Trading In The Zone by Mark Douglas is widely regarded as a classic in trading literature.
I myself have read it many times throughout my trading career, always managing to learn something new from it with each successive read.
The main thesis of Trading In The Zone is not to teach you a trading strategy but to instead teach you how to deal with the many psychological challenges of trading itself. Anyone who’s been trading for a long time knows how important it is to have the right mindset when trading the markets, this mindset is very difficult to achieve without help, which is why Trading In The Zone is revered by so many traders.
Mark breaks down the emotions traders go through everyday in the markets, when their in trades, placing trades, taking profits he goes on to define actionable tips and methods you can use to help achieve the zone mindset needed to make consistent profits from the markets.
Unfortunately Mark Douglas passed away last year, so I thought as a tribute to him we would take a look at some of his most well known trading quotes and see what we can learn by understanding them.
“Ninety-five percent of the trading errors you are likely to make—causing the money to just evaporate before your eyes—will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.”
Much of this quotes contradicts what most retail traders believe about what it takes to be able to trade profitably.
Many traders believe the reason they lose money is down to them doing incorrect market analysis, they try to rectify this by learning more about the markets when really, they should be learning more about how they themselves think and make decisions.
Mark is saying how most of the mistakes you are likely to make which cause you to lose money come from your beliefs about what losing money represents.
Mark calls these the four primary trading fears.
Most traders find that they can make money demo trading but can’t seem to make money live trading, why is this ?
The switch from fake money to real money is too great for most traders to handle, nothing changes in the market. The charts are still the same, the currencies are still the same everything is the same as it was when demo trading apart from the fact that now your money is at risk.
When you have something which you value greatly at risk the things which can jeopardize that cause you to feel fear, it’s this fear which causes traders to make mistakes.
You didn’t care about missing out on potential profits when demo trading nor did you care if you were right or wrong on a trade, its this carefree mindset you need to replicate when live trading.
You have probably heard the saying “don’t trade with money you can’t afford to lose” one of the most often repeated mantras of trading advice and it holds true because if you trade with money you can’t afford to lose it means you cannot replicate the carefree mindset you have when demo trading, your actions when trading will always be dominated by the fear rather than logical thinking.
If you perceive the endless stream of opportunities to enter and exit trades without self-criticism and regret, then you will be in the best frame of mind to act in your own best interest and learn from your experiences.
This is an extremely big issue for traders to overcome.
All the trading environment does is give you an endless stream of opportunities to make money identified by you as trading signals, but to be able to take advantage of these opportunities requires you to be in the right frame of mind.
You may have had days where you do everything right, you close your trades at the right time, the trades you place end up being winners and you execute your trading plan perfectly, I’ve had days like this and you’ve probably had days similar to this too.
What causes you to have days like this isn’t amazing market analysis or some type special skill only you posses ?
Its the mind-set and attitude you have going into the trading day.
If you wake up tomorrow and begin trading when you have lost 6 trades the previous day its unlikely your going to be able to make decent trading decisions, the losses will still be fresh on your mind as will the incorrect decisions you made which caused the losses in the first place.
In comparison, if you when into the trading day off the back of 6 consecutive winning trades, all which made you alot of money, your attitude will be one of confidence and optimism, you wont be thinking about past mistakes nor will you hesitate in taking trades which meet your trading plan.
The only way for you to enter the frame of mind needed to execute trades and make quality trading decisions is if you put yourself in a situation where your always making money.
When your consistently making money the past mistakes you’ve made hold little weight, this makes it easier to take advantage of the opportunities being presented to you in the market, you wont be relating the mistakes you’ve made on previous trades to the current trading opportunity your about to take.
This is why I said you should trade more when your trading well, because the fear and regret of past mistakes and situations will not be in your mind, allowing you to be in the “zone” mindset needed to make consistent profits.
People see what they’ve learned 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.
This quote highlights how traders get caught in the trap of believing they have learned everything there is to learn about the markets, when really their only scratching the surface of what they need to discover in order to trade profitably.
All the information you’ve gathered about trading forms the basis of what you see on your charts, a large selection of traders believe indicators are the only way you should trade, essentially this means every other piece of trading knowledge they have yet to acquire is invisible to them.
It may be hard to believe but there are traders out there who have been locked into believing the market works one way for significant lengths of time. For indicator traders, they believe the only way of trading the market is by using indicators, the thought of trading the market any other way is invisible to them, so when they look at their charts most of the information they need to learn in order start trading profitably is unseen to them because their so caught up in believing indicators are the key to making profits.
The most important trading knowledge you need to have isn’t found on the chart ?
Its understanding whats going on behind the charts. What is causing the market to go down ? Why did the market stop and reverse here ? The only way to figure these things out is by studying how other traders make decisions in the market.
When it comes to trading, knowing why things happen is far more important than knowing what is happening, a 4 year old could tell you if the markets are moving up or down, but they wouldn’t be able to tell you why its moving up or down.
To operate effectively in the trading environment, we need rules and boundaries to guide our behavior. It is a simple fact of trading that the potential exists to do enormous damage to ourselves damage that can be way out of proportion to what we may think is possible.
With this quote mark is saying how essential it is to have rules and guidelines in place to keep your behavior in check when trading the markets. Failure to do so means putting yourself at risk of losing significant sums of money.
The forex market is an environment where there are no boundaries to what you can do, in anything else you’ve done in life there have been people giving you rules and regulations as to what you can or can’t do, in trading none of these rules or people exist, therefore its down to you to come up with your own rules which you will follow to enforce your behavior.
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.
What Mark is talking about here is very important.
Probability is one of the least understood aspects of the forex market, having a firm understanding of probability and how it relates to you and your trading strategy will allow you to keep your expectations inline with the reality of the markets.
If you have tested your trading strategy over a sample size of trades ( lets say a thousand for example’s sake) you’ll know how many of the trades out of the thousand you have won and lost on, additionally you’ll also know what the highest streak of winners and losers you have had in a row.
Knowing this information allows you to trade from a standpoint of probability rather than chance, if you know out of 1000 trades your going to win on 500 of them then what purpose does it serve to be scared of losing money ?
We are blessed to of had someone as smart as Mark Douglas to shed an incredible amount of light on the psychological aspects of trading, if were not for him many of the techniques used to control and understand what a trader is thinking when trading would of forever been lost.