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Dear Group,
My narcissism is shining forth as I was the one to redact this excerpt from
Mark's book and publish it several years ago on the Omega list --- see
www.markdouglas.com
For devotees of the psychological side of trading (which I will admit I believe
to be about 99% of it, or at least it has been for me), some other books have
been published contemporaneously with Mark's, which I have also found useful:
1. A little gem, in the true spirit of Zen - Eddie says 1 word when the rest of
us (me especially) would say 10: Zen in the Markets by Eddie Toppel --- see
www.samuraitrader.com
2. Again, with analogies from the East: The Way of the Warrior Trader by
Richard McCall. Dick's father was career military and stationed in the far east
(Japan, Okinawa, I don't recall), where instead of going along with all the
other service brats, Dick integrated into the Japanese culture, got a black belt
in martial arts, returned to the states for a PhD in psychology, practiced a
number of years as a professional psychologist, then increased his ongoing
efforts into teaching martial arts. Through that, he attracted futures traders,
learned more of what being a trader was all about, began trading himself, and
then turned towards offering martial arts programs especially for traders. This
book is the result. Read it. Dick used to have a website devoted to his
martial arts stuff and zendo in Arkansas. I can't find it. Another of his
websites is www.gradeyourtrade.com I did a Google search of richard mccall and
founds loads of sites about his book, which should give you a flavor of what
he's saying. Ignore it at your peril.
I also did a Google search of trading psychology and was amazed at the number of
sites returned.
Bon appetit,
Richard
Larry Sanders wrote:
> This excerpt from the Mark Douglas book "Trading in the Zone" once appeared
> in this list. I think it is an excellent book and recommend it.
> Larry Sanders
> www.TradeLabStrategies.com
> ________________________________________________________________________
>
> Trading in the Zone - from the Omega list
>
> The Five Fundamental Truths of Trading
>
> 1. ANYTHING CAN HAPPEN.
>
> There are always unknown forces operating in every market at every moment;
> it takes only one trader somewhere in the world to negate the positive
> outcome of your edge --- only one. Regardless of how much time, effort, or
> money you've invested in your analysis, from the market's perspective, there
> are no exceptions to this truth. Any exceptions that may exist in your mind
> will be the source of conflict and potentially cause you to perceive market
> information as threatenting.
>
> 2. YOU DON'T NEED TO KNOW WHAT IS GOING TO HAPPEN NEXT IN ORDER TO MAKE
> MONEY.
>
> There is a random distribution between wins and losses for any given set of
> variables that define an edge. In other words, based on the past
> performance of your edge, you may know that out of the next 20 trades, 12
> will be winners and 8 will be losers. What you don't know is the sequence
> of wins and losses or how much money the market is going to make available
> on the winning trades. This truth makes trading a probability or numbers
> game. 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.
>
> Nothing has more potential to cause emotional discord than our unfulfilled
> expectations. Emotional pain is the universal response when the outside
> world expresses itself in a way that doesn't reflect what we expect or
> believe to be true. As a result, any market information that does not
> confirm our expectations is automatically defined and interpreted as
> threatening. That interpretation causes us to adopt a negatively-charged,
> defensive state of mind, where we end up creating the very experience we are
> trying to avoid.
>
> Market information is only threatening if you are expecting the market to
> do something for you. Otherwise, if you don't expect the market to make you
> right, you have no reason to be afraid of being wrong. If you don't expect
> the market to make you a winner, you have no reason to be afraid of losing.
> If you don't expect the market to keep going in your direction indefinitely,
> there is no reason to leave money on the table. If you don't expect to be
> able to take advantage of every opportunity just because you perceived it
> and it presented itself, you have no reason to be afraid of missing out.
>
> If you believe that all you need to know is :
>
> a) The odds are in your favor before you put on a trade;
>
> b) How much it's going to cost to find out if the trade is going to work;
>
> c) You don't need to know what going to happen next to make money on that
> trade; and
>
> d) Anything can happen;
>
> then the market can't make you wrong. The market can't generate
> information about itself that would cause your pain-avoidance mechansims to
> kick in so that you exclude that information from your awareness. If you
> believe that anything can happen and that you don't need to know what is
> going to happen next to make money, then you will always be right. Your
> expectations will always be in harmony with the conditions as they exist
> from the market's perpective, effectively neutralizing your potential to
> experience emotional pain.
>
> Furthermore, a losing trade or even a series of losing trades can't have
> the typical negative effect if you really believe that trading is a
> probability or numbers game. If your edge puts the odds in your favor, then
> every loss puts you that much closer to a win. When you really believe
> this, your response to a losing trade will no longer take on a negative
> emotional quality.
>
> 3. THERE IS A RANDOM DISTRIBUTION BETWEEN WINS AND LOSSES FOR ANY GIVEN
> SET OF VARIABLES THAT DEFINE AN EDGE.
>
> If every loss puts you that much closer to a win, you will be looking
> forward to the next occurrence of your edge, ready and waiting to jump in
> without the slightest reservation or hesitation. However, if you still
> believe that trading is about analysis or about being right, then after a
> loss you will anticipate the occurrence of your next edge with trepidation,
> wondering whether it's going to work. This, in turn, will cause you to
> start gathering evidence for or against a trade. You will gather evidence
> for the trade if your fear of missing out is greater than your fear of
> losing. And you will gather information against the trade is your fear of
> losing is greater than your fear of missing out. In either case, you will
> not be in the most conducive state of mind to produce consistent results.
>
> 4. AN EDGE IS NOTHING MORE THAN AN INDICATION OF A HIGHER PROBABILITY OF
> ONE THING HAPPENING OVER ANOTHER.
>
> Creating consistency requires that you completely accept that trading isn't
> about hoping, wondering, or gathering evidence one way or the other to
> determine if the next trade is going to work. The only evidence you need to
> gather is whether the variables you use to define an edge are present at any
> given moment. When you use "other" information, outside the parameters of
> your edge to decide whether you will take the trade, you are adding random
> variables to your trading regime. Adding random variables makes it
> extremely difficult, if not impossible, to determine what works and what
> doesn't. If you're never certain about the viability of your edge, you
> won't feel confident about it. To whatever degree you lack confidence, you
> will experience fear. The irony is, you will be afraid of random,
> inconsistent results without realizing that your random, inconsistent
> approach is creating exactly what you are afraid of.
>
> However, if you believe that an edge is simply a higher probability of one
> thing happening over another, and there's a random distribution between wins
> and losses for any given set of variables that define an edge, there is no
> reason to gather "other" evidence for or against a trade. To a trader
> operating out of these two beliefs, gathering "other" evidence makes no
> sense. Gathering "other" evidence makes about as much sense as trying to
> determine whether the next flip of a coin will be heads after the last flip
> came up tails. Regardless of what evidence you find to support heads coming
> up, there is still a 50% chance that the next flip will come up tails. By
> the same token, regardless of how much evidence you gather to support acting
> or not acting on a trade, it still only takes one trader somewhere in the
> world to negate the validity of any, if not all, of your evidence. The
> point is "why bother?" If the market is offering you a legitimate edge,
> determine the risk and take the trade.
>
> 5. EVERY MOMENT IN THE MARKET IS UNIIQUE.
>
> "Unique" means not like anything else that exists or has ever existed. As
> much as we may understand the concept of uniqueness, our minds don't deal
> with it very well on a practical level. Our minds are hardwired to
> automatically associate (without conscious awareness) anything in the
> exterior environment that is similar to anything that is already inside of
> us in the form of a memory, belief, or attitude. This creates an inherent
> contradiction between the way we naturally think about the world and the way
> the world exists. No two moments in the external environment will ever
> exactly duplicate themselves. To do so, every atom and every molecule would
> have to be in the exact same position they were in some previous moment.
> Yet, based on the way our minds are designed to process information, we will
> experience the "now moment" in the environment as being exactly the same as
> some previous moment as it exists inside our minds.
>
> If each moment is like no other, then there's nothing at the level of your
> rational experience that can tell you for sure that you "know" what will
> happen next. So, why bother trying to know? When you try to know, you are,
> in essence, trying to be right. I am not implying that you can't predict
> what the market will do next and be right, because you most certainly can.
> It's in the trying that you run into all the problems. If you believe that
> you correctly predicted the market once, you will naturally try to do it
> again. As a result, your mind will automatically start scanning the market
> for the same pattern, circumstance, or situation that existed the last time
> you correctly predicted its movement. When you find it, your state of mind
> will make it seem as if everything is exactly as it was the last time. The
> problem is that, from the market's perspective, it is not the same. As a
> result, you are setting yourself up for disappointment.
>
> What separates the best traders from all the rest is that they have trained
> their minds to believe in the uniqueness of each moment (although this
> training usually takes the form of losing several fortunes before they
> "really" believe in the concept of uniqueness). This belief acts as a
> counteracting force, neutralizing the automatic associative mechanism. When
> you truly believe that each moment is unique, then by definition there isn't
> anything in your mind for the associating mechanism to link that moment to.
> This belief acts as an internal force causing you to dissociate the "now"
> moment in the market from any previous moment filed away in your mental
> environment. The stronger your belief in the uniqueness of each moment, the
> lower your potential to associate. The lower your potential to associate,
> the more open your mind will be to perceive what the market is offering you
> from its perspective.
>
> ***
>
> When you completely accept the psychological realities of the market, you
> will correspondingly accept the risks of trading. When you accept the risks
> of trading, you eliminate the potential to define market information in
> painful ways. When you stop defining and interpreting market information in
> painful ways, there is nothing for your mind to avoid, nothing to protect
> against. When there is nothing to protect against, you will have access to
> all that you know about the nature of market movement. Nothing will get
> blocked, which means you will perceive all the possibilities you have
> learned about (objectively), and since your mind is open to a true exchange
> of energy, you will quite naturally start discovering other possibilities
> (edges) that you formerly couldn't perceive.
>
> For your mind to be open to a true exchange of energy, you can't be in a
> state of knowing or believing that you already know what's going to happen
> next. When you are at peace with not knowing what's going to happen next,
> you can interact with the market from a perspective where you will making
> yourself available to let the market tell you, from its perspective, what is
> likely to happen next. At that point, you will be in the best state of mind
> to spontaneously enter "the zone," where you are tapped into the "now moment
> opportunity flow."
>
> From: Mark Douglas (2000): "Trading in the Zone: Master the Market with
> Confidence, Discipline and a Winning Attitude." New York Institute of
> Finance: New York, 216 pages; (pp 130-35).
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