Trading in the Zone Mark Douglas


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Dear All,

Trading in the Zone
by Mark Douglas

Who is Best Trader? How he thinks? How he acts? How is he able to remain consistently successful? What is Trader’s Mind Set and how it works?

If you like / appreciate / find something worthwhile, its work of Mark Douglas. If you don’t like it or not able to understand properly or found something confusing, its error on my part / failure on my part to convey it properly.

Follows Summary of chapter 1 to 11. Trading in the Zone.

Reserve next 12 post for the chapters…

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Chapter 1 Road to success Fundamental, technical or mental analysis.

Traders are responsible for much of trading volume and they tend to place more weight on technical rather than fundamental analysis. These people move the market and their response to fundamentals is not always rational.

Technical analysis looks for identifiable patterns in order for an indication of the probability of a future event happening.

Technical analysis keeps trader focused on the now rather than a complex fundamental model of what should be happening.

Psychological gap between predicting what will happen and actually getting in and out of the trades.

Key is to be a consistent winner. Best traders think different from the rest.

Most traders have occasional elation and a lot of fear, anger, frustration, anxiety, disappointment, betrayal and regret.

Best traders mindset is disciplined, focused and confident. This can take time to develop and involve emotional and financial pain.

Big psych gap between assuming you are a risk taker and actually accepting and embracing the risk.

Best traders put on a trade without hesitation or conflict and just as readily admit it isnt working and get out of it.

Only when you can trade without discomfort or fear have you learned to accept the risks inherent in trading.

Once you have done this you can develop an objective perspective.

Common trader errors:

- Got into trades to soon or late
- Not taken a small loss and turned to big one
- Got out early on winning trades
- Been in a winning trade and turned it to a loser
- Stopped out only to see it reverse

This isnt markets fault it is neutral and its there to provide opportunities.

Best traders arent afraid; attitude gives them mental flexibility to flow in and out of trades based on what the market is telling them at that time. Their attitude also prevents them from being reckless.

Trading errors arise from an attitude about being wrong, losing money, missing out and leaving Money on table.

If youre in a state of fear, information about the market is missed, fear immobilizes us. You will only be rational after the event is over. Then it will be painfully obvious.

Need to understand and control your perception of market information

Anyone can make a winning trade but takes technique to achieve consistency (eg any golfer can hit occasional good shot but learned technique brings consistent good shots)

Trap is to think you need to learn more and more about the markets. Wrong - there are too many conflicting variables causing paralysis by analysis.

Every trade has an uncertain income. Analysis will not solve trading problems of lack of confidence, discipline and improper focus.

At times will feel disappointed and betrayed by markets and feel you cant trust them, its not the markets its you that cant be trusted

Trader has two choices.

1) Try to eliminate risk by learning as many market variables as possible or
2) Redefine your trading to truly accept the risk and no longer be afraid.

Desired mindset is to trade without fear and at the same time have a framework that keeps you from being reckless.

Need to establish a positive future projection of yourself as a consistently successful trader and grow into it.
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Chapter 2 - The Lure and dangers of trading

Trading gives virtually unlimited freedom of creative expression.

The possibilities that exist to make Money are almost limitless.

To survive you need a mental structure that balances freedom to do anything and the potential that exists to experience both, financial and psychological damage (that can be direct result of that freedom).

We are used to a society that provides us with structures, rules and boundaries.

To operate effectively in a boundary-less trading environment we still need these structures rules and boundaries to guide our behaviour, we must create them ourselves.

This creates the following problems which must be overcome:

1) Unwillingness to create rules. The absence of rules can be the very nature why you were attracted to trading, but you still need them.

2) Failure to take responsibility - Its not the market, you are completely responsible no matter what the outcome. Random trading is unstructured trading without responsibility and will not lead you to consistency. When we put our own research and ideas on the line, its difficult to rationalize away unsatisfactory results. But if it is random then it is easy to blame the market or others for their bad ideas. You must take the responsibility.

3) Addiction to random rewards Humans are susceptible to becoming addicted to random rewards (eg gambling addiction). Traders need to overcome this threat and put in place a mental structure that produces consistency.

4) External v Internal Control Some people have been successful prior to trading (in other business / professions) because of their ability to manipulate and control the social environment to respond to what they want. Problem is market does not respond to this control & manipulation. Answer is instead of controlling the surroundings we must learn to control ourselves and our perception and interpretation of market information.
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Chapter 3 Taking Responsibility

Shaping your mental environment Primary goal should be to learn to think like a consistently successful trader, in order to do this need to eliminate the fear and recklessness from your trading.

Once you have eliminated the fear you wont make those fear based errors.

Other half of the equation is to have internal discipline that eliminates effect of euphoria or overconfidence that comes from a string of winning trades.

For a trader winning can be very dangerous.

Trap (to overcome fear & recklessness) is to think you can make more Money by learning more about the markets.

Its not technique or market knowledge that causes most losses. Its attitudes and beliefs about being wrong, losing Money and the tendency to become reckless after winning trades.

Attitude produces better overall results than analysis or technique.

Lot of traders are closest to the way they need to think at start of their careers, especially if start with winning trades. They have a carefree state of mind, in the zone and have no fear, youre in the moment and just doing it.

Need to establish a positive winning attitude to get you close to in the zone

A positive winning attitude is expecting a positive result for your efforts with an acceptance that your results are a perfect reflection of your level of development and what you need to learn to do better.

Learn and move beyond your mistakes, they are inevitable.

Analysts have the skills but dont have the winning attitude. They are operating out of fear. To be successful you must develop that genuine winning attitude.

Reacting to loss The novice trader generally loses that winning attitude and carefree state once he encounter loss.

Must accept that losing is a natural consequence of trading. Attitude wont deteriorate if you have completely considered and accepted the risk.

Normal to feel angry, frustrated, emotionally distraught and betrayed. But you must take responsibility dont blame the market. You are responsible.

If you dont accept responsibility you will set up two major psychological barriers:

1) You will form a conflict type relationship with the market which will take you out of the constant flow of opportunities that the market offers. The market is neutral. You need to get into the flow of the market.

2) You will feel that your trading problems can be rectified through more market analysis.

You will extract your revenge on the market by beating it through sheer weight of analysis Wrong this will lead to paralysis by analysis.

Our pain avoidance mechanisms exclude or alter information being offered by the market. E.g. In a trade that turns against you, you hang on in there telling yourself it will reverse again in your favour, finally you exit. On review it is painfully obvious you should have exited and perhaps taken the other direction. But at the time that information was painful so you blocked it out.

The novice trader will suffer loss but will be driven by two factors

1) Wants that winning feeling back
2) Extremely enthusiastic about the knowledge he is acquiring.

What doesnt realise is that have gone from a carefree mindset to a prevent and avoid mindset. Attitude has shifted from a positive to a negative one.

Now you are focused on learning to prevent the market from hurting you.

Easy to get locked into a cycle of getting hurt by markets and feeling need to learn more. The problem doesnt lie in lack of market knowledge but in his perspective.

Boom and bust is created by euphoria from winning which leads to making a mistake such as over leveraging, violating your rules and acting as if no boundaries to your behaviour are required.

In authors experience 10% of active traders are consistent winners; 30 -40% are consistent losers and 40 50% are boom busters they havent learned to keep the Money they make.

The moment euphoria takes hold you are in deep trouble. You feel that nothing can go wrong, putting on a larger trade is compelling.

If you win and havent learned to create a healthy balance between confidence and restraint or you havent recognised your potential to self destruct then sooner or later you will lose.

If you stop fighting and blaming the market which in effect means you stop fighting yourself you will recognise exactly what you need learn and you will learn it quickly.

Taking responsibility is the cornerstone of a winning attitude.
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Chapter 4 Consistency A State of Mind

Consistency is a state of mind that has at its core certain fundamental thinking strategies that are unique to trading.

If trading should be so easy then why is it so hard?

Thinking about Trading You cant rely on the market to make you consistently happy. Consistent traders dont have to try to be consistent - they are consistent.

Just like you cant try to be happy you cant over try being consistent.

The very best trades are easy and effortless. Trying to hard for consistency can take you out of the flow of opportunities.

The very best traders simply dont try to get anything from the market they simply make themselves available to it.

If you try to get something from the market then you will be disappointed and your emotional defence mechanisms will kick in which will block the threatening information thereby taking you out of the opportunity flow. Post analysis will be the could have, should have and will be very evident in retrospect.

Remember fear is the source of 95% of errors.

The struggle isnt with the market. Its with your own internal resistance, conflicts and fears. Answer is to learn to accept the risk.

Really Understanding Risk accepting risk means accepting consequences of your trades without emotional discomfort or fear.

Need to make yourself available, dont impose limitations or expectations on the markets behaviour. Let the market do what its going to do and act on the opportunities.

Remember usual lifecycle of a trader is starting off carefree then becomes fearful which diminishes his potential, the successful few break this cycle and embrace the risk as a natural part of trading and accept the responsibility.

Align your mental environment How do we do this? Through developing a firm belief in probabilities and edges.
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Chapter 5 The Dynamics of perception

The market doesnt generate happy or painful information, its simply information. Its your own perception of that information which gives it meaning and determines your frame of mind and whether you can take advantage of what the market is offering.

When the pros are in the flow then no information is painful it is simply an endless stream of opportunities and when they arent in the flow they recognise it and scale back or dont trade at all.

Goal is to be objective and to act without resistance but with enough restraint to counter act euphoria or overconfidence.

Debugging your mental software & Perception of risk Getting your mind right.

First stage is to look at perception Were in trading because we perceive an opportunity.

Memories, distinctions and beliefs are a result of what weve learned from our external environment. Our learning capacity is unlimited but storage capacity isnt What you perceive depends on what you have been exposed to; eg price chart for beginner is confusing however as time goes on you learn to make interpretations and it takes on a different look. Yet you still wont see everything, what you havent learned yet will remain invisible. We are constantly exposed to invisible opportunities. People see what theyve learned to see.

Fear arises from past experiences which can lead to reluctance to place a trade and takes you out of the opportunity flow.

A top trader would say that the fear is irrational because the trade is to do with the now moment and has nothing to do with the last trade

Each trade is simply an edge with a probable outcome and statistically independent of every other trade.

Risk is relative to the person who perceives it.

The Power of Association You cant perceive what still needs to be learned unless your state of mind is conducive to learning.

If youve had a bad experience with the market then the next time you are faced with a similar set of circumstances you will project and associate the past experience with the coming one, thus causing fear. So instead of perceiving the next encounter as an opportunity to experience something new about the market you will perceive a threatening and dangerous market

Fear is debilitating and with it, it is very difficult to learn and perceive the possibilities that exist.

For Example, Last 3 trades were losers, now your model shows an opportunity exits. But you hesitate and question whether it really is a signal and set about gathering further confirmations that you normally wouldnt consider. Meanwhile entry opportunity is fast disappearing and the risk is becoming greater by the minute. You become paralyzed by conflict and dont trade as you tell yourself it was too risky in the first place.

The market gave a signal yet you couldnt look at it objectively or positively. If the situation was that you had 3 previous winning trades you wouldnt have hesitated.

The market doesnt provide positive and negative information it is neutral, your mind does.

In order to achieve consistency you need to understand these subconscious thought processes and learn how to circumvent it. Develop a state of mind that perceives the opportunity flow of the market in the now moment without the threat of fear or overconfidence generated from past trades. Remember winning and losing is just a function of your edge and its probability.
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Chapter 6 The Markets Perspective

Most traders perception of risk is a function of their most recent trades, the best traders do not have this problem.

You need to train your mind to stay in the now moment opportunity flow

The Uncertainty Principle - You need an unshakeable belief in an uncertain outcome with an edge in your favour, in order to

1) Trade without fear or overconfidence,
2) perceive what the market is offering from the markets perspective,
3) Stay focused in the now moment opportunity flow
4) Spontaneously enter the zone

The best traders make themselves available to take advantage of whatever opportunities the market offers at any given moment.

The fear of being wrong causes us to place an inordinate amount of significance on the information that tells us were right.

By making yourself available you know that your edge places the odds of success in your favour but at the same time you completely accept you dont know the outcome of any particular trade. By opening your mind up you can learn things about the market you didnt know and set up the mental condition most conducive to entering the zone.

In the zone means your mind and the market are in sync. To do this you need to:

1) Learn how to keep your mind focused in the now moment opportunity flow

2) Learn to trust the creative side of your brain instead of solely relying on the rational logical side. Its the creative side that holds the hunches, intuition and inspiration.

Once again you need an unshakeable belief in uncertainty and your edge.

Being a good trader is not synonymous with being a good market analyst.

Most traders dont do the mental work necessary to reconcile the conflicts that exist between what they have already learned and how that contradicts and acts as a source of resistance to implementing the various principles of successful trading. The Markets Most Fundamental Characteristic - The market can do anything at any time.

All price movement is a function of what traders believe about the future i.e. what is high in price and what is low.

Three primary forces exist in any market:
1) Traders who believe prices are to high
2) Traders who believe prices are to low
3) Traders who are watching and making their mind up (the potential force)

There can be extreme diversity of beliefs amongst traders of what they believe is going to happen in the market, in this makes virtually anything possible.

Know it all and arrogant analysts dont have the mental flexibility required to trade.

It only takes one trader to change the market, e.g. price has hit a resistance level, one trader could make a huge order above it and prove that resistance level incorrect.

Best traders

1) Predefine their risk prior to entering a trade

2) Cut their losses without hesitation once the market tells them the trade is not working.

3) Have a systematic money management regimen for taking profits

They have these systems because they believe anything can happen and always account for it.

Our edge may be recognising certain patterns but we dont know what the other traders are thinking. There are always constant unknown , hidden variables.

Most traders trade from the perspective what they cant see doesnt exist this causes them to not predefine the risk, cut their losses and have a systematic profit taking regimen. They do this because they dont think its necessary because they dont believe that anything can happen at any time, they believe they know what is going to happen next.

Our beliefs about what is true and real are powerful forces, they control how we interact, perceive and make decisions in the market. To counter this you need an unshakeable belief that anything can happen, by believing this you will train your mind to think in probabilities.
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Chapter 7 - The Traders Edge: Thinking in Probabilities

Thinking in probabilities is essential to ones consistent success as a trader.

Look at casinos they make money from what appears to be a random outcome, they do this because they have a small % edge in their favour, they dont change this edge, they dont need to because they allow the laws of probability to work for them.

It is difficult to think in terms of probabilities because at the micro level you need to believe that every event is unique and unpredictable but at the macro level you need to believe that a series of those random unique events is very predictable because you have the edge.

The traders analytical tools that identify patterns in the market (eg moving averages, trend lines etc) are the known variables that gives them the edge and puts the odds of success in their favour. But to work those tools must be used on a methodical and consistent basis.

Once a trader identifies a trade that meets their criteria and gives them an edge and places a trade then the behaviour of other traders will determine if the market unfolds in their direction. The reaction of the other traders are the unknown variables.

Since all trades have an uncertain outcome then they are statistically independent of the next trade. To keep the odds in your favour traders therefore have to have a large enough sample size to give their edge the opportunity to work.

Trading in the moment - Every trade is different if not for the simple reason that all the same traders who had an influence on the last trade will not be present. It doesnt matter that every other chart or piece of evidence is the same as the last trade.

We as traders are operating in a probabilistic environment where we dont know for certain what will happen next.

When youve trained your mind to think in probabilities it means you have fully accepted all possibilities and you always do something to take the unknown forces into account (ie predefine the risk, cut your losses have a profit taking money management plan)

You need to let go of the need to know what is going to happen next and be right with every trade.

Best traders commit themselves to take every trade that conforms to their definition of an edge. They have stopped trying to predict the outcome. By taking every trade that conforms to their edge they are increasing the sample size which will give the odds a chance to work out in their favour.

The typical trader wants to be right with every trade and will do an inordinate amount of analysis to ensure it. Once they have determined that, then they will enter the trade and because they are sure theyre right they wont deem it necessary to follow the rules of predefining the risk, cutting your losses and having a profit taking plan.

They cant predefine the risk because that is raising the possibility of losing and given they have to win they will gather yet more evidence or not participate.

So there is an irreconcilable dilemma, they want to win but the only way they can do that is participate and the only way theyll do that is if theyre sure theyll win.

Their answer is ignore the risk and convince themselves theyre right.

Once you have accepted the uncertainty of each edge and the uniqueness of each moment your frustrations as a trader will end.

Best traders define it as a probability game

Managing Expectations Any expectation of a markets behaviour that is specific, defined or rigid instead of being neutral and open ended is unrealistic and potentially damaging.

Unfulfilled expectations cause unhappiness. Our mind has pain avoidance mechanisms to help us avoid that pain by rationalizing, justifying, making excuses, blaming or we just lie to ourselves. Sub consciously we may block signals that if we werent in the moment would be painfully obvious to us. We concentrate on the info that keeps us out of pain. 20-20 hindsight will kick in after the trade.

When there is nothing at stake your perception of the market is much clearer and objective.

As a trader you need to be rigid and flexible at the same time, ie rigid with your rules and flexible in our expectations. Need to be rigid to give protection in an environment that has few boundaries and to give you confidence and need to be flexible in order to be objective and give clarity to what the market is communicating.

The typical trader is the reverse.

Eliminating the emotional risk Need to neutralize your expectations of what the market will do.

A probabilistic trading mindset consists of 5 fundamental truths:

1) Anything can happen
2) You can make Money without knowing what is going to happen next
3) There is a random distribution of wins and losses that define an edge
4) An edge is just the greater probability of one thing happening over an other
5) Every moment in the market is unique

If you really believe in an uncertain outcome you wouldnt make the trading errors.

Best traders are in the now moment. They are not trying to avoid being wrong or trying to prove anything. Their minds arent blocking the info that tells them it is time to take losses or take profits. They accept what the market is offering and move onto the next trade.
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Chapter 8 Working with your beliefs

Any particular pattern defined as an edge is simply an indication that there is a higher probability that the market will move in one direction over the other.

The outcome of each pattern is random relative to one another due to the fact that the traders who contribute to the pattern will be different each time.

The market is a never ending stream of opportunities.

Our fears prevent us from taking advantage of many of those opportunities.

Our beliefs working in conjunction with the association and pain avoidance mechanisms cause us to perceive, define and interpret market information in a way that is consistent with what we expect.

Expectations are beliefs projected into some future moment.

Each moment in the market is unique, but if information generated by the market is similar to a past experience then we connect it to a belief that is already in our mind.

The two sets of information the outside (market) and the inside (our mind and beliefs) become linked.

Its our state of mind that makes the truth from whatever we are perceiving outside of us as indisputable and the absolute truth.

The problem is the beliefs that triggered our state of mind may not be true relative to the possibilities that exist in the market at any given moment.

Trouble is the instant we think we know what to expect we stop taking all the unknown forces in the market into consideration. (Unknown forces being the other traders)

As traders we need to know:

1) What an edge looks, sounds and feels like
2) How much we need to risk to determine if an edge is going to work
3) A specific plan on how we are going to take profit or cut lossess

Were in trouble if we start thinking we know what the market will do.

Creating consistent results requires skill. Need to focus on acquiring the tools to master these skills rather than focusing on Money.

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 (from its perspective) at any given moment.

A carefree state of mind is when you dont feel any fear, hesitation or compulsion to do anything because youve eliminated the potential to define and interpret market info as threatening. To remove that threat you have to accept the risk completely.

To be objective is to have conscious access to everything you have learned about the market.

Making your self available is to come to the market with no agenda other than to let it unfold as it chooses and be in the best state of mind to recognize and take adv of the opportunities it makes available to you.

Trading in the now moment is not associating it with any past experience.

How the Fundamental truths relate to the skills

1) Anything can happen there are always unknown forces and traders operating

2) You dont need to know what is going to happen next to make Money - So long as you have an edge then the laws of probability will decide the outcome over a series of winning and losing trades. Market info is only threatening if you expect the market to do something for you. If you dont expect the market to make you a winner every time you will have no fear of losing, if you dont expect the market to keep going in your direction you will take profits off the table. If you believe this then how can the market make you wrong. If you believe anything can happen then you will always be right. If the odds are in your favour then every loss puts you closer to a win.

3) There is a random distribution between wins and losses for any given set of variable that define an edge. : If you believe this then you will be looking for anything that meets your criteria of an edge and jumping in without hesitation. If you still believe trading is about analysis for each loss you will be doubting your edge and gathering yet more info.

4) An edge is a higher probability one thing will happen over the other. The only evidence you need to gather is whether the variable you define as an edge are present at any one time. When you use other info you are adding random info outside of the parameters of an edge to your trading regime. This will create a random inconsistent approach that will lead to random inconsistent results. Why bother gathering further info, if the market is offering you a legitimate edge, determine the risk and take the trade.

5) Every moment in the market is unique. If each moment is like no other then how can you know what will happen next, so why bother trying to know. The best traders have trained their mind to believe in the uniqueness of each moment. If you believe in this uniqueness you will not associate and your mind will be open to perceive what the market is offering from its perspective.

You will enter the zone when you are tapped into the now moment opportunity flow. This will happen when you are at peace with not knowing whats going to happen next and make yourself available to the market.
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Chapter 9 - The Nature of Beliefs

You can understand the principles of success but it takes a lot of time and effort to fully train your mind to accept them.

Understanding the concept is only the first step in integrating it at a functional level.

Our minds are not naturally wired to be objective or be in the “now moment”

The Origins of a Belief - Need to understand the difference between a memory and a belief.

Pure memory is sensory information stored in its original form.

A belief is a concept about the nature of the way the external environment expresses itself. Not born with them we acquire them through being taught them or our own experiences.

How beliefs shape our lives :

1) They manage our perception and interpretation of environmental information in a way that is consistent with what we believe.

2) They create our expectations

3) Our decisions and behaviour are consistent with what we believe

4) Beliefs shape how we feel about the results of our actions

eg – Guy in New York held a sign saying “Free Money”, only one person asked for enough for his bus. In reality he would have given him and any others a lot more. Belief was that he was mad or free money didn’t exist we believe there is always a price to pay.

Beliefs v The Truth – Our beliefs limit our awareness of the external information being generated. Our interpretation of events differ as a consequence of our beliefs.

Need to consider the following:

1) Environment expresses itself in an infinite combination of ways

2) Our beliefs will represent a limited version of what is possible.

3). If our beliefs were always fulfilled we would be in a perpetual state of satisfaction.

4) If we are not experiencing satisfaction then our beliefs are not working well with the external environment

What is truth? – Whatever works in relation to what we are trying to accomplish at any given moment.
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