Updated: Jul 25, 2021
No doubt that trading psychology is the topliner for the trading business. Trading is a tuff business to earn easy money, and only a few people survive and make decent earnings here. For a fact, Nithin Kamath, CEO of the largest discount broker in India Zerodha, articulate in a recent blog that there are only 1% of active traders in the business who are making higher returns than FD 😐 ( Here is the link for the blog ).
You may be wondering now, Why it's so hard to make money here? The one line answer is "TRADING PSYCHOLOGY." You are bound to fail here even if you have world top class trading strategy and tools without the proper mindset to execute the system.
"One of the many contradictions of trading is that it offers a gift and a curse at the same time. The gift is that, perhaps for the first time in our lives, we're in complete control of everything we do. The curse is that there are no external rules or boundaries to guide or structure our behavior." - Mark Douglas Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude.
The quote above sets the tone for Mark Douglas excellent work on psychology and mental preparation for traders, Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude. This superb book is not about how to trade or what to trade. It's about how to think when trading. And, importantly, how not to think.
Mark's book Trading in the Zone has changed my perspectives about the markets, and I always read this book when I get free time. In this blog, I will try to recall few essential learnings I have gathered from this book. Douglas describes many things about the human mindset and how they play a role in trading to conclude about making money in the market. His book contains so many valuable insights that it's difficult to summarize them in a single article so that this review will focus on the essential points. The first key point is that financial markets differ from almost every other social environment we know (work, family and friends). Those frameworks have basic ways to protect our feelings and emotions. Even if someone disagrees with you or your boss orders you to do something, you expect them to follow them. Another difference is that your work doesn't matter. A developer might spend a week coding an application. At the end of time, something real and valuable will exist. This link between work and outcome is valid for most things in life, but not in trading. In the market, results have no direct link to your effort. Well, let's dive in...
Analyzing the market is helpful. Douglas says it can prevent traders from taking responsibility for their actions. It makes them think they need to understand more instead of trading better. The market analysis does have a purpose for developing an edge, which I'll cover below.
"Every trader I've worked with over the last 18 years has had to learn how to train his/her mind to stay properly focused in the 'NOW MOMENT opportunity flow.' This is a universal problem, and has to do both with the way our minds are wired and our common social upbringing." - Mark Douglas
Trading in the Zone says that taking responsibility as a trader "means believing that all of your outcomes are self-generated." Failure to take responsibility in this way will push you into a conflicting relationship with the markets and drive you to the black hole of market analysis (Neverending Journey). Another reason traders need to take responsibility is that we can only control our behaviour, actions and trades. It's a fact that we cannot control the markets. Traders must take what the market gives them and never question it.
Overcoming the FEAR
Nowhere Douglas suggests not to trade, but he highlights that trading is very different from most other activities. Therefore, traders need to think differently. As he says at the start of chapter 4, "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 think when they do it."
So, what are those ways of thinking? One of them is overcoming fear. Douglas lists four primary fears:
Fear of being wrong
Fear of losing money
Fear of missing out
Fear of leaving money on the table
Trading in the Zone often emphasises how this worry — an injury to our self-esteem can blind us to reality. It can make us stick in losing trades and prevent us from profiting on possibilities we might not have expected.
Another obstacle is that many people attempting to trade come from successful professional backgrounds: doctors, lawyers, executives. They generally tend to being right and being in charge. They're also not afraid of hard work. So they spend a lot of time learning about the markets. Douglas views this as a common trap of falling into market analysis.
Thinking in PROBABILITIES
A trader can only control himself/herself. Douglas highlights the need to think in probabilities. The trader must not care if they're right or wrong with any individual trade. All that matters is following their system consistently. That way, probabilities will favour him or her over time, provided he/she has an EDGE in the markets.
Being open about the market lets traders see the opportunities, and their opinions might fade. Meanwhile, strictly following rules allow them to manage risk and enter positions consistently. It also enables them to focus on the one thing under their control and their actions.
Let me recall my favourite quote in the book.
"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. The typical trader does just the opposite: He is flexible in his rules and rigid in his expectations. - Mark Douglas
Douglas then spends several chapters on how to overcome rigid beliefs that surrounded our minds. It's one of the most valuable parts of the book and the most difficult to implement. It's worth reading on your own. Again, he puts the mirror right before the reader, saying to worry less about the market doing mad things and more about yourself doing crazy things.
Douglas defines EDGE as "nothing more than an indication of a higher probability of one thing happening over another."
Trading is not about hoping, wondering or gathering more and more evidence to see the following trade results. Practically one cannot predict the future. But gathering evidence is confirm whether the variables used in the trading strategy has repeating patterns.
Here is where backtesting plays a crucial role. You must have well-verified variables that help you make decisions. And, of course, they should match your mindset. Douglas highlights the importance of acting on your edges when you have them. He urges readers to identify them objectively and act on them without hesitancy. In other words, don't fear entering a trade chosen by your system because the last one lost money.
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The ZONE of PROFITABLE TRADING
When a trader accepts and embraces the risk involved in trading, you will see a different trading world altogether.
When you accept the risk, you elimante the potential to define market information in painful way. When you stop doing so,there is nothing for your mind to 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 the market. - Mark Douglas
When you start executing by knowing the uncertainty of the outcome and risk, you enter the ZONE of trading.
Here is the overview of my overall reading experience of TRADING IN THE ZONE,
Anything Can happen.
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.
An EDGE is nothing more than an indication of a higher probability of one thing happening over another.
Every moment in the markets (in fact, LIFE) is UNIQUE.
Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude is a must-read book for any trader searching for the right methods of trading. You can read this book on amazon by clicking here. I hope this blog helped you. If you like the content, hit the like button and share it with your trading friends.
If you have any questions, kindly post them in the comment :)
Happy Trading 😎
Wishing you most and more,
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