Trading in the Zone Recap

I just finished reading Mark Douglas' Trading in the Zone. It took me way too long to finish the book. The Dale Carnegie class started when I was in the middle of the book so I started reading for the class instead and I didn't really pick up Douglas' book again for a while. Plus, I just have to say that this book is pretty deep. There are time I felt like I was Neo from The Matrix reading something Morpheus wrote. It's in English and I understand the words but when they're put together I can't seem to understand them sometimes. It's like the author is using one string of long and complicated thought to explain another long and complicated thought.

Despite that, I'd still recommend the book. It talks about trading on a psychological level, which is something that I need to read at the moment. The main idea of the book is to get over the fear or other negatively charged energy that we have and trade in a state of mind where we're not scared of losing money or get upset if a trade doesn't work out, but instead treat trading as a series of probabilities. You can achieve consistent result if you identify what is your edge and have good risk reward, therefore if you win only say 50% or 60% of the time but you have a 3:1 or 2:1 risk reward you're going to make money consistently.

Here are the quotables from the book:

The defining characteristic that separates the consistent winners from everyone else is this: The winners have attained a mind-set --- a unique set of attitudes --- that allows them to remain disciplined, focused, and, above all, confident in spite of adverse conditions. As a result, they are no longer susceptible to the common fears and trading errors that plague everyone else.

I don't think I could put the difference between the consistent winners and everyone else more simply than this: The best traders aren't afraid. They aren't afraid because they have developed attitudes that give them the greatest degree of mental flexibility to flow in and out of trades based on what the market is telling them about the possibilities from its perspective. At the same time, the best traders have developed attitudes that prevent them from getting reckless. Everyone else is afraid, to some degree or another. When they're not afraid, they have the tendency to become reckless and to create the kind of experience for themselves that will cause them to be afraid from that point on.

So if you are afraid of being wrong or losing money, it means you will never learn enough to compensate for the negative effects these fears will have on your ability to be objective and you ability to act without hesitation. In other words, you won't be confident in the face of constant uncertainty. The hard, cold reality of trading is that every trade has an uncertain outcome. Unless you learn to completely accept the possibility of an uncertain outcome, you will try either consciously or unconsciously to avoid any possibility you define as painful. In the process, you will subject yourself to any number of self-generated, costly errors.

... It will feel like you can't trust the markets; but the reality is, you can't trust yourself.

Trading can be characterized as a pure, unencumbered personal choice with an immediate outcome. Remember, nothing happens until we decide to start; it lasts as long as we want; and it doesn't end until we decided to stop. All of these beginnings, middles, and endings are the result of our interpretation of the information available and how we choose to act on our interpretation. Now, we may want the freedom to make choices, but that doesn't mean we are ready and willing to accept the responsibility for the outcomes. Traders who are not ready to accept responsibility for the outcomes of their interpretation and actions will find themselves in a dilemma: How does one participate in an activity that allows complete freedom of choice, and at the same time avoid taking responsibility if the outcome of one's choices are unexpected and not to one's liking?

The hard reality of trading is that, if you want to create consistency, you have to start from the premise that no matter what the outcome, you are completely responsible. This is a level of responsibility few people have aspired to before they decide to become traders. The way to avoid responsibility is to adopt a trading style that is, to all intents and purposes, random. I define random trading as poorly-planned trades or trades that are not planned at all. It is an unorganized approach that takes into consideration an unlimited set of market variables, which do not allow you to find out what works on a consistent basis and what does not.

The best traders think in a number of unique ways. They have 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 bottom line is that successful traders have virtually eliminated the effects of fear ad recklessness from their trading. These two fundamental characteristics allow them to achieve consistent results.

The consistency you seek is in your mind, not in the markets. It's attitudes and beliefs about being wrong, losing money, and the tendency to become reckless, when you're feeling good, that cause most losses--not technique or market knowledge.

It's when you're winning that you are most susceptible to making a mistake, overtrading, putting on too large a position, violating your rules, or generally operating as if no prudent boundaries on your behavior are necessary. You may even go to the extreme of thinking you are the market. However, the market rarely agrees, and when it disagrees, you'll get hurt. The loss and the emotional pain are usually significant. You will experience a boom, followed by the inevitable bust.

What separates the best traders from everyone else is not what they do or when they do it, but rather how they think about what they do and how they're thinking when they do it.

If your goal is to trade like a professional and be a consistent winner, then you must start from the premise that the solutions are in your mind and not in the market. Consistency is a state of mind that has at its core certain fundamental thinking strategies that are unique to trading.

You can't rely on the market to make you consistently successful, any more than 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. They are happy people who do things.

The best traders stay in the flow because they don't try to get anything from the market; they simply make themselves available so they can take advantage of whatever the market is offering at any given moment.

The threat of pain generates fear, and fear is the source of 95 percent of the errors you are likely to make.

Risk is relative, but to the person who perceives it in the moment, it seems absolute and beyond question. when the child encountered his first dog, he was bubbling with excitement and curiosity. What is it about the way our minds think and process information that could automatically flip the boy into a state of fear the next time he encounters a dog, even if it's months or years later.

If there is such a thing as a secret to the nature of trading, this is it: At the very core of one's 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," and 4) spontaneously enter the "zone," it is a strong virtually unshakable belief in an uncertain outcome with an edge in your favor.

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. At some point in their careers, they learned to believe without a shred of doubt that anything can happen, and to always account for what they don't know, for the unexpected.

When you've trained your mind to think in probabilities, it means you have fully accepted all the possibilities (with no internal resistance or conflict) and you always do something to take the unknown forces into account. Thinking this way is virtually impossible unless you've done the mental work necessary to "let go" of the need to know what is going to happen next or the need to be right on each trade. In fact, the degree by which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader.

In what way does a trader have to learn how to be rigid and flexible at the same time? The answer is: We have to be rigid in our rules and flexible in our expectations. We need to be rigid in our rules so that we gain a sense of self-trust that can, and will always, protect us in an environment that has few, if any, boundaries. We need to be flexible in our expectations so we can perceive, with the greatest degree of clarity and objectivity, what the market is communicating to us from its perspective. At this point, it probably goes without saying that the typical trader does just the opposite: He is flexible in his rule sand rigid in his expectations. Interestingly enough the more rigid the expectation, the more he has to either bend, violate, or break his rules in order to accommodate his unwillingness to give up what he wants in favor of what the market is offering.

A probabilistic ind-set pertaining to trading consists of five fundamental truths:
1) Anything can happen
2) You don't need to know what is going to happen next in order to make money
3) There is 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 best traders are in the "now moment" because there's no stress. There's no stress because there's nothing at risk other than the amount of money they are willing to spend on a trade. They are not trying to be right or trying to avoid being wrong; neither are they trying to prove anything. If and when the market tells them that their edges aren't working or that it's time to take profits, their minds do nothing to block this information. They completely accept what the market is offering them, and they wait for the next edge.

Consistency is the result of a carefree, objective state of mind, where we are making ourselves available to perceive and act upon whatever the market is offering us (from its perspective) in any given "now moment."

To remove the sense of threat, you have to accept the risk completely. When you have accepted the risk, you will be at pace with any outcome. To be at peace with any outcome, you must reconcile anything in your mental environment that conflicts with the five fundamental truths about the market. What's more, you also have to integrate these truths into your mental system as core beliefs.

When you really believe that trading is simply a probability game, concepts like right and wrong or win and lose no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.

When you believe at a functional level that every edge has a unique outcome (meaning that it's a dominant belief without any other beliefs arguing for something different), you will experience a state of mind that is free of fear, stress, and anxiety when you trade. It really can't work any other way. A unique outcome is not something we have already experienced, therefor it is not something we can already know. If it were know, it could not be defined as unique. when you believe that you don't now what is going to happen next, what exactly are you expecting from the market? If you said "I don't know," you are absolutely right. If you believe that something will happen and that you don't need to know exactly what that something is to make money, then where's the potential to define and interpret market information as threatening and painful? If you said "There is none," you are absolutely right again.

If you are not experiencing the quality of mental freedom and it is your desire to do so, then 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.

If you asked me to distill trading down to its simplest form, I would say that it is a pattern recognition numbers game. We use market analysis to identify the patterns, define the risk, and determine when to take profits. the trade either works or it doesn't. In any case, we go on to the next trade. It's that simple, but it's certainly not easy. In fact, trading is probably the hardest thing you'll ever attempt to be successful at. That's not because it requires intellect; quite the contrary! But 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 a state of not having to know, you have to properly manage your expectations. To properly manage your expectation, you must realign your mental environment so that you believe without a shadow of a doubt in the five fundamental truths.

When it comes to personal transformation, the most important ingredients are your willingness to change, the clarity of your intent, and the strength of your desire. Ultimately, for this process to work, you must choose consistency over every other reason or justification you have for trading

What separates the "consistently great" athletes and performers from everyone else is their distinct lack of fear of making a mistake. The reason they aren't afraid is that they don't have a reason to think less of themselves when they do make a mistake, meaning they don't have a reservoir of negatively charged energy waiting to well up and pounce on their conscious thought process like a lion waiting for the right moment to pounce on its intended prey.

Self-discipline is a technique to create a new mental framework. It is not a personality trait. People are born with self-discipline.

Beliefs can be changed, and if it's possible to change one belief, then it's possible to change any belief, if you understand that you really aren't changing them, but are only transferring energy from one concept to another

sub-beliefs building blocks that provide the underlying structure for what is means "to be a consistent winner."
1) I objectively identify my edges
2) I predefine the risk of every trade
3) I completely accept the 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.