can’t gather information about all the variables. If the market is offering you an edge, you have to determine the risk and take the trade.
Every moment is unique
Our minds are hard-wired to associate anything in the external environment with something that is already insides our head. But in trading, no two moments are exactly same.
If no two moments are same, there’s nothing you can tell for sure what is about to happen.
The best traders have trained thier minds to believe in the uniqueness of each moment. This allows them to be more open to perceive what the market is offering from its perspective.
You must take an active role in training your mind to believe in the uniqueness of each moment, and you must de-activate any other belief that argues for something different.
Every conflict, from the smallest to the largest, from the least to the most significant, whether between individuals, cultures, societies, or nations, is always the result of conflicting beliefs.
In some cases, we are so intolerant that we are willing to kill each other to get our point across.
Don’t we like being with people with similar beliefs, because it feels comfortable and secure? Don’t we avoid people with dissimilar or conflicting beliefs, because it feels uncomfortable or even threatening?
The secret to effectively changing our beliefs is in understanding and, consequently, believing that we really aren’t changing our beliefs; we are simply transferring energy from one concept to another concept, one that we find more useful in helping us to fulfill our desires or achieve our goals.
Thinking Like a Trader
Observe yourself. See what you’re thinking, saying, and doing. If you don’t commit yourself to becoming an observer of these processes, your realizations will always come after the experience, usually when you are in a state of deep regret and frustration.
The Role of Self-discipline
No one’s born with discipline. Self-discipline is a technique to create a new mental framework.
Remember that consistency is not the same as the ability to put on a winning trade, or even a string of winning trades for that matter because putting on a winning trade requires absolutely no skill. All you have to do is guess correctly, which is no different than guessing the outcome of a coin toss, whereas consistency is a state of mind that, once achieved, won’t allow you to “be” any other way.
Principles of consistency
- You objectively identify edges
- You predefine the risk of every trade
- You completely accept the risk or are willing to let go of the trade
- You act on your edges without reservation or hesitation
- You pay yourself as the market makes money available for you
- You continually monitor your susceptibility to making errors
- You never violate these principles
Trading is a probability game
Trading is simply a game of probabilities not much different than you pulling the handle of slot machines in the casino. If you, instead of being the person playing the slot machine, you can be the casino if you are aware of the following:
- You have an edge that genuinely puts the odds of success in your favor
- You can think about trading in the appropriate manner
- You can do everything you need to do over a series of trades
If you act with these beliefs, you’ll own the game and be a consistent trader.
If you want to be a professional golfer, you would have to dedicate yourself hitting 10,000 or more golf balls until the precise combination of movements are so ingrained in your muscle memory that you no longer had to think about it consciously.
Learning to a consistent winner as a trader is more or less the same.