Mental Game: Excerpts from Trading in the Zone

The hard, cold reality of trading is that every trade has an uncertain outcome; therefore, the possibility of being wrong and losing money is always present. 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. If you are unable to trade without the slightest bit of emotional discomfort (specifically, fear), then you have not learned how to accept the risks inherent in trading.

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.

The problem is that preventing pain by avoiding losses can't be done. What a trader doesn't realize is that, in spite of his enthusiasm, when he goes from a carefree state of mind to a prevent-and-avoid mode of thinking, he shifts from a positive to a negative attitude. He's no longer focused on just winning, but rather on how he can avoid pain by preventing the market from hurting him again.

Developing a winning attitude is the key to your success. The problem for many traders is that either they think they already have one, when they don't, or they expect the market to develop the attitude for them by giving them winning trades. You are responsible for developing your own winning attitude. The market is not going to do it for you, and, I want to be as emphatic as I can, no amount of market analysis will compensate for developing a winning attitude if you lack one.

I am offering you a specific thinking strategy composed of a set of beliefs that will keep you focused, in the moment, and in the flow. With this perspective, you will not be trying to get anything from the market or to avoid anything. Rather, you will let the market unfold and you will make yourself available to take advantage of whatever situations you define as opportunities. When you make yourself available to take advantage of an opportunity, you don't impose any limitations or expectations on the market’s behavior. You are satisfied to let the market do whatever it's going to do.

A perspective from which you make yourself available takes into consideration both the known and the unknown: For example, you've built a mental framework that allows you to recognize a set of variables in the markets behavior that indicates when an opportunity to buy or sell is present. This is your edge and something you know.

From: "Trading in the Zone" by Mark Douglas

MM

ps. If ya ain't got the book or read it ... I highly recommend it ... I just re-read it in one day a week ago and it's had a positive impact on my trading.

Thanks MM! I haven't read that book for a while and agree that like many of the classics it needs to be read every now and again.

That's a great passage that you quoted.

Sequel to the initial "excerpts" post for "Trading in the Zone." Here are a few others that help balance out and fill in some gaps from the collection of excerpts listed above. Again, if you don't have the book, order it. These references only scratch the surface of what's between the covers.


Traders who have learned to think in probabilities approach the markets with a certain perspective. At the micro level, they believe that each trade or edge is unique. What they understand about the nature of trading is that we can use all the various tools to analyze the market's behavior and find the patterns that represent the best edges, and from an analytical perspective at any given moment, these patterns can appear to be precisely the same in every respect, both mathematically and visually. But the outcome of the current pattern has the potential to be different from the past pattern.

Thinking in probabilities 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. Traders who have learned to think in probabilities are confident of their overall success, because they commit themselves to taking every trade that conforms to their definition of an edge. They don't attempt to pick and choose the edges they believe are going to work and act on those; nor do they avoid the edges that they believe aren't going to work. If they did either of those things, they would be contradicting their belief that the "now" moment situation is always unique, creating a random distribution between wins and losses on any given string of edges.

Successful traders have learned, usually quite painfully, that they don't know in advance which edges are going to work and which ones aren't. They have stopped trying to predict outcomes. They have found that by taking every edge, they correspondingly increase their sample size of trades, which in turn gives whatever edge they use ample opportunity to play itself out in their favor. On the other hand, why do you think unsuccessful traders are obsessed with market analysis.

For the traders who have learned to think in probabilities, there is no dilemma. Predefining the risk doesn't pose a problem for these traders because they don't trade from a right or wrong perspective. They have learned that trading doesn't have anything to do with being right or wrong on any individual trade. As a result, they don't perceive the risks of trading in the same way the typical trader does.

To eliminate the emotional risk of trading, you have to neutralize your expectations about what the market will or will not do at any given moment or in any given situation. You can do this by being
willing to think from the markets perspective. Remember, the market is always communicating in probabilities. To think in probabilities, you have to create a mental framework or mind-set that is consistent with the underlying principles of a probabilistic environment. A probabilistic mind-set for 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.

Thank you MM ...

... It has taken me about 3 years since I read "Trading In The Zone" for the 1st time to get to that point:

- a lot of hard work on automated systems (so that I can backtest them and prove to myself they have an edge - at least in the past)
- failing to successfully trade my 5th wave system (automated), only due to me messing-up most trades
- realizing afterwards that trading that 5th wave system would have brought me some money (way less than backtesting would have predicted, but still some decent money) if I had been disciplined and taken all the trades the way they were supposed to be taken
- realizing that even trading the system 100% correctly, it would have experienced a number of significant drawdowns, and there is no way around that.


It is totally true that my mindset re. my system trades is totally different now from what it is re. my discretionary trades. Even though I (believe that I) have a proven edge for my discretionary trades, I still focus on the current trade outcome, and that leads me to wrong behaviors on most every discretionary trade. To the contrary, I only consider my system trades from the long-term point-of-view ... meaning, I know I have to take ALL of them, in the exact way the system takes them - I know some will be wins, some will be losses, and the losses are okay, even those which look so stupid in hindsight... Drawdowns are okay, too... not welcome, but a necessary pain to get through to the next equity peak.

Originally posted by dom993

Thank you MM ...

... It has taken me about 3 years since I read "Trading In The Zone" for the 1st time to get to that point:

- a lot of hard work on automated systems (so that I can backtest them and prove to myself they have an edge - at least in the past)
- failing to successfully trade my 5th wave system (automated), only due to me messing-up most trades
- realizing afterwards that trading that 5th wave system would have brought me some money (way less than backtesting would have predicted, but still some decent money) if I had been disciplined and taken all the trades the way they were supposed to be taken
- realizing that even trading the system 100% correctly, it would have experienced a number of significant drawdowns, and there is no way around that.


It is totally true that my mindset re. my system trades is totally different now from what it is re. my discretionary trades. Even though I (believe that I) have a proven edge for my discretionary trades, I still focus on the current trade outcome, and that leads me to wrong behaviors on most every discretionary trade. To the contrary, I only consider my system trades from the long-term point-of-view ... meaning, I know I have to take ALL of them, in the exact way the system takes them - I know some will be wins, some will be losses, and the losses are okay, even those which look so stupid in hindsight... Drawdowns are okay, too... not welcome, but a necessary pain to get through to the next equity peak.

Good stuff. I love both of Mark Douglas's books.

A couple of key things that I would add:

1) Discretionary trading is not so much about being right or wrong, but is really (or should be) about how much are you willing to risk to find out?

2) Everyone thinks of risk:rward as a ratio based on probabilities that is determined entirely by the market. while I don't entirely refute that, I add an important element to risk:reward - where the rubberer meets the road... risk is actually determined by the trader (max pain level) and reward is determined by a mixture of market force and expectation. the old risk:reward ratio that everyone loves to talk about is typically misunderstood.

3) A corollary is this: A set-up with a 60% win rate does NOT mean that 6 of the next 10 occurrences will win. For that to happen, all the same exact condtions must be present...same players, same volume, not to mention that your money mgt. position sizing, and psych. will vary from trade to trade. Too many traders tend to take an objective stat. and try to transform it into a subjective probability. Good luck with that.....

4) We can never know if a trade will work or not, for that reason, all we can do is focus not on whether we are right or not, but instead the focus must be on 'doing the right thing.....not on being right'. Again, we must not focus on whether we are right, our focus must be on ACTING in our best interest = protect ourself on the downside and pay ourself on the upside. If you understand and and are able to operationalize what I just wrote, you will make money over time (given you have set-ups with an edge....not just a set-up with a pos. percentage)