Trading In the Zone - by Mark Douglas - Part 1

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Introduction:


Welcome to the world of trading, where your mindset and discipline are just as important as knowing which stocks to buy or sell. Imagine trading as a game of strategy and nerves, where your thoughts and actions can make all the difference between winning big and losing it all. It's all about how you think and feel about trading. Are you confident and patient, or do you let fear and greed take over? Having the right mindset can help you stay calm and make smart decisions even when things get tough. Discipline is like your superpower. It's about sticking to your plan no matter what. Even when you see other traders making quick money, discipline helps you stay focused on your goals and not get distracted.

That's why "Trading in the Zone" is such an important book for traders. It's written by Mark Douglas, and it's not just about fancy strategies or charts. It's about understanding your own mind and emotions when you trade. This book is like a guide that shows you how to develop the right mindset and discipline to succeed in trading.


Chapter 1 - MENTAL ANALYSIS

 

The shift to mental analysis:

There is huge gap between what you understand about market and your ability to transform that knowledge into consistent profits. – ‘Psychological Gap’

 

Big question: can trading be mastered?

Yes, not without gaining insight and understanding about yourself and about the nature of trading. Trading is chock full of paradoxes and contradictions in thinking that make it extremely difficult to learn how to be successful. Traders start trading with lack of understanding of what it means to be a trader – skills that are involved and depth to which those skills need to be developed.

 

Difference between consistent winners and other:

winners: money is within their grasp and they can take it at their will.

Losers: money evaporates before their eyes, time and time again. – only thing consistent with them is emotional pain.

 


 

Mind set of Winners :

Think differently from the rest. They have attained a mindset – unique set of attitudes – that allows them to


·      Remain disciplined,

·      Focused, and

·      Confident in adverse conditions.

 



Accept the Risk

Any trader is taking risk when you put on a trade, but that doesn’t mean that your are correspondingly accepting that risk. Have they fully accepted the possible consequences? Answer is No.

There is a huge psychological gap between assuming you are a risk taker because you have put on a trade and fully accepting the risks inherent in each trade. Trying to avoid something that is unavoidable will have disastrous effects in your ability to trade successfully.

 

Learning how to redefine your trading activities in a waythat allows you to completely accept the risk is the key to thinking like asuccessful trader.

Traders mistakes:

Source of our trading difficulties is internal, derived from our state of mind.

·       Getting into trades too soon – before the market actually generated a signal

·       Getting in trade too long – after the market has generated a signal

·       Traders convince themselves not to take loss – as a result it turn into a bigger loss.

·       Getting out of trades too early

·       Not getting out of winning trade and let the trade turn into losers.

·       Move stoploss closer to entry point – only to get stopped out and then stock running up.

These errors are “faulty trading attitudes and perspective” Best traders have developed attitude that prevent them from getting reckless. And mental flexibility to flow in and out of trades based on what the market is telling them about the possibilities.

Traders lose money due to attitudes about being wrong, losing money, missing out, and leaving money on table. Your fears will act against you in such a way that your will cause the very thing you are afraid of to actually happen. Physically it causes us to freeze or run. Mentally it causes us to narrow out focus to the object of fear and other information available from market get blocked. Understanding the relationship between beliefs, attitudes and perception is as fundamental to trading as learning how to serve is to tennis.

Understanding and controlling your perception of market information is important and how our beliefs and attitudes affect our perception of market

information.

 

Market in information:

Mkt offers too many – often confliction – unlimited variables to consider. Unless you accept the possibility of an uncertain outcome, your will try to avoid any possibility you define as painful. In process, you will subject yourself to any number of self-generated, costly errors. In a hope to create consistency, you will be driven to gather as many market variables as possible into your arsenal of trading tools [ Black hole of analysis]. You are

still betrayed by the markets. It feel like you cant trust markets: but in reality you can’t trust yourself.

You won’t be able to achieve success until you have trained your mind to override your natural inclination to think in ways that are counterproductive

to being a consistently successful trader. If you cant be objective and always act in your own best interest, achieving consistent results will be next to impossible.

What you currently hold to be true about the nature of trading will argue to keep things just the way they are, inspite of your frustration and unsatisfying results.

 

Chapter 2 – DANGER OF TRADING

 

People are getting into trading for wrong reasons. Unlimited possibility + unlimited freedom to take advantage of those possibilities =unique psychological challenges. Very few people are aware and equipped to deal with it. Freedom is great, but that doesn’t mean that we have the appropriate psychological resources to operate efficiently in an environment that has few boundaries and where the potential to do enormous damage to ourselves exists. Creating a mental structure can be difficult if what you want to instill is in conflict with what you already believe.

 

The Dangers:

Our needs and desires are generated in our mental environment and they are fulfilled in exterior environment. If these environments are not in correspondence, we experience dissatisfaction, anger and frustration. Needs and desires create mental vacuums. Universe has a natural tendency to not tolerate a vacuum and moves to fill it. If needs are not fulfilled – it gives rise to “denied impulses” – If they are no reconciled, they accumulate and usually end up manifesting themselves in any number of addictive and compulsive behavior patterns. They affect our ability to stay focused and take a disciplined, consistent approach to our trading.

 

The Safeguards:

·       We need rules and boundaries to guide our behavior.

·     Create an internal structure in the form of specialized mental discipline and a perspective that guides our behavior so that we always act in our best interests.

 



Gambling vs trading:

In trading, no one is going to force you to decide in advance what your risk is. [only consistent winners define their risk in advance]

In trading, prices are in constant motion, nothing begins until your decide, it lasts as long as you want, it doesn’t end until your want it to be over. [gambling have forced ending]. Once your are in losing trade u don’t have to do anything to keep on losing. U can just ignore the situation, and the market will take everything you own – and more.

 


So, we have to act with some degree of restraint and self- control, at least if we want to create some measure of consistent success.

 

Problem 1: The willingness to create rules.

People always resist the notion of creating a set of rules. The very reason we are attracted to trading is unlimited freedom . its the same reason we feel natural resistance to creating the rules and boundaries. It takes lots of pain to establish and abide by a trading regime that is organized, consistent and reflects prudent money management guidelines.

 

Problem 2: Failure to take responsibility

How does one participate in an activity that allows complete freedom of choices, and at the same time avoid taking responsibility if outcome are not to ones liking. You have to start with premise that no matter what the outcome, you are completely responsible.

Random trading = poorly planned trades or trades that are no planned at all.

  

Problem 3: Addiction to take random rewards

I am not sure why we are susceptible to becoming addicted to random rewards. The problem with any addiction is that it leaves us in a state of “choicelessness”. Due to addiction other needs (like need to trust ourselves and not to subject too many of our assets to risk) are either ignored or dismissed. This addiction is another source of resistance to creating the kind of mental structure that produces consistency.

 

Problem 4: External v/s Internal Control

To some degree, all of us have learned or developed techniques to make the external environment conform to our mental environment. The problem is none of these techniques work with markets. However we can control our perception and interpretation of market information, as well as our own behavior.

Chapter 3 – TAKING RESPONSIBILITY

 

Shaping your mental environment

The tools you will use to create new version of yourself are :

·       your willingness and desire to learn.

·       Fueled by your passion to be successful.

·       Medium for your artistic endeavor will be your mental environment

·       Where you can restructure and install the beliefs and attitudes that are necessary to achieve ultimate goal.


 

Primary goal –

·      learn how to think like a consistently successful trader. The consistency you seek is in your mind, not in markets.

·      Attitude produces better results than analysis and technique.

·      Acquire mental structure to trade without fear

·      Avoid becoming reckless and committing fear-based errors. Tendency to become reckless, when you are feeling good, that causes more losses.

·    Need to develop a restraint. Internal discipline to counteract the negative effects of euphoria and overconfidence that comes from string of winning trades.

 

Winning attitude:

Many people begin trading with very unrealistic concept of the inherent dangers involved. This lack of fear translates into carefree state of mind. Similar to state of mind many great athletes describe as a “Zone”. You don’t weigh alternatives or second guess yourself. Winners have winning attitude that allows them to easily move beyond their mistakes. Others get bogged down in negative self-criticism, regret and self-pity. IF few winning trades can cause you to enter into a kind of carefree state of mind that is an essential component to your success, but is not founded on the appropriate attitudes, then want you have is prescription for extreme misunderstanding about the nature of trading is inevitably result in both emotional and financial disaster.

 

Ideal attitude for losing trade:

·     There is no possible way to avoid a loss, coz losing is a natural consequence of trading.

·      Completely accept the risk – considered and accounted for all of what would otherwise be unacceptable possibilities in mkt behavior.

Taking responsibility means – believing that all of your outcomes are self – generated: results are based on your interpretation of market information, decisions you make and the actions you take.

·      Without deterioration of attitude, move on to next trade.

·      Accept the inherent risk of trading and learn how to guard against such risks.



 

It is fundamental shift in attitude that accounts for their success, not some brilliant realization about the market. Market is a group of people interacting to extract money from one another, then market has no responsibility other than to follow the rules it has established to facilitate

this activity.

 

Obstacles created by not taking responsibility:

·       Establish an adversarial relationship with the market that takes you out of the constant flow of opportunities.

·       You will mislead yourself into believing that lack of success can be rectified through market analysis.

 

Market dynamics:

From mkt perspective each moment is neutral; to observer every price move can have meaning. The meaning are based on what you’ve learned, and exist inside your mind. Although it may feel as if you are fighting the mkt or mkt is fighting you, the reality is you are simply fighting the negative consequences of not fully accepting that mkt owes you nothing; and that you need to take advantage of the opportunities it presents by yourself. Way to take maximum advantage of a situation is to get into the flow. Its often erratic, in shorter timeframe, but it does display symmetrical patterns that repeat themselves.

 

Market in simple way giving a systematic way of winning, need to look at it in objective way rather then prove something. With increased knowledge abt mkt indicators, he now finds that he’s developed problems executing his trades. He hesitates, second guessing himself, or does not put a trade at all, in spite of clear signals. The dilemma is that our minds are wired to avoid both physical and emotional pain, and learning about the markets will not compensate for the negative effects our paid avoidance mechanism have on out trading. Our minds have number of ways to shield us from information that we have learned to perceive as painful. At a conscious level, we can rationalize, justify, or make a case for staying in a losing trade. Call our trading buddies, look at new indicators, all for the purpose of gathering nonpainful information in order to deny the validity of the painful information. Consider the experience of being in losing trader when the market is making consistently higher highs while you refuse to acknowledge you are in losing trade because you have focused all your attention on the tics that go in your favour. Opportunity to put on a trade in the opposite direction was easily recognized once there was nothing at stake. But we were blinded to this opportunity while we were in a losing trade.

 

Its absolutely essential to your development that you understand these negative effects and learn how to take conscious control in a way that helps you fulfill your goals.

 

Boom and Bust Cycles:

3 types of traders : consistent winners, consistent losers and “boom and busters”

Many traders have learned making money only on a limited basis; they haven’t yet learned how to counteract the negative effects of euphoria and how to compensate for the potential for self-sabotage.

They have learned to make money but haven’t learned the trading skills that have to mastered in order to keep the money they make.

Equity curve looks like roller coaster ride. Euphoria - creates a sense of supreme confidence - possibility of anything going wrong is virtually inconceivable. When you winning you are most susceptible to making a mistake, overtrading, putting large a position, violating rules, even thinking you are the market. Overconfidence and euphoria starts to take hold of the thinking process. As soon as you put large positions even small move in opposite direction can cause you to go into a state of “mind-freeze”. Once u out of position – you feel betrayed – buy you are actually betrayed by your own emotions. Even our behavior is in direct conflict with what we want.

 

Market doesn’t create your attitude or state of mind; it simply acts as a mirror reflecting what’s inside back to you.

 

How to learn from losing trade?

Assume complete responsibility for the losing trade.

Try to identify how you might change your perspective, attitude and behavior?

Try to identify how you might learn about it to prevent such things from happening again?

Chapter 4 - CONSISTENCY: A STATE OF MIND

 

Winning and consistency are state of mind in the same way the happiness, having fun are.

state of mind = by product of your beliefs and attitudes.

If u depend on outside conditions to make you happy, then it is extremely unlikely that you will experience happiness on a consistent basis.

You can easily increase the possibility of being happy by developing fun-type attitudes and by working on neutralizing the beliefs and attitudes that prevent you from having fun.

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.

You have to learn to think about trading in such a way that you are no longer susceptible to conscious or subconscious mental processes that cause

you to obscure, block or pick and chose information on the basis of what will make you happy.

 

Accepting the risk:

·       Accepting the consequences of your trade without emotional discomfort or fear.

·       Means possibility of bring wrong, missing out, losing or leaving money on table doesn’t cause mental defense mechanism kick in and take you out of the opportunity flow.

·       You will let the mkt unfold and you will make yourself available to take advantage of whatever situation you define as opportunity.

·       You don’t impose any limitation or expectation on the markets behavior, let mkt do whatever its going to do.

·       The mkt will create certain conditions you define as opportunity, you act on those opportunity to best of your ability, without affecting your state of mind by the outcome.

·       When state of mind not affected by mkt behavior, the internal struggle cease to exist. And you will be able to take full advantage of your skills.

·       You wont get reckless because you have the appropriate monitoring mechanism in place. 


Aligning your mental environment:

Need a thinking strategy that has, at its core, a firm belief in probabilities and edges. Several thousand lines of perfectly written code will be stuck

because of one flawed line. The shift would be equivalent to finding the flawed line in your mental system and replacing it with something that works properly. Contradictory beliefs and nonfunctional awareness represent flawed mental software code, that destroys your ability to stay focused and accomplish your goals. Most of us we live with irrational fear because we don’t wont to go through the emotional work that is necessary to overcome the fear.

 

 

Chapter 5: THE DYNAMICS OF PERCEPTION

 

To become professional trader:

Redefine your relationship with market means change your perspective and operate out of a mental framework that keeps you focused on the opportunity available instead of tapping you into emotional pain.

·       See the market from objective perspective, without distortion.

·       You must be able to act without resistance and hesitation

·       But with the appropriate amount of positive restrain to counteract the negative effects of overconfidence or euphoria.

 

There is a cause and effect relationship that exists between ourselves and everything else that exists in external environment. As a result, out encounters with external forces create what I am going to call “energy Structure” inside out minds. People see what they have leaned to see and everything else is invisible until they learn how to counteract the energy that blocks their awareness of whatever is unlearned and waiting to be discovered.

 

Perception and Risk:

The top traders 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.

 

The power of Association:

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 a memory or distinction.

 

If what you perceive at any given moment causes you to feel fear, ask yourself question: is information is threatening or are you simply experiencing the effect of your own state of mind reflected back to you. If your last two or three trades were winners would you perceive the signal any different? Thus market generates same signals in all scenarios but your state of mind was negative in first scenario and that caused you to focus on the possibility of failure, which in turn caused you to hesitate. Many of the mental patterns that cause traders to lose and make errors are so self evident and deeply ingrained that it would never occur to us that the reason we aren’t consistently successful is because of the way we think.


Conclusion:

Implementing the principles outlined in the first five chapters of "Trading in the Zone" can lead to significant improvements in trading outcomes over time. Here's how you can start implementing each point:

  1. Mental Analysis Shift: Begin by reflecting on your current understanding of the market and your trading approach. Identify any gaps between your knowledge and your ability to generate consistent profits.
  2. Mastering Trading: Develop a mindset of discipline, focus, and confidence. Set aside time for self-reflection and learning about yourself as a trader, in addition to learning about the markets.
  3. Accepting Risk: Practice fully accepting the risks inherent in each trade you take. Remind yourself that losses are a natural part of trading and focus on managing risk effectively rather than avoiding it.
  4. Traders' Mistakes: Identify any recurring mistakes or patterns in your trading behavior. Work on correcting these faulty attitudes and perspectives to minimize errors and improve consistency.
  5. Dangers of Trading: Evaluate your reasons for getting into trading and ensure they align with realistic expectations and a willingness to face the psychological challenges involved.

By actively incorporating these principles into your trading routine and mindset over the next six months, you can expect to see improvements in your decision-making process, emotional resilience, and ultimately, your trading results. Keep track of your progress and adjustments along the way to gauge the impact of these changes on your overall trading performance.


wait for chapter 6 - 10 of the book.....


Disclaimer:

1.        Objective of this documents is share knowledge on Method of Analysis and not the strategy.

2.        Before using for trading please understand the method and precautions to be taken while using.

3.        A great strategy is useless without proper discipline and even mediocre strategy can do the trick with strong discipline.

4.        Observe 100s of historical charts using this method or in combination of other indicators and see how it works. Then try to form the rules for entry / exit and stop loss.



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