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This excerpt from the Mark Douglas book "Trading in the Zone" once appeared
in this list. I think it is an excellent book and recommend it.
Larry Sanders
www.TradeLabStrategies.com
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Trading in the Zone - from the Omega list
The Five Fundamental Truths of Trading
1. ANYTHING CAN HAPPEN.
There are always unknown forces operating in every market at every moment;
it takes only one trader somewhere in the world to negate the positive
outcome of your edge --- only one. Regardless of how much time, effort, or
money you've invested in your analysis, from the market's perspective, there
are no exceptions to this truth. Any exceptions that may exist in your mind
will be the source of conflict and potentially cause you to perceive market
information as threatenting.
2. 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 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. As a result, your expectations will be in harmony with the
possibilities.
Nothing has more potential to cause emotional discord than our unfulfilled
expectations. Emotional pain is the universal response when the outside
world expresses itself in a way that doesn't reflect what we expect or
believe to be true. As a result, any market information that does not
confirm our expectations is automatically defined and interpreted as
threatening. That interpretation causes us to adopt a negatively-charged,
defensive state of mind, where we end up creating the very experience we are
trying to avoid.
Market information is only threatening if you are expecting the market to
do something for you. Otherwise, if you don't expect the market to make you
right, you have no reason to be afraid of being wrong. If you don't expect
the market to make you a winner, you have no reason to be afraid of losing.
If you don't expect the market to keep going in your direction indefinitely,
there is no reason to leave money on the table. If you don't expect to be
able to take advantage of every opportunity just because you perceived it
and it presented itself, you have no reason to be afraid of missing out.
If you believe that all you need to know is :
a) The odds are in your favor before you put on a trade;
b) How much it's going to cost to find out if the trade is going to work;
c) You don't need to know what going to happen next to make money on that
trade; and
d) Anything can happen;
then the market can't make you wrong. The market can't generate
information about itself that would cause your pain-avoidance mechansims to
kick in so that you exclude that information from your awareness. If you
believe that anything can happen and that you don't need to know what is
going to happen next to make money, then you will always be right. Your
expectations will always be in harmony with the conditions as they exist
from the market's perpective, effectively neutralizing your potential to
experience emotional pain.
Furthermore, a losing trade or even a series of losing trades can't have
the typical negative effect if you really believe that trading is a
probability or numbers game. If your edge puts the odds in your favor, then
every loss puts you that much closer to a win. When you really believe
this, your response to a losing trade will no longer take on a negative
emotional quality.
3. THERE IS A RANDOM DISTRIBUTION BETWEEN WINS AND LOSSES FOR ANY GIVEN
SET OF VARIABLES THAT DEFINE AN EDGE.
If every loss puts you that much closer to a win, you will be looking
forward to the next occurrence of your edge, ready and waiting to jump in
without the slightest reservation or hesitation. However, if you still
believe that trading is about analysis or about being right, then after a
loss you will anticipate the occurrence of your next edge with trepidation,
wondering whether it's going to work. This, in turn, will cause you to
start gathering evidence for or against a trade. You will gather evidence
for the trade if your fear of missing out is greater than your fear of
losing. And you will gather information against the trade is your fear of
losing is greater than your fear of missing out. In either case, you will
not be in the most conducive state of mind to produce consistent results.
4. AN EDGE IS NOTHING MORE THAN AN INDICATION OF A HIGHER PROBABILITY OF
ONE THING HAPPENING OVER ANOTHER.
Creating consistency requires that you completely accept that trading isn't
about hoping, wondering, or gathering evidence one way or the other to
determine if the next trade is going to work. The only evidence you need to
gather is whether the variables you use to define an edge are present at any
given moment. When you use "other" information, outside the parameters of
your edge to decide whether you will take the trade, you are adding random
variables to your trading regime. Adding random variables makes it
extremely difficult, if not impossible, to determine what works and what
doesn't. If you're never certain about the viability of your edge, you
won't feel confident about it. To whatever degree you lack confidence, you
will experience fear. The irony is, you will be afraid of random,
inconsistent results without realizing that your random, inconsistent
approach is creating exactly what you are afraid of.
However, if you believe that an edge is simply a higher probability of one
thing happening over another, and there's a random distribution between wins
and losses for any given set of variables that define an edge, there is no
reason to gather "other" evidence for or against a trade. To a trader
operating out of these two beliefs, gathering "other" evidence makes no
sense. Gathering "other" evidence makes about as much sense as trying to
determine whether the next flip of a coin will be heads after the last flip
came up tails. Regardless of what evidence you find to support heads coming
up, there is still a 50% chance that the next flip will come up tails. By
the same token, regardless of how much evidence you gather to support acting
or not acting on a trade, it still only takes one trader somewhere in the
world to negate the validity of any, if not all, of your evidence. The
point is "why bother?" If the market is offering you a legitimate edge,
determine the risk and take the trade.
5. EVERY MOMENT IN THE MARKET IS UNIIQUE.
"Unique" means not like anything else that exists or has ever existed. As
much as we may understand the concept of uniqueness, our minds don't deal
with it very well on a practical level. Our minds are hardwired to
automatically associate (without conscious awareness) anything in the
exterior environment that is similar to anything that is already inside of
us in the form of a memory, belief, or attitude. This creates an inherent
contradiction between the way we naturally think about the world and the way
the world exists. No two moments in the external environment will ever
exactly duplicate themselves. To do so, every atom and every molecule would
have to be in the exact same position they were in some previous moment.
Yet, based on the way our minds are designed to process information, we will
experience the "now moment" in the environment as being exactly the same as
some previous moment as it exists inside our minds.
If each moment is like no other, then there's nothing at the level of your
rational experience that can tell you for sure that you "know" what will
happen next. So, why bother trying to know? When you try to know, you are,
in essence, trying to be right. I am not implying that you can't predict
what the market will do next and be right, because you most certainly can.
It's in the trying that you run into all the problems. If you believe that
you correctly predicted the market once, you will naturally try to do it
again. As a result, your mind will automatically start scanning the market
for the same pattern, circumstance, or situation that existed the last time
you correctly predicted its movement. When you find it, your state of mind
will make it seem as if everything is exactly as it was the last time. The
problem is that, from the market's perspective, it is not the same. As a
result, you are setting yourself up for disappointment.
What separates the best traders from all the rest is that they have trained
their minds to believe in the uniqueness of each moment (although this
training usually takes the form of losing several fortunes before they
"really" believe in the concept of uniqueness). This belief acts as a
counteracting force, neutralizing the automatic associative mechanism. When
you truly believe that each moment is unique, then by definition there isn't
anything in your mind for the associating mechanism to link that moment to.
This belief acts as an internal force causing you to dissociate the "now"
moment in the market from any previous moment filed away in your mental
environment. The stronger your belief in the uniqueness of each moment, the
lower your potential to associate. The lower your potential to associate,
the more open your mind will be to perceive what the market is offering you
from its perspective.
***
When you completely accept the psychological realities of the market, you
will correspondingly accept the risks of trading. When you accept the risks
of trading, you eliminate the potential to define market information in
painful ways. When you stop defining and interpreting market information in
painful ways, there is nothing for your mind 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 market movement. Nothing will get
blocked, which means you will perceive all the possibilities you have
learned about (objectively), and since your mind is open to a true exchange
of energy, you will quite naturally start discovering other possibilities
(edges) that you formerly couldn't perceive.
For your mind to be open to a true exchange of energy, you can't be in a
state of knowing or believing that you already know what's going to happen
next. When you are at peace with not knowing what's going to happen next,
you can interact with the market from a perspective where you will making
yourself available to let the market tell you, from its perspective, what is
likely to happen next. At that point, you will be in the best state of mind
to spontaneously enter "the zone," where you are tapped into the "now moment
opportunity flow."
From: Mark Douglas (2000): "Trading in the Zone: Master the Market with
Confidence, Discipline and a Winning Attitude." New York Institute of
Finance: New York, 216 pages; (pp 130-35).
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