I read Mark Douglas’s book “Trading in the Zone” several years ago and it helped a lot with trading psychology. I’ve later seen many traders refer to this other book by the author, so I started to feel that I should skim through this one as well. It’s also about trading psychology. According to the author, it takes 80% psychology and 20% methodology to become successful in the markets, whereas it seems to me that most beginning traders focus more on the methodology part. The book was published in 1990.
The author explains how he lost a lot of money trading for himself, but kept his job at Merrill Lynch trading for others, obviously not telling anyone he had declared personal bankruptcy. It’s funny to read how Douglas describes his experience meeting floor traders and other professionals who barely were able to make money from the markets. Even though floor traders were able to win money, most of them gave it all back in a matter of time. As a side note, this just reminds me again and again how stupid it is to take someone’s “How I made $1000 in a day” type of YouTube videos seriously. I could show days like that several times a month, even if it was a losing month overall.
The fear of losing kills focus on opportunities
Those who fear to lose, lose even more. Confidence in making decisions will reduce fear. I feel that backtesting and setting up rules have helped me a lot to gain confidence and therefore get rid of the fear, because I know what to expect. It does take mental fortitude to keep realizing small losses if they come in a consecutive manner. This is what trading discipline is for. The market offers all kinds of opportunities day by day, and most of them have random outcomes that seem crystal clear only in hindsight. That’s just the way it is. The goal of a beginning trader is to learn to let go of control, praise the uncertainty and not let emotions dictate with the benefit of hindsight. It’s not an easy learning curve and takes time with a consistent process to get there.
The remedy for fear
If you don’t let the market hurt you, and you’re not afraid of it, you’re not afraid of your own competence and decisions, then there will be no fear in trading. Fearful trading usually isn’t profitable due to the behavior of the trader, while the market has nothing to do with it. The trader creates fear that is only in the trader’s mind, which can be overcome by money management (smaller positions) and by increasing confidence in a strategy (experience). From there the trader just needs to accept the everyday fluctuation of the market, meanwhile applying the strategy without fear.
Always take the next trade
A person may hold a belief or expectation for a market or a trade, but it has nothing to do with the future or the outcome of the trade. That’s why the only way to stay in the game and be profitable overall, is to cut losses and take the next trade. Mark Douglas describes the way most people think when it comes to financial markets and why we can’t trust our general human intuition in this game. Add the lack of skills, limiting beliefs and lack of self-discipline to understand why most people never find long-term success in trading. They encounter consecutive losses and are afraid of taking the next trade.
The market is always right
Noone else than the trader can be accountable or responsible for a trade. The market is just a simple place to buy and sell securities, where prices infinitely flow. Few independent traders understand why decision-making can only rely on themselves, others go with the herd mentality, look for what others are doing. If they win, they can praise themselves for doing the right thing and when they lose, they can blame the market or others. A person may be a good technical analyst, but fail as a trader if he or she wants to have psychological distance between a trading decision and the outcome.
Trading the markets is personal
Everyone creates the way they see the market and therefore everyone creates their personal experience in the market. That’s why a trader needs his or her own tools and strategies, while following someone else’s plan just won’t cut it. So even if we all trade the same market, our personal approach and views are what makes trading work, not the market itself.
Summing up
This review describes what I got out of the book. Many thoughts overlap with other materials I’ve read before, because I have studied this subject extensively to reach flow state and to not have any fear while trading. There’s much more in the book about how to train one’s mind to become a disciplined trader to have an enjoyable and profitable journey in financial markets. Reading the book helped me to remind myself the wisdom of Mark Douglas and what separates successful traders from punters. I understand the importance of how I feel myself while being in a trade, that actually makes the difference if it’s going to be a successful path in long-term or not.
Reading the review here may make you feel that there’s nothing particularly new to this. Actually, the author goes into a great depth of the topics in this book, describing in detail how the energy flows in our mind creating expectations and fears about the market based on our past experience. So it’s definitely well worth to read the whole book if you’re interested in understanding how psychology really impacts the success or failure of an individual trader.
The Disciplined Trader by Mark Douglas book link
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