The main idea of the book by M. Douglas, “Trading in the Zone

There’s a big difference between predicting that something will happen in the market and the reality of actually getting into and out of trades

  • Consistent trader has attained a mindset – a unique set of attitudes – that allows him to remain disciplined, focused and confident in spite of adverse conditions
  • Everyone ends up learning something about market, few ever end up learning about attitudes that are essential to be consistent
  • Taking risk when putting trade doesn’t mean you are correspondingly accepting the risk.
  • The best traders can put a trade without slightest bit of hesitation or conflict, and just as freely and without hesitation or conflict admit it isn’t working. They can get out with loss and do it so it doesn’t resonate the slightest bit of emotional discomfort.
  • Accepting risk is key to thinking like a successful trader. The best traders aren’t afraid. They have developed attitudes that give them mental flexibility to flow in and out trades based on what market is telling them about possibilities from its perspectives.
  • Key is to stay confident in the face of constant uncertainty.
  • We have force inside our mental environment causing us to resist anything that denies us the freedom to do and to be whatever we want and when want
  • Consistency starts with premise that you are completely responsible. Avoiding responsibility -random trading- poorly planned trades or trades that are not planned at all
  • Outcome of each individual pattern is random, the outcome of series of patterns is consistent /statistically reliable/
  • Another problem is addiction to random rewards- when we desire to experience an unexpected pleasant surprise
  • Primary goal is to learn how to think like a consistently successful trader. Such a trader has acquired a mental structure that allows them to trade without fear, and at the same time keeps them from becoming reckless and committing fear-based errors.
  • The consistency is in your mind, not in the markets
  • A lack of fear translates into a carefree state of mind, similar to the state of mind many great athletes describe as a ‘zone’ which is the state of mind where there’s absolutely no fear and you act and react instinctively, you are in the moment and ‘just doing it’
  • In order to experience ‘zone’ you must develop positive winning attitude.
  • Positive winning attitude is expecting a positive result from your efforts, with an acceptance that whatever results you get are a perfect reflection of your level of development and what you need to learn to do better
  • Winning attitude that allows easily move beyond the mistakes VS negative self-criticism, regret and self-pity
  • If you start with winning trade you will automatically experience the kind carefree mindset that is a by-product of a winning attitude
  • Winning in any endeavor is mostly a function of attitude. You really don’t need a lot of skills, you need a genuine winning attitude
  • Usually in our lives, childhood… the cause of pain came from outside. But not so with the market. It’s not that market gives and market takes, it’s YOU
  • Taking responsibility means YOU -not the market- are completely responsible for your success or failure as a trader. It means you believe your outcomes are self-generated, results are based on your interpretatio of market information
  • Preventing pain by avoiding losses can’t be done. Market generates patterns and patterns repeat themselves, but not every time
  • Euphoria /that creates a sense of supreme confidence – nothing can go wrong/ and self-sabotage are two powerful psychological forces that will have an extremely negative effect on your bottom line
  • State of mind is a by-product of believes and attitudes.
  • You can’t rely on market to make you consistently successful, any more then you can rely on the outside world to make you consistently happy. People who are truly happy don’t have to do anything in order to be happy. There are happy people who do things. Traders who are consistently successful are consistent as a natural expression of who they are.
  • Accepting the risk means accepting the consequences of trades without emotional discomfort or fear. Possibility of being wrong, loosing, missing out, leaving money on the table must not cause your mental defense mechanisms to kick in and take you out of the opportunity flow
  • When we are afraid it’s so natural to assume everyone shares our reality. But it’s not true
  • If you are not afraid, you don’t need courage, if you are not stressed, why would you need nerves of steel
  • Professionals don’t perceive anything about the markets as painful, therefore, no threat exists for them.
  • Top trader would say that your 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 statistically independent of every other trade
  • A typical traders perception of the risk in any given trading situation is a function of the outcome of his most recent two or three trades (depending on the individual). The best traders on the other hand are not impacted (either negatively or too positively) by the outcomes of their last or even their last several trades. So their perception of the risk of any given trading situation is not affected by this personal, psychological variable.
  • Secret to the nature of trading is ability 1. To trade without fear or overconfidence, 2. Perceive what the market is offering from its perspective, 3. Stay completely focused in the “now moment opportunity flow”, 4. Spontaneously enter the “zone”, it is a strong virtually unshakeable belief in an uncertain outcome with an edge in your favor
  • The consistent traders are able to keep their minds free of unrealistic and rigid expectations about how the market will express itself. They have learned to make themselves available to take advantage of whatever opportunities the market may offer in any given moment
  • If we operate out of fear the trend and the opportunity to trade in the direction of that trend don’t become visible until we are out of the trade
  • With the perspective of making yourself available, you know that your edge places odds of success in your favor, but at the same time, you completely accept the fact that you don’t know the outcome of any particular trade.
  • The “zone” is a mental space where you are doing more than just reading the collective mind, you are in complete harmony with it
  • The market can do virtually anything at any time
  • Not predefining your risk, not cutting your losses, nor systematically taking profits are three of the most common and usually most costly trading errors you can make
  • The most effective and functional trading belief trader can acquire is “anything can happen”. With this belief his mind will automatically and usually without his conscious awareness, cause him to avoid, block, or rationalize away any information that indicates the market may do something he hasn’t accepted as possible
  • The best traders treat trading like a numbers game, similar to the way in which casinos and professional gamblers approach gambling
  • If you focus on each hand individually, there will be A random, unpredictable distribution between winning and loosing hands. But on a collective basis, just the opposite is true. If a large enough number of hands is played, patterns will emerge that produce a consistent, predictable, and statistically reliable outcome
  • It’s the ability to believe in the unpredictability of the game at the micro level and simultaneously believe in the predictability of the game at the macro level that makes casinos and the professional gamblers effective and successful at what they do
  • Because they don’t have to know what’s going to happen next, they don’t place any special significance, emotional or otherwise, on each individual hand. Their egos are not involved in a way that makes them to be right. As a result, it’s easier to stay focused on keeping odds in their favor and expecting flawlessly, which in turn makes them less susceptible to making costly mistakes. They stay relaxed because they are committed and willing to let probabilities (their edges) play themselves out, all the while knowing that if their edges are good enough and the sample sizes are big enough, they will come out net winners.
  • The set of criteria and the boundaries identified are the trader’s known market variables. They are to the individual trader what the rules of the game are to casino and gambler. The trader’s analytical tools are the known variables that put the odds of success of any given trade in the trader’s favor, in the same way that the rules of the game put the odds of success in favor of the casino
  • In trading the unknown variables are all other traders who have the potential to come into the market to put on or take off a trade
  • Since all trades have an uncertain outcome, then, like in gambling, each trade has to be statistically independent of the next trade, the last trade, or any trades in the future, even though the trader may use the same set of known variables to identify his edge for each trade. There’s a random distribution between wins and losses in any given string or set of trades, even though the odds of success for each individual trade may be in trader’s favor.
  • If the consistency of the group of traders who are creating the pattern now is different by even one person from the group that created pattern in the past, then the outcome of the current pattern has potential to be different from the last pattern. It takes only one trader, somewhere in world, with a different belief about the future to change the outcome of any particular market pattern and negate the edge that pattern represents
  • Thinking in probabilities can be difficult to master, because our minds don’t naturally process information in this manner. Quite the contrary, our minds cause us to perceive what we know, and what we know is part of our past, whereas, in the market, every moment is new and unique, even though there may be similarities to something that occurred in the past. This means unless we train our minds to perceive the uniqueness of each moment, that uniqueness will automatically be filtered by our perception. We will perceive only what we know, minus any information that is blocked by our fears, everything else will remain invisible
  • Why do you think unsuccessful traders are obsessed with market analysis. They crave the sense of certainty that analysis appears to give them. Typical trader wants to be right on every single trade. He is desperately trying to create certainty where it just doesn’t exist.
  • When you achieve complete acceptance of the uncertainty of each edge and the uniqueness of each moment, your frustration with trading will end
  • Typical trader won’t predefine the risk of getting into a trade because he doesn’t believe it’s necessary, he believes he knows what’s going to happen next. The reason he believes he knows what’s going to happen next is because he won’t get into a trade until he is convinced that he’s right. At the point where he’s convinced the trade will be winner, it’s no longer necessary to define risk. But any trade can easily tap him into the accumulated pain of every time he has been wrong in his life. It’s easy to see why each and every trade can literally take on the significance of a life or death situation
  • Predefining the risk doesn’t pose a problem for best traders because they don’t trade from a right or wrong perspective. They have learned that trading doesn’t have anything to do with being right or wrong on any individual trade. Their emotional responses to the outcome of any particular trade are equivalent how the typical trader would feel about flipping a coin, calling heads, and seeing the coin come up tails.
  • We have to be rigid in our rules and flexible in our expectation. Typical trader does just the opposite- he is flexible in his rules and rigid in his expectations
  • To eliminate the emotional risk of trading, you have to neutralize your expectations about what the market will or will not do at any given moment or in any given situation
  • To think in probabilities, you have to create a mental framework or mind-set that is consistent with the underlying principles of a problematic environment. A probabilistic mind-set pertaining to trading consist of five fundamental truth
    1. Anything can happen
    2. You don’t need to know what is going to happen next in order to make money
    3. There’s a random distribution between wins and losses for any given set of variables that define an edge
    4. An edge is nothing more than an indication of a higher probability of one thing happening over another
    5. Every moment in the market is unique
    • The idea is to create a carefree state of mind that there are always unknown forces operating in the market. When you make these truth a fully functional part of your belief system, the rational part of your mind will defend these truths in the same way it defends any other belief you hold about the nature of trading. This means that, at least at the rational level, your mind will automatically defend against the idea or assumption that you can know for sure what will happen next.
    • Expecting a random outcome doesn’t mean that you can’t use your full reasoning and analytical abilities to project an outcome, or that you can’t guess what’s going to happen next, or have a hunch or feeling about it, because you can. Furthermore, you can be right in each instance. You just can’t expect to be right.
    • As unnatural it may seems to do, you can’t let some previous experience (either negative or extremely positive) dictate your state of mind. If you do, it will be very difficult, if not impossible, to perceive what the market is communicating from its perspective
    • The loss doesn’t create any emotional damage, because i don’t interpret the experience negatively. To me, losses are simply the cost of doing business or this amount of money i need to spend to make myself available for winning trades. If, on the other hand, the trade turns to be a winner, in most cases i know for sure at what point i am going to take my profits (if i don’t know for sure, i certainly have a very good idea)
    • Carefree means confident, but not euphoric. When you are in a carefree state of mind, you won’t feel any fear, hesitation, or compulsion to do anything, because you effectively eliminated the potential to define and interpret market information as threatening. To remove the sense of threat, you have to accept risk completely. When you have accepted the risk, you will be at peace with any outcome.
    • Making yourself available means trading from the perspective that you have nothing to prove. You are not trying to win or to avoid loosing. You are not trying to get your money back or to take revenge on the market
    • The underlying cause of fear is the potential to define and interpret market information as threatening. What is the source of our potential to interpret market information as threatening? – Our expectations! What is underlying source of our expectations? – Our beliefs!
    • Keep in mind that all active beliefs demand expression, even when we don’t want them to. To think in probabilities, you have to believe that every moment in the market is unique, or more specifically, that every edge has a unique outcome.
    • When you believe at a functional level that every edge has a unique outcome, you will experience a state of mind that is free of fear, stress, and anxiety when you trade. It’s really can’t work any other way.
    • TRADING down to its simplest form: pattern recognition numbers game. We use market analysis to identify the patterns, define the risk, and determine when to take the profits. The trade either works or it doesn’t. In any case, we go on to die next trade
    • Because the more you think you know, the less successful you’ll be. Trading is hard because you have to operate in a state of not having to know, even though your analysis may turn out at times to be “perfectly” correct. To operate in state of not having to know, you’ll have to properly manage your expectations. To properly manage your expectations, you must realign your mental environment so that you believe without a shadow of doubt in five fundamental truths.
    • Consistent results = steadily rising equity curve with only minor draw downs that are the natural consequence of edges that didn’t work.
    • Beliefs we operate out of will determine our state of mind and shape our experiences in ways that constantly reinforce what we already believe to be true. If producing consistent results is your primary objective as a trader, then creating a belief that “I am a consistently successful trader” will act as a primary source of energy that will manage your perceptions, interpretations, expectations, and actions in ways that satisfy the belief and consequently, the objective
    • The 1st step in the process of creating consistency is to start noticing what you’re thinking, saying and doing. Why? Because everything we think, say, or do as a trader contributes, and therefore, reinforces some belief in our mental system.
    • To create a belief that “I am a runner” required that I create a series of experiences consistent with the new belief.
    • I am a consistent trader because:
    1. I objectively identify my edges
    2. I predefine the risk of every trade
    3. I completely accept risk or I am willing to let go of the trade
    4. I act on my edges without reservation or hesitation
    5. I pay myself as the market makes money available to me
    6. I continually monitor my susceptibility for making errors
    7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.
    • To integrate these principles into your mental system at a functional level requires that you purposely create a series of experiences that are consistent with them
    • Being objective means there’s no potential to define, interpret, and therefore perceive any market information from either painful or euphoric perspective. The way to be objective is to operate out of beliefs that keep your expectations neutral and to always take the unknown forces into consideration.
    • When you stop making errors, you’ll begin trusting yourself. As your sense of self-trust increases, so you will your sense of self-confidence. The greater your confidence, the easier it will be to execute your trades (act on your edges without reservation or hesitation)
    • When you genuinely accept the risks, you will be at peace with any outcome. When you are at peace with any outcome, you will experience a carefree, objective state of mind
    • As a trader, you can be the casino if:
    1. You have an edge that genuinely puts the odds of success in your favor;
    2. You can think about trading in the appropriate manner (the five fundamental truth);
    3. You can do everything you need to do over a series of trades.
    • The variables you use to define your edge have to be absolutely precise. The system has to be designed so that it does not require you to make any subjective decisions or judgments about whether your edge is present. If the market is aligned in a way that conforms with the rigid variables of your system, then you have a trade; if not, then you don’t have a trade. No other extraneous or random factors can enter into the equation.
    • Your methodology has to tell you EXACTLY how much you need to risk to find out of the trade is going to work. There’s always an optimum point at which the possibility of a trade not working is so diminished, especially in relationship to the profit potential, that you’re better off taking your loss and getting your mind clear to act on the next edge. Let the market structure determine where this optimum point is, rather then using an arbitrary dollar amount that you are willing to risk on a trade.
    • There is no ability to determine if the market reverses or go higher/lower – so the best course of action from psychological perspective is to divide your position into thirds (or quarters), and scale out the position as market moves in your favor. I always without reservation or hesitation, take off a portion of a winning position whenever the market gives me a little to take. How much that might be depends on the market, it will be a different amount in each case.
    • It is so important to experience the state of “risk-free opportunity”. When you set up a situation in which there is “risk-free opportunity”, there’s no way to lose unless something extremely unusual happens, like limit up or limit down move through your stop. If, under normal circumstances, there’s no way to lose, you get to experience what is really feels like to be in a trade with a relaxed, carefree state of mind.
    • Ideally, your risk-reward ratio should be at least 3:1, which means you are only risking one dollar for every three dollars of profit potential. If your edge and the way you scale out of your trades give you a 3:1 risk-to-reward ratio, your winning trade percentage can be less then 50% and you will still make money consistently.
    • The typical trader practically lives or dies (emotionally) on the results of most recent trade. If it was a winner, he’ll gladly go to the next trade; if it wasn’t. he’ll start questioning the viability of his edge. To find out what variables work, how well they work, and what doesn’t work, we need a systematic approach, one that doesn’t take any random variables into consideration.
    • You will know for sure that thinking in probabilities is a functioning part of your identity when you’ll be able to go through one sample size of at least 20 or more trades without any difficulty, resistance, or conflicting thoughts distracting you from doing exactly what your mechanical system calls for. Then, and only then, you will be ready to move into the more advanced subjective or intuitive stages of trading
      The market review for November, 2st
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