[ { "type": "Title", "element_id": "dfe161173181f58d9926c46b00c2f368", "text": "TRADING IN THE ZONE", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 1, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "cc07099d70b208021a8340361a8d677a", "text": "MASTER THE MARKET WITH CONFIDENCE, DISCIPLINE AND A WINNING ATTITUDE", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 2, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "af033752bcaac420bfbf01a775132c6a", "text": "MARK DOUGLAS Foreword by Thorn Hartle", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 2, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "d7d4968efa3c9ce6473624240d5e0808", "text": "NEW YORK INSTITUTE OF FINANCE wcw VHDV \u2022 Tnnnurn . cvnucv \u2022 Tnrvn \u2022 cinr.\u00abpnpc Library of Congress Cataloging-in-Publication Data Douglas, Mark (Mark J.) Trading in the zone : master the market with confidence, discipline, and a winning attitude / by Mark Douglas, p. cm. ISBN 0-7352-0144-7 (cloth) 1. Stocks. 2. Speculation. I. Title. HG6041 .D59 2001 332.64\u2014dc21 00 045251 \u00a9 2000 by Prentice Hall All rights reserved. No part of this book may be reproduced in any form or by any means, without permission in writing from the publisher. Printed in the United States of America 10 9876 5 4321 This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 2, "parent_id": "af033752bcaac420bfbf01a775132c6a", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "945c0048338bb64a145b558f196a73e2", "text": "other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. . . . From the Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations. ISBN D-73SE-DmM-7", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 3, "parent_id": "af033752bcaac420bfbf01a775132c6a", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "be18fa7684558a212a43bf2ec543957c", "text": "ATTENTION: CORPORATIONS AND SCHOOLS Prentice Hall books are available at quantity discounts with bulk purchase for educational, business, or sales promotional use. For information, please write to: Prentice Hall, Special Sales, 240 Frisch Court, Paramus, N] 07652. Please supply: title of book, ISBN, quantity, how the book will be used, date needed. NEW YORK INSTITUTE OF FINANCE An Imprint of Prentice Hall Press Paramus, NJ 07652 http://www.phdirect.com NYIF and NEW YORK INSTITUTE OF FINANCE are trademarks of Executive Tax Reports, Inc. used under license by Prentice Hall Direct, Inc.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 3, "parent_id": "af033752bcaac420bfbf01a775132c6a", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "006f5b8fb1ec08a390d9bfcd7d1d3c90", "text": "DEDICATION", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 4, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "99bef17302967e9c3b20f111f5e41cc1", "text": "This book is dedicated to all of the traders I have had the pleasure of working with over the last 18 years as a trading coach. Each of you in your own unique way is a part of the insight and guidance this book will provide to those who choose to trade from a confident, disciplined, and consistent state of mind.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 4, "parent_id": "006f5b8fb1ec08a390d9bfcd7d1d3c90", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "dbec94fff5a49c29230eafc73e49ef71", "text": "o", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 5, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "87c0f5a6827f4c2c782369c9e462f460", "text": "TABLE OF CONTENTS", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 5, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Table", "element_id": "d6dc44943456abeaf92bf6259f8005d3", "text": "FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xm ATTITUDE SURVEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii", "metadata": { "text_as_html": "
FOREWORDX1
PREFACEXm
ATTITUDE SURVEYXvil
", "table_as_cells": [ { "x": 0, "y": 0, "w": 1, "h": 1, "content": "FOREWORD" }, { "x": 0, "y": 1, "w": 1, "h": 1, "content": "PREFACE" }, { "x": 0, "y": 2, "w": 1, "h": 1, "content": "ATTITUDE SURVEY" }, { "x": 1, "y": 0, "w": 1, "h": 1, "content": "X1" }, { "x": 1, "y": 1, "w": 1, "h": 1, "content": "Xm" }, { "x": 1, "y": 2, "w": 1, "h": 1, "content": "Xvil" } ], "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 5, "parent_id": "87c0f5a6827f4c2c782369c9e462f460", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "UncategorizedText", "element_id": "f3aae5959a323140aba0bf4c405c12db", "text": "_________________CHAPTER 1___________ THE ROAD TO SUCCESS: FUNDAMENTAL, TECHNICAL, OR MENTAL ANALYSIS?", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 5, "parent_id": "87c0f5a6827f4c2c782369c9e462f460", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "ca2780f1d7a8c3dc20d0dcc60bfa178a", "text": "IN THE BEGINNING: FUNDAMENTAL ANALYSIS . . . . . . . . . . 1 THE SHIFT TO TECHNICAL ANALYSIS . . . . . . . . . . . . . . . . . 3 THE SHIFT TO MENTAL ANALYSIS . . . . . . . . . . . . . . . . . . . 4", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 5, "parent_id": "87c0f5a6827f4c2c782369c9e462f460", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "UncategorizedText", "element_id": "b97e78cc7aae4e3e46e91c1907ca5b1f", "text": "_____________________CHAPTER 2_______________ THE LURE (AND THE DANGERS) OF TRADING", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 5, "parent_id": "87c0f5a6827f4c2c782369c9e462f460", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Table", "element_id": "c8fd2cadf9014d8111b5376d70c7aa1a", "text": "THE ATTRACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 THE DANGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 THE SAFEGUARDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Problem: The Unwillingness to Create Rules. . . . . . . 27", "metadata": { "text_as_html": "
THE ATTRACTION17
THE DANGERS20
THE SAFEGUARDS25
Problem: The Unwillingness to Create Rules.27
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SHAPING YOUR MENTAL ENVIRONMENT34
REACTING TO LOSS38
WINNERS, LOSERS, BOOMERS, AND BUSTERS50
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THINKING ABOUT TRADING58
REALLY UNDERSTANDING RISK61
ALIGNING YOUR MENTAL ENVIRONMENT64
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DEBUGGING YOUR MENTAL SOFTWARE70
PERCEPTION AND LEARNING74
PERCEPTION AND RISK79
THE POWER OF ASSOCIATION80
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DEFINING THE PROBLEM125
DEFINING THE TERMS128
HOW THE FUNDAMENTAL TRUTHS RELATE TOTHE SKILLS130
MOVING TOWARD \"THE ZONE\"135
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T TRADING IN THE MOMENT106
MANAGING EXPECTATIONS113
ELIMINATING THE EMOTIONAL RISK120
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THE ORIGINS OF A BELIEF139
BELIEFS AND THEIR IMPACT ON OUR LIVES142
BELIEFS vs. THE TRUTH147
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THE MECHANICAL STAGE173
THE ROLE OF SELF-DISCIPLINE179
CREATING A BELIEF IN CONSISTENCY EXERCISE: LEARNING TO TRADE AND EDGE184 LIKE A
CASINO189
", "table_as_cells": [ { "x": 0, "y": 0, "w": 1, "h": 1, "content": "THE MECHANICAL STAGE" }, { "x": 0, "y": 1, "w": 1, "h": 1, "content": "THE ROLE OF SELF-DISCIPLINE" }, { "x": 0, "y": 2, "w": 1, "h": 1, "content": "CREATING A BELIEF IN CONSISTENCY EXERCISE: LEARNING TO TRADE AND EDGE" }, { "x": 0, "y": 3, "w": 1, "h": 1, "content": "CASINO" }, { "x": 1, "y": 0, "w": 1, "h": 1, "content": "173" }, { "x": 1, "y": 1, "w": 1, "h": 1, "content": "179" }, { "x": 1, "y": 2, "w": 1, "h": 1, "content": "184 LIKE A" }, { "x": 1, "y": 3, "w": 1, "h": 1, "content": "189" } ], "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 7, "parent_id": "2d5a626090104cc2a546932c76208715", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Table", "element_id": "e22642cf82d0a22491f92a974b2356df", "text": "A FINAL NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 ATTITUDE SURVEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209", "metadata": { "text_as_html": "
A FINAL NOTE201
ATTITUDE SURVEY203
INDEX209
", "table_as_cells": [ { "x": 0, "y": 0, "w": 1, "h": 1, "content": "A FINAL NOTE" }, { "x": 0, "y": 1, "w": 1, "h": 1, "content": "ATTITUDE SURVEY" }, { "x": 0, "y": 2, "w": 1, "h": 1, "content": "INDEX" }, { "x": 1, "y": 0, "w": 1, "h": 1, "content": "201" }, { "x": 1, "y": 1, "w": 1, "h": 1, "content": "203" }, { "x": 1, "y": 2, "w": 1, "h": 1, "content": "209" } ], "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 8, "parent_id": "2d5a626090104cc2a546932c76208715", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "a7473a6a31497b5ed73371181ac82e3b", "text": "FOREWORD", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 9, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "ccb919ccd7e91aaccff47cf278d7881f", "text": "The great bull market in stocks has led to an equally great bull market in the number of books published on the subject of how to make money trading the markets. Many ideas abound, some good, some not, some original, some just a repackaging of earlier works. Occasionally, though, a writer comes forward with something that really sets him or her apart from the pack, something special. One such writer is Mark Douglas. Mark Douglas, in Trading in the Zone, has written a book that is the accumulation of years of thought and research\u2014the work of a lifetime\u2014and for those of us who view trading as a profession, he has produced a gem. Trading in the Zone is an in-depth look at the challenges that we face when we take up the challenge of trading. To the novice, the only challenge appears to be to find a way to make money. Once the novice learns that tips, brokers' advice, and other ways to justify buying or selling do not work consistently, he discovers that he either needs to develop a reliable trading strategy or purchase one. After that, trading should be easy, right? All you have to do is follow the rules, and the money will fall into your lap. At this point, if not before, novices discover that trading can turn into one of the most frustrating experiences they will ever face. This experience leads to the oft-started statistic that 95 percent of futures traders lose all of their money within the first year of trading. Stock traders generally experience the same results, which is why pundits always point to the fact that most stock traders fail to outperform a simple buy and hold investment scenario. So, why do people, the majority of whom are extremely successful in other occupations, fail so miserably as traders? Are successful traders born and not made? Mark Douglas says no. What's necessary, he says, is that the individual acquire the trader's mindset. It sounds easy, but the fact is, this mindset is very foreign when compared with the way our life experiences teach us to think about the world. That 95-percent failure rate makes sense when you consider how most of us experience life, using skills learned as we grow. When it comes to trading, however, it turns out that the skills we learn to earn high marks in school, advance our careers, and create relationships with other people, the skills we are taught that should carry us through life, turn out to be inappropriate for trading. Traders, we find out, must learn to think in terms of probabilities and to surrender all of the skills we have acquired to achieve in virtually every other aspect of our lives. In Trading in the Zone, Mark Douglas teaches us how. He has put together a very valuable book. His sources are his own personal experiences as a trader, a traders coach in Chicago, author, and lecturer in his field of trading psychology. My recommendation? Enjoy Douglas's Trading in the Zone and, in doing so, develop a trader's mindset.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 9, "parent_id": "a7473a6a31497b5ed73371181ac82e3b", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "9bf497c78325b0c8c90666367d818d68", "text": "PREFACE", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 10, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "fcbb6f82aa4d6c27547d5f9e881e0462", "text": "The goal of any trader is to turn profits on a regular basis, yet so few people ever really make consistent money as traders. What accounts for the small percentage of traders who are consistently successful? To me, the determining factor is psychological\u2014the consistent winners think differently from everyone else.I started trading in 1978. At the time, I was managing a commercial casualty insurance agency in the suburbs of Detroit, Michigan. I had a very successful career and thought I could easily transfer that success into trading. Unfortunately, I found that was not the case. By 1981, I was thoroughly disgusted with my inability to trade effectively while holding another job, so I moved to Chicago and got a job as a broker with Merrill Lynch at the Chicago Board of Trade. How did I do? Well, within nine months of moving to Chicago, I had lost nearly everything I owned. My losses were the result of both my trading activities and my exorbitant life style, which demanded that I make a lot of money as a trader. From these early experiences as a trader, I learned an enormous amount about myself, and about the role of psychology in trading. As a result, in 1982, I started working on my first book, The Disciplined Trader: Developing Winning Attitudes. When I began this project I had no concept of how difficult it was to write a book or explain something that I understood for myself in a manner and form that would be useful to other people. I thought it was going to take me between six and nine months to get the job done. It took seven and a half years and was finally published by Prentice Hall in 1990. In 1983, I left Merrill Lynch to start a consulting firm, Trading Behavior Dynamics, where I presently develop and conduct seminars on trading psychology and act in the capacity of what is commonly referred to as a trading coach. I've done countless presentations for trading companies, clearing firms, brokerage houses, banks, and investment conferences all over the world. I've worked at a personal level, one on one, with virtually every type of trader in the business, including some of the biggest floor traders, hedgers, option specialists, and CTAs, as well as neophytes As of this writing, I have spent the last seventeen years dissecting the psychological dynamics behind trading so that I could develop effective methods for teaching the proper principles of success. What I've discovered is that, at the most fundamental level, there is a problem with the way we think. There is something inherent in the way our minds work that doesn't fit very well with the characteristics shown by the markets. Those traders who have confidence in their own trades, who trust themselves to do what needs to be done without hesitation, are the ones who become successful. They no longer fear the erratic behavior of the market. They learn to focus on the information that helps them", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 10, "parent_id": "9bf497c78325b0c8c90666367d818d68", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "4ea5b62d332cd3d1bd63e6b943c36bd1", "text": "spot opportunities to make a profit, rather than focusing on the information that reinforces their fears. While this may sound complicated, it all boils down to learning to believe that: (1) you don't need to know what's going to happen next to make money; (2) anything can happen; and (3) every moment is unique, meaning every edge and outcome is truly a unique experience. The trade either works or it doesn't. In any case, you wait for the next edge to appear and go through the process again and again. With this approach you will learn in a methodical, non-random fashion what works and what doesn't. And, just as important, you will build a sense of self-trust so that you won't damage yourself in an environment that has the unlimited qualities the markets have. Most traders don't believe that their trading problems are the result of the way they think about trading or, more specifically, how they are thinking while they are trading. In my first book, The Disciplined Trader, I identified the problems confronting the trader from a mental perspective and then built a philosophical framework for understanding the nature of these problems and why they exist. I had five major objectives in mind in writing Trading in the Zone:", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 11, "parent_id": "9bf497c78325b0c8c90666367d818d68", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "82053fc68b3c17b1203449e24e1be622", "text": "To prove to the trader that more or better market analysis is not the solution to his trading difficulties or lack of consistent results.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 11, "parent_id": "9bf497c78325b0c8c90666367d818d68", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "b3526a4c70a86884fe1fa31425a41ea5", "text": "To provide the trader with the specific beliefs and attitudes that are necessary to build a winner's mindset, which means learning how to think in probabilities.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 11, "parent_id": "9bf497c78325b0c8c90666367d818d68", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "2ed9338d2e73ed3ee0c7794ded9555d4", "text": "To address the many conflicts, contradictions, and paradoxes in thinking that cause the typical trader to assume that he already does think in probabilities, when he really doesn't.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 11, "parent_id": "9bf497c78325b0c8c90666367d818d68", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "4753b8899157e4f484ad0d0d719befe5", "text": "To take the trader through a process that integrates this thinking strategy into his mental system at a functional level.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 11, "parent_id": "9bf497c78325b0c8c90666367d818d68", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "14cfb2414fda6b45c935b2d818ebe113", "text": "(Note: Until recently, most traders were men, but I recognize that more and more women are joining the ranks. In an effort to avoid confusion and awkward phrasing, I have consistently used the pronoun \"he\" throughout this book in describing traders. This certainly does not reflect any bias on my part.)", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 11, "parent_id": "9bf497c78325b0c8c90666367d818d68", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "d1583e892ae115546eef10c53a2542c3", "text": "Trading in the Zone presents a serious psychological approach to becoming a consistent winner in your trading. I do not offer a trading system; I am more interested in showing you how to think in the way necessary to become a profitable trader. I assume that you already have your own system, your own edge. You must learn to trust your edge. The edge means there is a higher probability of one outcome than another. The greater your confidence, the easier it will be to execute your trades. This book is", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 11, "parent_id": "9bf497c78325b0c8c90666367d818d68", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "606a14132ac512dd5d0a0a16b64e6527", "text": "To convince the trader that it's his attitude and \"state of mind\" that determine his results.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 11, "parent_id": "9bf497c78325b0c8c90666367d818d68", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "f21bb676d090ad7f90093c2d72363905", "text": "designed to give you the insight and understanding you need about yourself and the nature of trading, so that actually doing it becomes as easy, simple, and stressfree as when you're just watching the market and thinking about doing it. In order to determine how well you \"think like a trader,\" take the following Attitude Survey. There are no right or wrong answers. Your answers are an indication of how consistent your current mental framework is with the way you need to think in order to get the most out of your trading.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 12, "parent_id": "9bf497c78325b0c8c90666367d818d68", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "41b9b0a71edb38f7a5dc4b99318ff76e", "text": "ACKNOWLEDGMENTS", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 15, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "17c44aadf95b7c43024ac57c7154cb54", "text": "I would especially like to thank all of the traders who bought the signed limited edition manuscript of the first seven chapters of this book. Your feedback gave me the inspiration to add the additional four chapters. Next, I would like to thank fellow traders Robert St. John, Greg Bieber, Larry Pesavento, and Ted Hearne for their friendship and the special ways in which each of them contributed to the development of this book. I would also like to acknowledge my friend, Eileen Bruno, for editing the original manuscript; and, at Prentice Hall, Ellen Schneid Coleman, Associate Publisher, for her professionalism and help in smoothing the path to publication, and Barry Richardson, Development Editor, for his help in shaping the introduction. His time and talent are greatly appreciated. CHAPTER 1", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 15, "parent_id": "41b9b0a71edb38f7a5dc4b99318ff76e", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "c8552b6d27c3bb1422a85bd1482c65c3", "text": "CHAPTER 1", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 16, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "UncategorizedText", "element_id": "d2922fa7d17fa9c671de9263a1e14b43", "text": "THE ROAD TO SUCCESS: FUNDAMENTAL, TECHNICAL, OR MENTAL ANALYSIS?", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 16, "parent_id": "c8552b6d27c3bb1422a85bd1482c65c3", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "ded4d31de285df0f236cfbc4e80bcae9", "text": "IN THE BEGINNING: FUNDAMENTAL ANALYSIS", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 16, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "58e1866bb04f2d6fa4c179b2614af7d0", "text": "Who remembers when fundamental analysis was considered the only real or proper way to make trading decisions? When I started trading in 1978, technical analysis was used by only a handful of traders, who were considered by the rest of the market community to be, at the very least, crazy. As difficult as it is to believe now, it wasn't very long ago when Wall Street and most of the major funds and financial institutions thought that technical analysis was some form of mystical hocus-pocus. Now, of course, just the opposite is true. Almost all experienced traders use some form of technical analysis to help them formulate their trading strategies. Except for some small, isolated pockets in the academic community, the \"purely\" fundamental analyst is virtually extinct. What caused this dramatic shift in perspective? I'm sure it's no surprise to anyone that the answer to this question is very simple: Money! The problem with making trading decisions from a strictly fundamental perspective is the inherent difficulty of making money consistently using this approach. For those of you who may not be familiar with fundamental analysis, let me explain. Fundamental analysis attempts to take into consideration all the variables that could affect the relative balance or imbalance between the supply of and the possible demand for any particular stock, commodity, or financial instrument. Using primarily mathematical models that weigh the significance of a variety of factors (interest rates, balance sheets, weather patterns, and numerous others), the analyst projects what the price should be at some point in the future. The problem with these models is that they rarely, if ever, factor in other traders as variables. People, expressing their beliefs and expectations about the future, make prices move\u2014not models. The fact that a model makes a logical and reasonable projection based on all the relevant variables is not of much value if the traders who are responsible for most of the trading volume are not aware of the model or don't believe in it. As a matter of fact, many traders, especially those on the floors of the futures exchanges who have the ability to move prices very dramatically in one direction or the other, usually don't have the slightest concept of the fundamental supply and demand factors that are supposed to affect prices. Furthermore, at any given moment, much of their trading activity is prompted by a response to emotional factors that are completely outside the parameters of the fundamental model. In other words, the people who trade (and consequently move prices) don't always act in a rational manner.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 16, "parent_id": "ded4d31de285df0f236cfbc4e80bcae9", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "bc008efb08831d1306c5481f8c30b777", "text": "Ultimately, the fundamental analyst could find that a prediction about where prices should be at some point in the future is correct. But in the meantime, price movement could be so volatile that it would be very difficult, if not impossible, to stay in a trade in order to realize the objective.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 17, "parent_id": "ded4d31de285df0f236cfbc4e80bcae9", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "a7771531503778558ef2cec03d1c7ec3", "text": "THE SHIFT TO TECHNICAL ANALYSIS", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 17, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "bb7f01043acd8a09106b954f2b3b55c6", "text": "Technical analysis has been around for as long as there have been organized markets in the form of exchanges. But the trading community didn't accept technical analysis as a viable tool for making money until the late 1970s or early 1980s. Here's what the technical analyst knew that it took the mainstream market community generations to catch on to. A finite number of traders participate in the markets on any given day, week, or month. Many of these traders do the same lands of things over and over in their attempt to make money. In other words, individuals develop behavior patterns, and a group of individuals, interacting with one another on a consistent basis, form collective behavior patterns. These behavior patterns are observable and quantifiable, and they repeat themselves with statistical reliability. Technical analysis is a method that organizes this collective behavior into identifiable patterns that can give a clear indication of when there is a greater probability of one thing happening over another. In a sense, technical analysis allows you to get into the mind of the market to anticipate what's likely to happen next, based on the kind of patterns the market generated at some previous moment. As a method for projecting future price movement, technical analysis has turned out to be far superior to a purely fundamental approach. It keeps the trader focused on what the market is doing now in relation to what it has done in the past, instead of focusing on what the market should be doing based solely on what is logical and reasonable as determined by a mathematical model. On the other hand, fundamental analysis creates what I call a \"reality gap\" between \"what should be\" and \"what is.\" The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct. In contrast, technical analysis not only closes this reality gap, but also makes available to the trader a virtually unlimited number of possibilities to take advantage of. The technical approach opens up many more possibilities because it identifies how the same repeatable behavior patterns occur in every time frame\u2014moment-tomoment, daily, weekly, yearly, and every time span in between. In other words, technical analysis turns the market into an endless stream of opportunities to enrich oneself.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 17, "parent_id": "a7771531503778558ef2cec03d1c7ec3", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "8dc548b23d08c9e84cd8378759a4ae50", "text": "THE SHIFT TO MENTAL ANALYSIS", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 17, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "e0799d64d00a1c7aefa208c40dd7d44e", "text": "If technical analysis works so well, why would more and more of the trading community shift their focus from technical analysis of the market to mental analysis of themselves, meaning their own individual trading psychology? To answer this question, you probably don't have to do anything more", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 17, "parent_id": "8dc548b23d08c9e84cd8378759a4ae50", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "6aebcc00b69bc77a0ee745a3441e4ab6", "text": "than ask yourself why you bought this book. The most likely reason is that you're dissatisfied with the difference between what you perceive as the unlimited potential to make money and what you end up with on the bottom line. That's the problem with technical analysis, if you want to call it a problem. Once you learn to identify patterns and read the market, you find there are limitless opportunities to make money. But, as I'm sure you already know, there can also be a huge gap between what you understand about the markets, and your ability to transform that knowledge into consistent profits or a steadily rising equity curve. Think about the number of times you've looked at a price chart and said to yourself, \"Hmmm, it looks like the market is going up (or down, as the case may be),\" and what you thought was going to happen actually happened. But you did nothing except watch the market move while you anguished over all the money you could have made. There's a big difference between predicting that something will happen in the market (and thinking about all the money you could have made) and the reality of actually getting into and out of trades. I call this difference, and others like it, a \"psychological gap\" that can make trading one of the most difficult endeavors you could choose to undertake and certainly one of the most mysterious to master. The big question is: Can trading be mastered? Is it possible to experience trading with the same ease and simplicity implied when you are only watching the market and thinking about success, as opposed to actually having to put on and take off trades? Not only is the answer an unequivocal \"yes,\" but that's also exactly what this book is designed to give you\u2014the insight and understanding you need about yourself and about the nature of trading. So the result is that actually doing it becomes as easy, simple, and stress-free as when you are just watching the market and thinking about doing it. This may seem like a tall order, and to some of you it may even seem impossible. But it's not. There are people who have mastered the art of trading, who have closed the gap between the possibilities available and their bottom-line performance. But as you might expect, these winners are relatively few in number compared with the number of traders who experience varying degrees of frustration, all the way to extreme exasperation, wondering why they can't create the consistent success they so desperately desire. In fact, the differences between these two groups of traders (the consistent winners and everyone else) are analogous to the differences between the Earth and the moon. The Earth and moon are both celestial bodies that exist in the same solar system, so they do have something in common. But they are as different in nature and characteristics as night and day. By the same token, anyone who puts on a trade can claim to be a trader, but when you compare the characteristics of the handful of consistent winners with the characteristics of most other traders, you'll find they're also as different as night and day. If going to the moon represents consistent success as a trader, we can say that getting to the moon is possible. The journey is extremely difficult and only a handful of people have made it. From our perspective here on Earth, the moon is usually visible every night and it seems so close that we could", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 18, "parent_id": "8dc548b23d08c9e84cd8378759a4ae50", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "8913e403df472bbb19847bbd12cf775f", "text": "just reach out and touch it. Trading successfully feels the same way. On any given day, week, or month, the markets make available vast amounts of money to anyone who has the capacity to put on a trade. Since the markets are in constant motion, this money is also constantly flowing, which makes the possibilities for success greatly magnified and seemingly within your grasp. I use the word \"seemingly\" to make an important distinction between the two groups of traders. For those who have learned how to be consistent, or have broken through what I call the \"threshold of consistency,\"the money is not only within their grasp; they can virtually take it at will. I'm sure that some will find this statement shocking or difficult to believe, but it is true. There are some limitations, but for the most part, money flows into the accounts of these traders with such ease and effortlessness that it literally boggles most people's minds. However, for the traders who have not evolved into this select group, the word \"seemingly\" means exactly what it implies. It seems as if the consistency or ultimate success they desire is \"at hand,\" or \"within their grasp,\" just before it slips away or evaporates before their eyes, time and time again. The only thing about trading that is consistent with this group is emotional pain. Yes, they certainly have moments of elation, but it is not an exaggeration to say that most of the time they are in a state of fear, anger, frustration, anxiety, disappointment, betrayal, and regret. So what separates these two groups of traders? Is it intelligence? Are the consistent winners just plain smarter than everyone else? Do they work harder? Are they better analysts, or do they have access to better trading systems? Do they possess inherent personality characteristics that make it easier for them to deal with the intense pressures of trading? All of these possibilities sound quite plausible, except when you consider that most of the trading industry's failures are also some of society's brightest and most accomplished people. The largest group of consistent losers is composed primarily of doctors, lawyers, engineers, scientists, CEOs, wealthy retirees, and entrepreneurs. Furthermore, most of the industry's best market analysts are the worst traders imaginable. Intelligence and good market analysis can The Road to Success certainly contribute to success, but they are not the defining factors that separate the consistent winners from everyone else. Well, if it isn't intelligence or better analysis, then what could it be? Having worked with some of the best and some of the worst traders in the business, and having helped some of the worst become some of the best, I can state without a doubt that there are specific reasons why the best traders consistently out-perform everyone else. If I had to distill all of the reasons down to one, I would simply say that the best traders think differently from the rest. I know that doesn't sound very profound, but it does have profound implications if you consider what it means to think differently. To one degree or another, all of us think differently from everyone else. We may not always be mindful of this fact; it seems natural to assume that other people share our perceptions and interpretations of events. In fact, this assumption continues to seem valid until we find ourselves in a basic, fundamental", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 19, "parent_id": "8dc548b23d08c9e84cd8378759a4ae50", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "7c64760b44fd11c8b2f51833a43ae25e", "text": "disagreement with someone about something we both experienced. Other than our physical features, the way we think is what makes us unique, probably even more unique than our physical features do. Let's get back to traders. What is different about die way the best traders think as opposed to how those who are still struggling think? While the markets can be described as an arena of endless opportunities, they simultaneously confront the individual with some of the most sustained, adverse psychological conditions you can expose yourself to. At some point, everyone who trades learns something about the markets that will indicate when opportunities exist. But learning how to identify an opportunity to buy or sell does not mean that you have learned to think like a trader. The defining characteristic that separates the consistent winners from everyone else is this: The winners have attained a mind-set\u2014aunique set of attitudes\u2014that allows them to remain disciplined, focused, and, above all, confident in spite of the adverse conditions. As a result, they are no longer susceptible to the common fears and trading errors that plague everyone else. Everyone who trades ends up learning something about the markets; very few people who trade ever learn the attitudes that are absolutely essential to becoming a consistent winner. Just as people can learn to perfect the proper technique for swinging a golf club or tennis racket, their consistency, or lack of it, will without a doubt come from their attitude Traders who make it beyond \"the threshold of consistency\" usually experience a great deal of pain (both emotional and financial) before they acquire the land of attitude that allows them to function effectively in the market environment. The rare exceptions are usually those who were born into successful trading families or who started their trading careers under the guidance of someone who understood the true nature of trading, and, just as important, knew how to teach it. Why are emotional pain and financial disaster common among traders? The simple answer is that most of us weren't fortunate enough to start our trading careers with the proper guidance. However, the reasons go much deeper than this. I have spent the last seventeen years dissecting the psychological dynamics behind trading so that I could develop effective methods for teaching the principles of success. What I've discovered is that trading is chock full of paradoxes and contradictions in thinking that make it extremely difficult to learn how to be successful. In fact, if I had to choose one word that encapsulates the nature of trading, it would be \"paradox.\" (According to the dictionary, a paradox is something that seems to have contradictory qualities or that is contrary to common belief or what generally makes sense to people.) Financial and emotional disaster are common among traders because many of the perspectives, attitudes, and principles that would otherwise make perfect sense and work quite well in our daily lives have the opposite effect in the trading environment. They just don't work. Not knowing this, most traders start their careers with a fundamental lack of understanding of what it means to be a trader, the skills that are involved, and the depth to which those skills need to be developed. Here is a prime example of what I am talking about: Trading is inherently risky. To my knowledge, no trade has a guaranteed outcome; therefore, the possibility of being wrong and losing money is always present. So when you put on a trade, can you consider yourself a risk-taker? Even though this may", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 20, "parent_id": "8dc548b23d08c9e84cd8378759a4ae50", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "a68c330106d148be2f575779be6fe571", "text": "sound like a trick question, it is not. The logical answer to the question is, unequivocally, yes. If I engage in an activity that is inherently risky, then I must be a risktaker. This is a perfectly reasonable assumption for any trader to make. In fact, not only do virtually all traders make this assumption, but most traders take pride in thinking of themselves as risk-takers. The problem is that this assumption couldn't be further from the truth. Of course, any trader is taking a risk when you put on a trade, but that doesn't mean that you are correspondingly accepting that risk. In other words, all trades are risky because the outcomes are probable\u2014not guaranteed. But do most traders really believe they are taking a risk when they put on a trade? Have they really accepted that the trade has a non-guaranteed, probable outcome? Furthermore, have they fully accepted the possible consequences? The answer is, unequivocally, no! Most traders have absolutely no concept of what it means to be a risk-taker in the way a successful trader thinks about risk. The best traders not only take the risk, they have also learned to accept and embrace that risk. There is a huge psychological gap between assuming you are a risk-taker because you put on trades and fully accepting the risks inherent in each trade. When you fully accept the risks, it will have profound implications on your bottom-line performance. The best traders can put on a trade without the slightest bit of hesitation or conflict, and just as freely and without hesitation or conflict, admit it isn't working. They can get out of the trade\u2014even with a loss\u2014and doing so doesn't resonate the slightest bit of emotional discomfort. In other words, the risks inherent in trading do not cause the best traders to lose their discipline, focus, or sense of confidence. 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. This is a big problem, because to whatever degree you haven't accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully. Learning to truly accept the risks in any endeavor can be difficult, but it is extremely difficult for traders, especially considering what's at stake. What are we generally most afraid of (besides dying or public speaking)? Certainly, losing money and being wrong both rank close to the top of the list. Admitting we are wrong and losing money to boot can be extremely painful, and certainly something to avoid. Yet as traders, we are confronted with these two possibilities virtually every moment we are in a trade. Now, you might be saying to yourself, \"Apart from the fact that it hurts so much, it's natural to not want to be wrong and lose something; therefore, it's appropriate for me to do whatever I can to avoid it.\" I agree with you. But it is also this natural tendency that makes trading (which looks like it should be easy) extremely difficult. Trading presents us with a fundamental paradox: How do we remain disciplined, focused, and confident in the face of constant uncertainty? When you have learned how to \"think\" like a trader, that's exactly what you'll be able to do. Learning how to redefine your trading activities in a way that allows you to completely accept the risk is the key to thinking like a successful trader. Learning to accept the risk is a trading skill\u2014the most important skill you can learn. Yet it's rare that developing traders focus", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 21, "parent_id": "8dc548b23d08c9e84cd8378759a4ae50", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "1b2fe2a4cb5d17d8ab59a09ffb9322a6", "text": "any attention or expend any effort to learn it. When you learn the trading skill of risk acceptance, the market will not be able to generate information that you define or interpret as painful. If the information the market generates doesn't have the potential to cause you emotional pain, there's nothing to avoid. It is just information, telling you what the possibilities are. This is called an objective perspective\u2014one that is not skewed or distorted by what you are afraid is going to happen or not happen. I'm sure there isn't one trader reading this book who hasn't gotten into trades too soon\u2014before the market has actually generated a signal, or too late\u2014long after the market has generated a signal. What trader hasn't convinced himself not to take a loss and, as a result, had it turn into a bigger one; or got out of winning trades too soon; or found himself in winning trades but didn't take any profits at all, and then let the trades turn into losers; or moved stoplosses closer to his entry point, only to get stopped out and have the market go back in his direction? These are but a few of the many errors traders perpetuate upon themselves time and time again. These are not market-generated errors. That is, these errors do not come from the market. The market is neutral, in the sense that it moves and generates information about itself. Movement and information provide each of us with the opportunity to do something, but that's all! The markets don't have any power over the unique way in which each of us perceives and interprets this information, or control of the decisions and actions we take as a result. The errors I already mentioned and many more are strictly the result of what I call \"faulty trading attitudes and perspectives.\" Faulty attitudes that foster fear instead of trust and confidence. 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. At the same time, the best traders have developed attitudes that prevent them from getting reckless. Everyone else is afraid, to some degree or another. When they're not afraid, they have the tendency to become reckless and to create the kind of experience for themselves that will cause them to be afraid from that point on. Ninety-five percent of the trading errors you are likely to make\u2014causing the money to just evaporate before your eyes\u2014will 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. Now, you may be saying to yourself, \"I don't know about this: I've always thought traders should have a healthy fear of the markets.\" Again, this is a perfectly logical and reasonable assumption. But when it comes to trading, your fears will act against you in such a way that you will cause the very thing you are afraid of to actually happen. If you're afraid of being wrong, your fear will act upon your perception of market information in a way that will cause you to do something that ends up making you wrong. When you are fearful, no other possibilities exist. You can't perceive other possibilities or act on them properly, even if you did manage to perceive them, because fear is immobilizing. Physically, it causes us to freeze or run. Mentally, it causes us to narrow our focus of attention to the object of our fear. This", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 22, "parent_id": "8dc548b23d08c9e84cd8378759a4ae50", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "a9609761564246b5284937605686f013", "text": "means that thoughts about other possibilities, as well as other available information from the market, get blocked. You won't think about all the rational things you've learned about the market until you are no longer afraid and the event is over. Then you will think to yourself, \"I knew that. Why didn't I think of it then?\" or, \"Why couldn't I act on it then?\" It's extremely difficult to perceive that the source of these problems is our own inappropriate attitudes. That's what makes fear so insidious. Many of the thinking patterns that adversely affect our trading are a function of the natural ways in which we were brought up to think and see the world. These thinking patterns are so deeply ingrained that it rarely occurs to us that the source of our trading difficulties is internal, derived from our state of mind. Indeed, it seems much more natural to see the source of a problem as external, in the market, because it feels like the market is causing our pain, frustration, and dissatisfaction. Obviously these are abstract concepts and certainly not something most traders are going to concern themselves with. Yet understanding the relationship between beliefs, attitudes, and perception is as fundamental to trading as learning how to serve is to tennis, or as learning how to swing a club is to golf. Put another way, understanding and controlling your perception of market information is important only to the extent that you want to achieve consistent results. I say this because there is something else about trading that is as true as the statement I just made: You don't have to know anything about yourself or the markets to put on a winning trade, just as you don't have to know the proper way to swing a tennis racket or golf club in order to hit a good shot from time to time. The first time I played golf, I hit several good shots throughout the game even though I hadn't learned any particular technique; but my score was still over 120 for 18 holes. Obviously, to improve my overall score, I needed to learn technique. Of course, the same is true for trading. We need technique to achieve consistency. But what technique? This is truly one of the most perplexing aspects of learning how to trade effectively. If we aren't aware of, or don't understand, how our beliefs and attitudes affect our perception of market information, it will seem as if it is the market's behavior that is causing the lack of consistency. As a result, it would stand to reason that the best way to avoid losses and become consistent would be to learn more about the markets. This bit of logic is a trap that almost all traders fall into at some point, and it seems to make perfect sense. But this approach doesn't work. The market simply offers too many\u2014often conflicting\u2014 variables to consider. Furthermore, there are no limits to the market's behavior. It can do anything at any moment. As a matter of fact, because every person who trades is a market variable, it can be said that any single trader can cause virtually anything to happen. This means that no matter how much you learn about the market's behavior, no matter how brilliant an analyst you become, you will never learn enough to anticipate every possible way that the market can make you wrong or cause you to lose money. So if you are afraid of being wrong or losing money, it means you will never learn enough to compensate for the negative effects these fears will have on your ability to be objective and your ability to act without hesitation. In other words, you won't be confident in the face of constant uncertainty. The", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 23, "parent_id": "8dc548b23d08c9e84cd8378759a4ae50", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "6bcb65cfbafd04fcd5c2485f5ee64d36", "text": "hard, cold reality of trading is that every trade has an uncertain outcome. 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. In the process, you will subject yourself to any number of self-generated, costly errors. Now, I am not suggesting that we don't need some form of market analysis or methodology to define opportunities and allow us to recognize them; we certainly do. However, market analysis is not the path to consistent results. It will not solve the trading problems created by lack of confidence, lack of discipline, or improper focus. When you operate from the assumption that more or better analysis will create consistency, you will be driven to gather as many market variables as possible into your arsenal of trading tools. But what happens then? You are still disappointed and betrayed by the markets, time and again, because of something you didn't see or give enough consideration to. It will feel like you can't trust the markets; but the reality is, you can't trust yourself. Confidence and fear are contradictory states of mind that both stem from our beliefs and attitudes. To be confident, functioning in an environment where you can easily lose more than you intend to risk, requires absolute trust in yourself. However, you won't be able to achieve that trust until you have trained your mind to override your natural inclination to think in ways that are counterproductive to being a consistently successful trader. Learning how to analyze the market's behavior is simply not the appropriate training. You have two choices: You can try to eliminate risk by learning about as many market variables as possible. (I call this the black hole nf analvr^T- iTlir\u00bbl-c anri r^avc Now, you may be asking yourself, how can I think about trading in such a way that I'm no longer afraid and, therefore, no longer susceptible to the mental processes that cause me to block, obscure, or pick and choose information? The answer is: Learn to accept the risk.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 54, "parent_id": "414be0908e449fb21bc06f623c702a18", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "05147998a6c6d0988a7149aafecfd04b", "text": "REALLY UNDERSTANDING RISK", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 54, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "f7276513c60b2e0b919c9888fab64542", "text": "Other than the many issues surrounding responsibility that we discussed in Chapter 3, there isn't anything about trading that is more central to your success and also more misunderstood than the concept of accepting the risk. As I mentioned in the first chapter, most traders erroneously assume that because they are engaged in the inherently risky activity of putting on and taking off trades, they are also accepting that risk. I will repeat that this assumption couldn't be further from the truth. Accepting the risk means accepting the consequences of your trades without emotional discomfort or fear. This means that you must learn how to think about trading and your relationship with the markets in such a way that the possibility of being wrong, losing, missing out, or leaving money on the table doesn't cause your mental defense mechanisms to kick in and take you out of the opportunity flow. It doesn't do you any good to take the risk of putting on a trade if you are afraid of the consequences, because your fears will act on your perception of information and your behavior in a way that will cause you to create the very experience you fear the most, the one you are trying to avoid. I am offering", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 54, "parent_id": "05147998a6c6d0988a7149aafecfd04b", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "dc3bc8f6627fc9028d1912c625714fba", "text": "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\u2019s behaviour. You are satisfied to let the market do whatever it's going to do. However, in the process of doing something, the market will create certain conditions you define and perceive as opportunities. You act on those opportunities to the best of your ability, but your state of mind is not dependent upon or affected by the market's behavior. If you can learn to create a state of mind that is not affected by the market's behavior, the struggle will cease to exist. When the internal struggle ends, everything becomes easy. At that point, you can take full advantage of all your skills, analytical or otherwise, to eventually realize your potential as a trader. Here's the challenge! How do you accept the risks of trading without emotional discomfort and fear, when at the moment you perceive the risk, you simultaneously feel discomfort and fear? In other words, how do you remain confident and pain-free when you are absolutely certain you can be proved wrong, lose money, miss out, or leave money on the table? As you can see, your fear and feeling of discomfort are completely justified and rational. Each of those possibilities becomes real the moment you contemplate interacting with the market. However, as true as all of these possibilities are for every trader, what isn't true or the same for every trader is what it means to be wrong, lose, miss out, or leave money on the table. Not everyone shares the same beliefs and attitudes about these possibilities and, therefore, we don't share the same emotional sensitivities. In other words, not everyone is afraid of the same things. This may seem obvious, but I assure you it is not. When we're afraid, the emotional discomfort we feel in the moment is so real that it's beyond question, and it's natural to assume that everyone shares our reality. I will give you a perfect example of what I am talking about. I recently worked with a trader, who was deathly afraid of snakes. As far as he was concerned, he had always been afraid of snakes because he couldn't recall a time when he wasn't. Now he is married and has a three-year-old daughter. One evening, while his wife was out of town, his daughter and he were invited to a friend's house for dinner. Unbeknownst to my client, his friends child had a pet snake. When the friends child brought out the snake for everyone to see, my client freaked and practically leapt to the other side of the room to get as far away from the snake as possible. His daughter, on the other hand, was completely enthralled with the snake, and wouldn't leave it alone. When he related this story to me, he said that he was not only shocked by the unexpected confrontation with the snake, but that he was just as shocked by his daughter's reaction. She wasn't afraid and he assumed that she would be. I explained to him that his fear was so intense and his attachment to his daughter was so great that it was inconceivable to him that his daughter would not automatically share his reality about snakes. But then I pointed out, there really wasn't any way she could have shared his experience, unless he", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 55, "parent_id": "05147998a6c6d0988a7149aafecfd04b", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "f4a0789f17d6c7324fcd53a63fc1e52c", "text": "specifically taught her to be afraid of snakes or she had had her own painful frightening experience. Otherwise, without anything to the contrary in her mental system, the most likely reaction to her first encounter with a living snake would be pure, unadulterated fascination. Just as my client assumed that his daughter would be afraid of snakes, most traders assume the best traders, like themselves, are also afraid of being wrong, losing, missing out, and leaving money on the table. They assume that the best traders somehow neutralize their fears with an inordinate amount of courage, nerves of steel, and self-control. Like many other things about trading, what seems to make sense, just isn't the case. Certainly, any one or all of these characteristics may be present in any top trader. But what is not true is that these characteristics play any role in their superior performance. Needing courage, nerves of steel, or self- control would imply an internal conflict where one force is being used to counteract the effects of another. Any degree of struggle, trying, or fear associated with trading will take you out of the moment and flow and, therefore, diminish your results. This is where professional traders really separate themselves from the crowd. When you accept the risk the way the pros do, you won't perceive anything that the market can do as threatening. If nothing is threatening, there's nothing to fear. If you're not afraid, you don't need courage. If you're not stressed, why would you need nerves of steel? And if you're not afraid of your potential to get reckless, because you have the appropriate monitoring mechanisms in place, then you have no need for self-control. As you contemplate the implications of what I am saying, I want you to keep something in mind: Very few people who go into trading start out with the appropriate beliefs and attitudes about responsibility and risk. There are some who do but it's rare. Everyone else goes through the same cycle I described in the example of the novice trader: We start out carefree, then become scared, and our fears continually diminish our potential. The traders who break through the cycle and ultimately make it are the ones who eventually learn to stop avoiding and start embracing the responsibility and the risk. Most of those who successfully break the cycle don't make the shift in thinking until they have experienced so much pain from large losses that it has the positive effect of stripping away their illusions about the nature of trading. With respect to your development, the how of their transformation is not that important, because in most cases it happened inadvertently. In other words, they weren't completely aware of the shifts that were taking place inside their mental environment until they experienced the positive effects their new perspective had on the ways in which they interacted with the market. This is why very few top traders can really explain what accounts for their success, except to speak in axioms like \"cut your losses\" and \"go with the flow.\" What is important is that you understand it is completely possible to think the way the professionals do and to trade without fear, even though your direct experience as a trader would argue otherwise.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 56, "parent_id": "05147998a6c6d0988a7149aafecfd04b", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "4e3fe2ac3011b849f6361bc348a83b38", "text": "ALIGNING YOUR MENTAL ENVIRONMENT", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 57, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "3ac04f1e3259e428122cd23018437684", "text": "Now we're going to start zeroing in on exactly how you can align your mental environment in order to accept the risk and function like a professional trader. Most of what I've discussed up to this point was designed to get you ready to do the real work. I'm going to teach you a thinking strategy that has, at its core, a firm belief in probabilities and edges. With this new thinking strategy, you'll learn how to create a new relationship with the market, one that disassociates your trading from what it typically means to be wrong or to lose, and that precludes you from perceiving anything about the market as threatening. When the threat of pain is gone, the fear will correspondingly disappear, as will the fear-based errors you are susceptible to. You will be left with a mind that is free to see what is available and to act on what you see. Getting to this carefree, fearless state of mind, in spite of being burned over and over again, will take some work, but it's not going to be so difficult as you may think. In fact, by the time you've finished reading this book, most of you will be amazed at how simple the solutions to your problems really are. In many respects, a state of mind or perspective is like software code. You could have several thousand lines of perfectly written code, with only one flawed line, and in that one flawed line there might be only one character out of place. Depending on the purpose of the software and where that flaw is in relation to everything else, that one misplaced character could ruin the performance of an otherwise perfectly written system. You see, the solution was simple: Fix the misplaced character, and everything runs smoothly. However, finding the error or even knowing it exists in the first place can take considerable expertise. When it comes to the ideal trading mentality, everybody is a certain psychological distance away. In other words, virtually everyone starts out with flawed software code. I use terms like clicks or degrees to indicate psychological distance but these terms don't imply a specific distance. So, for example, many of you will find that you are only, let's say, one click away in perspective from the ideal mind- set. That one click could represent one or two erroneous or misplaced assumptions you have about the nature of trading. As you reflect upon some of the ideas presented in this book, your perspective may shift. To use the analogy of software code, that shift would be equivalent to finding the flawed line in your mental system and replacing it with something that works properly. People normally describe this kind of internal mental shift as an \"ah, ha\" experience, or the moment when the light goes on. Everyone has had these kinds of experiences, and there are some common qualities associated with them. First, we usually feel different. The world even seems different, as if it had suddenly changed. Typically, we might say at the moment of the breakthrough something like, \"Why didn't you tell me this before?\" or, \"It was right in front of me the whole time, but I just didn't see it\" or, \"It's so simple; why couldn't I see it?\" Another interesting phenomenon of the \"ah, ha\" experience, is that sometimes within moments,", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 57, "parent_id": "4e3fe2ac3011b849f6361bc348a83b38", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "734abc91551067f48f094cada026ceae", "text": "although the amount of time can vary, we feel as if this new part of our identity has always been a part of who we are. It then becomes difficult to believe that we were ever the way we were before we had the experience. In short, you may already have some awareness of much of what you need to know to be a consistently successful trader. But being aware of something doesn't automatically make it a functional part of who you are. Awareness is not necessarily a belief. You can't assume that learning about something new and agreeing with it is the same as believing it at a level where you can act on it. Take the example of my client who is afraid of snakes. He is certainly aware that not all snakes are dangerous, and that learning how to make a distinction between the ones that are dangerous and the ones that aren't would not be difficult. Will learning how to make these distinctions suddenly cause him not to be afraid of \"non-dangerous snakes\"? Can we assume that his awareness will drop down to a level in his mental environment where he can now interact with snakes without fear or immobility? No, we cannot make this assumption. His awareness that some snakes aren't dangerous and his fear of snakes can exist side by side in his mental environment, as a contradiction to each other. You could confront him with a snake and he might readily acknowledge that he knows the snake is not dangerous and wouldn't hurt him; but, at the same time, he would still find it extremely difficult to touch the snake, even if he wanted to. Does this mean that he is doomed to be afraid of snakes for the rest of his life? Only if he wants to be. It's really a matter of willingness. It's certainly possible to neutralize his fear, but he will have to work at it, and working at anything requires sufficient motivation. Many of us have what we know to be irrational fears and simply choose to live with the contradiction because we don't want to go through the emotional work that is necessary to overcome the fear. In this example, the contradiction is obvious. However, in my many years of working with traders, I have uncovered several typical contradictions and conflicts surrounding the issues of risk and responsibility, where holding two or more conflicting beliefs can easily cancel out your positive intentions, no matter how motivated you are to be successful. The problem is that none of these contradictions are really obvious, at least not at first glance. Contradictory beliefs, however, aren't the only problems. What about assertions like \"I'm a risk taker,\" that traders typically assume have dropped down to the functional level of a belief when, in fact, the underlying dynamics of the way they perceive the market indicates they are doing everything possible to avoid risk. Contradictory beliefs and nonfunctional awareness represent flawed mental software code; code that destroys your ability to stay focused and accomplish your goals; code that makes it seem as if you simultaneously have one foot on the accelerator and the other on the brake; code that gives learning how to trade a mysterious quality that will be challenging in a fun way at first, but usually turns into pure, unadulterated exasperation. When I was in college in the late 1960s, one of my favorite movies was Cool Hand Luke, starring Paul Newman. It was a very popular movie back then, so I'm sure some of you have seen it on late-night TV. Luke was in a Georgia chain gang. After he escaped and was caught for the second time, the warden", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 58, "parent_id": "4e3fe2ac3011b849f6361bc348a83b38", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "c16b40768b4b56d463689fe342b6e23e", "text": "and guards were determined not to let Luke make fools of them a third time. So while forcing him to do an inordinate amount of work with no rest and giving him intermittent beatings, they kept asking, \"Have you got your mind right yet, Luke?\" Eventually, after considerable suffering, Luke finally told the prison bosses that he had his mind right. They said that if he didn't, and tried to escape again, they'd kill him for sure. Of course, Luke attempted another escape, and true to their word, the guards killed him. Like Luke, many traders, whether they realize it or not, are trying to have it their way by beating the market; as a result, they get financially and emotionally killed. There are easier, infinitely more satisfying ways of getting what you want from the market, but first you have to be willing to \"get your mind right.\" CHAPTER 5", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 59, "parent_id": "4e3fe2ac3011b849f6361bc348a83b38", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "17b73b43c26a7694475bd10268179e61", "text": "CHAPTER 5", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 59, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "39df426122d93164c861bfb6a58dd0a4", "text": "THE DYNAMICS OF PERCEPTION", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 59, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "603520b3e6c2feebd92e0dc46e933881", "text": "One of the primary objectives of this book is to teach you how to take the threat of pain out of market information. The market doesn't generate happy or painful information. From the markets perspective, it's all simply information. It may seem as if the market is causing you to feel the way you do at any given moment, but that's not the case. It's your own mental framework that determines how you perceive the information, how you feel, and, as a result, whether or not you are in the most conducive state of mind to spontaneously enter the flow and take advantage of whatever the market is offering. Professionals don't perceive anything about the markets as painful; therefore, no threat exists for them. If there's no threat, there's nothing to defend against. As a result, there isn't any reason for their conscious or subconscious defense mechanisms to kick in. That's why professionals can see and do things that mystify everyone else. They're in the flow, because they're perceiving an endless stream of opportunities, and when they're not in the flow, the very best of the best can recognize that fact and then compensate by either scaling back or not trading at all. If your goal is to be able to trade like the professionals, you must be able to see the market from an objective perspective, without distortion. You must be able to act without resistance or hesitation, but with the appropriate amount of positive restraint to counteract the negative effects of overconfidence or euphoria. In essence, your objective is to be able to create a unique state of mind, a traders mentality. When you've accomplished this, everything else about your success as a trader will fall into place. To help you achieve that objective, I'm going to give you a way to redefine your relationship to market information so that there will be little or no potential to perceive any of it as threatening. By \"redefine,\" I mean to change your perspective and operate out of a mental framework that keeps you focused on the opportunities available instead of tapping you into emotional pain.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 59, "parent_id": "39df426122d93164c861bfb6a58dd0a4", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "068fecebe71b7215ef792889b961c4e8", "text": "DEBUGGING YOUR MENTAL SOFTWARE", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 60, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "d693d7f3e5bf4de84694237a64191bf8", "text": "In other words, we want to get the bugs out of our mental software code and get our minds right. Doing this effectively will require an understanding of the nature of mental energy and how you can use that energy to change a perspective that is generating an unwanted, negative, emotional response to market information. There's much to learn, but I think you will be amazed at how some simple changes can make a huge difference in your trading results. The process of trading starts with perceiving an opportunity. Without the perception of an opportunity, we wouldn't have a reason to trade. So I think it is only fitting that we start our examination of mental energy by breaking down the process of perception. What are the underlying dynamics of perception? What factors determine how we perceive information or what we perceive in relationship to what is available? How is perception connected with what we experience at any given moment? Probably the easiest way to understand the dynamics of perception and answer these questions is to think of everything (and I do tion of forces\u2014forces that generate information about the properties, characteristics, and traits that make them uniquely what they are. Everything that exists outside of our bodies\u2014all plants and all categories of life; all planetary phenomena in the form of weather conditions, earthquakes, and volcanic eruptions; all active and inert physical matter; and all noncorporeal phenomena such as light, sound waves, microwaves, and radiation\u2014generates information about the nature of its existence. That information has the potential to act as a force on one of our five physical senses. Before we go any further, notice that I use the verb \"generate\" in an all-inclusive way implying that everything is in an active state of expression, including inanimate objects. To illustrate why I do that, let's look at something as simple as a rock. It's an inanimate object, composed of unique atoms and molecules expressing themselves as a rock. I can use the active verb \"expressing\" because the atoms and molecules that make up the rock are in constant motion. So, even though the rock doesn't appear active except in the most abstract sense, it has characteristics and properties that will act as forces on our senses, causing us to experience and make distinctions about the nature of its existence. For example, a rock has texture, and that texture acts as a force on our sense of touch if we run our fingers across the rock's surface. A rock has shape and color, which act as a force on our vision; the rock takes up space that no other object can occupy, so that we see it instead of an empty space or some other object. A rock can also have an odor that acts as a force on our sense of smell, or taste like something, although I haven't licked any rocks lately to find out. When we encounter anything in the environment that expresses its properties and characteristics, an exchange of energy takes place. Energy from the outside, in the form of whatever is expressing itself, gets transformed by our nervous system into electrical impulses and then gets stored in our inner, mental environment. To be more specific, whatever we are seeing, hearing, tasting, smelling, or feeling through our senses gets transformed into electrical impulses of", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 60, "parent_id": "068fecebe71b7215ef792889b961c4e8", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "5503a813fab3962d07796938349048c5", "text": "energy and stored in our mental environment as a memory and/or dis- I think all of this is fairly self- evident to most people, but there are some profound implications here that aren't self-evident, and we typically take them completely for granted. First of all, there's a cause-and-effect relationship that exists between ourselves and everything else that exists in the external environment. As a result, our encounters with external forces create what I am going to call \"energy structures\" inside our minds. The memories, distinctions, and, ultimately, the beliefs we acquire throughout our lives exist in our mental environment in the form of structured energy. Structured energy is an abstract concept. You might be asking yourself, \"How does energy take shape or form?\" Before I answer this question, an even more fundamental question needs to be addressed. How do we know that memories, distinctions, and beliefs exist in the form of energy in the first place? I don't know if it's been scientifically proven or completely accepted by the scientific community, but ask yourself in what other form could these mental components exist? Here's what we know for sure: Anything composed of atoms and molecules takes up space and, therefore, can be observed. If memories, distinctions, and beliefs existed in some physical form, then we should be able to observe them. To my knowledge, no such observations have been made. The scientific community has dissected brain tissue (both living and dead) examined it at the level of the individual atom, mapped various regions of the brain in terms of their functions, but nobody, as yet, has observed a memory, distinction, or belief in its natural form. By \"in its natural form\" I mean that although a scientist can observe the individual brain cells that contain certain memories, he can't experience those memories first hand. He can only experience them if the person to whom the memories belong is alive and chooses to express them in some way. If memories, distinctions, and beliefs don't exist as physical matter, then there really isn't any alternative way for them to exist except as some form of energy. If this is in fact the case, can this energy take on a specific shape? Can it be structured in a way that reflects the external forces that caused it to come into existence? Most definitely! Is there anvthing in the environment that is analogous to energy having shape Thoughts are energy. Because you think in a language, your thoughts are structured by the limitations and rules that govern the particular language in which you think. When you express those thoughts aloud, you create sound waves, which are a form of energy. The sound waves created by the interaction of your vocal cords and tongue are structured by the content of your message. Microwaves are energy. Many phone calls are relayed by microwaves, which means that the microwave energy has to be structured in a way that reflects the message it is carrying. Laser light is energy, and if you've ever witnessed a demonstration of a laser light show, or laser art, what you've seen is pure energy taking a shape that reflects the creative desires of the artists. All of these are good examples of how energy can take shape, form, and structure. Of course, there are many more, but there is one more example that illustrates the point in the most graphic way. At the most fundamental level, what are dreams? I am not asking you what dreams mean or what you think their", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 61, "parent_id": "068fecebe71b7215ef792889b961c4e8", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "a4da05cba31bc68cbdf46672831caf9c", "text": "purpose is, but rather, what are they? What are their properties? If we assume that dreams take place within the confines of our skulls, then they can't be composed of atoms and molecules, because there wouldn't be enough space for all of the things that exist and take place in our dreams. Dream experiences seem to have the same proportions and dimensions as the things we perceive when we are awake and experiencing life through our five senses. The only way this could be possible is if dreams were a form of structured energy, because energy can take on any size or dimension, but, in doing so, doesn't actually take up any space. Now, if it hasn't already occurred to you, there's something here that's really profound. If the memories, distinctions, and beliefs we've acquired as a result of our encounters with the external environment represent what we've learned about that environment and how it works; and if these memories, distinctions, and beliefs exist in our mental environment as energy; and if energy doesn't take up any space; then it also could be said that we have an unlimited capacity for learning. Well, not only do I think it could be said, I'm saying it. Consider the development of human consciousness and what to know to function effectively compared to just 100 years ago. There is absolutely nothing to indicate that we don't have an unlimited capacity to learn. The difference between what we are aware of now and what we can do as a result of this expanded awareness would boggle the mind of anyone living 100 years ago.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 62, "parent_id": "068fecebe71b7215ef792889b961c4e8", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "c425f318e0a7e2b9c142acdff3d86b71", "text": "PERCEPTION AND LEARNING", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 62, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "6637d6dab1c2bf95d16795db235a0afa", "text": "However, we must be careful not to equate storage capacity with learning capacity. Learning, and becoming aware of what is available to be learned, is not just a function of storage capacity. If it were, then what would stop us from knowing everything? And if we knew everything, then what would stop us from perceiving every possible characteristic, property, or trait of everything that is expressing itself in any given moment? What stops us now? These questions get to the very heart of why you have to understand that mental components like memories, distinctions, and beliefs exist as energy. Anything that is energy has the potential to act as a force expressing its form, and that is exactly what our memories, distinctions and beliefs do. They act as a force on our senses from the inside, expressing their form and content, and, in the process of doing so, they have a profoundly limiting effect on the information we perceive in any given moment, making much of the information that is available from the environment's perspective, and the possibilities inherent within that information, literally invisible. I am saying here that, in any given moment the environment is generating an enormous amount of information about its properties, characteristics, and traits. Some of that information is beyond the physiological range of our senses. For example, our eyes can't see every wavelength of light nor can our ears hear every frequency of sound the environment produces, so there's definitely a range of information that is beyond the physiological capabilities of our senses. What about the rest of the", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 62, "parent_id": "c425f318e0a7e2b9c142acdff3d86b71", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "809f83b9a56a13ae4d7642527e9a884b", "text": "information the environment is generating about itself? Do we see, hear, taste, smell, or feel through our senses every possible distinction, trait, and characteristic being senses? Absolutely not! The energy that's inside of us will categorically limit and block our awareness of much of this information by working through the same sensory mechanisms the external environment works through. Now, if you take a moment and think about it, some of what I just said should be self-evident. For example, there are many ways in which the external environment can express itself that we don't perceive simply because we haven't learned about them yet. This is easy to illustrate. Think back to the first time you ever looked at a price chart. What did you see? Exactly what did you perceive? With no previous exposure, I'm sure, like everyone else, you saw a bunch of lines that had no meaning. Now if you're like most traders, when you look at a price chart you see characteristics, traits, and behavior patterns that represent the collective actions of all the traders who participated in those particular trades. Initially, the chart represented undifferentiated information. Undifferentiated information usually creates a state of confusion, and that's probably what you experienced when you first encountered a chart. Gradually, however, you learned to make distinctions about that information, such as trends and trend lines, consolidations, support and resistance, retracements or significant relationships between volume, and open interest and price action, just to name a few. You learned that each of these distinctions in the market s behavior represented an opportunity to fulfill some personal need, goal, or desire. Each distinction now had a meaning and some relative degree of significance or importance attached to it. Now, I want you to use your imagination and pretend that I just set before you the very first price chart you ever saw. Would there be a difference between what you see now and what you saw then? Absolutely. Instead of a bunch of undifferentiated lines, you would see everything you've learned about those lines between then and now. In other words, you would see all the distinctions you've learned to make, as well as all the opportunities those distinctions represent. Yet, everything you can see as you look at that chart now existed then, and, furthermore, was available to be perceived. What's the difference? The structured energy that's inside of you now\u2014the knowledge you have gained\u2014acts as a force on your eyes, causing you to recognize the various distinctions that you've learned about. Since that energy wasn't there the first time you looked at the chart, all the opportunities that you now see were there, but at the same time invisible to you. Furthermore, unless you've learned to make every possible distinction based on every possible relationship between the variables in that chart, what you haven't learned yet is still invisible. Most of us have no concept of the extent to which we are continually surrounded by the invisible opportunities inherent in the information we're exposed to. More often than not, we never learn about these opportunities and, as a result, they remain invisible. The problem, of course, is that unless we're in a completely new or unique situation or we're operating out of an attitude of genuine openness, we won't perceive something that we haven't learned about yet. To learn about something, we have to be able to experience it in some way. So what we have here is a", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 63, "parent_id": "c425f318e0a7e2b9c142acdff3d86b71", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "e14c6c001acc87aa4ca373f94810206f", "text": "closed loop that prevents us from learning. Perceptual closed loops exist in all of us, because they are natural functions of the way mental energy expresses itself on our senses. Eveiyone has heard the expression, \"People see what they want to see.\" I would put it a little differently: 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. To illustrate this concept and make it even clearer, I am going to give you another example, one that demonstrates how mental energy can affect how we perceive and experience the environment in a way that it actually reverses the cause-and-effect relationship. Let's look at a very young child's first encounter with a dog. Because it's a first-time experience, the child's mental environment is a clean slate, so to speak, with respect to dogs. He won't have any memories and certainly no distinctions about a dog's nature. Therefore, up to the moment of his first encounter, from the child's perspective, dogs don't exist. Of course, from the environment's perspective, dogs do exist and they have the potential to act as a force on the child's senses to create an experience. In other words, dogs expressing their nature can act as a cause to produce an effect inside the child's mental environment. What kind of effect are dogs capable of producing? Well, dogs have a range of expression. By range of expression I mean dogs can behave in a number of ways toward humans. They can be friendly, loving, protective, and fun to play with; or they can be hostile, mean, and dangerous\u2014just to name a few of the many behaviors they're capable of. All of these traits can be observed, experienced, and learned about. When the child sees the dog for the first time, there is absolutely nothing in his mental environment to tell him what he is dealing with. Unfamiliar, unknown, and unclassified environmental information can generate a sense of curiosity\u2014when we want to find out more about what we're experiencing\u2014or it can generate a state of confusion, which can easily turn to fear if we can't place the information into an understandable or meaningful organizational framework or context. In our example, the child's sense of curiosity kicks in and he rushes to the dog to get more sensory experience. Notice how children are literally compelled to thrust themselves into a situation they know nothing about. However, in this example, the environmental forces at hand do not react favorably to the child's advances. The dog the child is interested in is either inherently mean or having a bad day. In any case, as soon as the child gets close enough, the dog bites him. The attack is so severe that the dog has to be pulled off the child. This kind of unfortunate experience is certainly not typical, but it's not that uncommon either. I chose it for two reasons: First, most people can relate to it in some way either from their own direct experience or through the experience of someone they know. Second, as we analyze the underlying dynamics of this experience from an energy perspective, we're going to learn about 1) how our minds are designed to think, 2) process information, 3) how these processes affect what we experience and 4) our ability to recognize new possibilities.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 64, "parent_id": "c425f318e0a7e2b9c142acdff3d86b71", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "73520626c30d9aa623033513e033be43", "text": "I know this mav seem like a lot of insieht from iust one example, but the principles involved apply to the dynamics beneath virtually all learning. As a result of being physically and emotionally traumatized, the little boy in our example now has a memory and one distinction about the way dogs can express themselves. If the boys ability to remember his experiences is normal, he can store this incident in a way that represents all of the senses the experience had an impact on: For example the attack can be stored as mental images based on what he saw, as well as mental sounds representing what he heard, and so on. Memories representing the other three senses will work the same way. However, the kind of sensory data in his memory is not as important as the kind of energy the sensory data represents. We basically have two kinds of mental energy: positively charged energy, which we call love, confidence, happiness, joy, satisfaction, excitement, and enthusiasm, to name a few of the pleasant ways we can feel; and negatively charged energy, representing fear, terror, dissatisfaction, betrayal, regret, anger, confusion, anxiety, stress, and frustration, all representing what is commonly referred to as emotional pain. Because the boy's first experience with a dog was intensely painful, we can assume that regardless of what senses were affected, all of his memories of this experience will be in painful, unpleasantfeeling, negative energy. Now, what effect will this negatively charged mental energy have on his perception and behavior if and when he encounters another dog? The answer is so obvious that it may seem ridiculous even to ask, but the underlying implications are not obvious, so bear with me. Clearly, the moment he comes into contact with another dog, he will experience fear. Notice that I used the word \"another\" to describe the next dog he has any contact with. What I want to point out is that any dog can cause the boy to feel fear, not just the one that actually attacked him. It won't make a bit of difference if the next dog he comes into contact with is the friendliest dog in the world, one whose nature is only to express playfulness and love. The child will still be afraid, and furthermore, his fear could quickly turn to unrestrained terror especially if the second dog (seeing a child and wanting to play) attempts to approach him. Each of us has at one time or another witnessed a situation in which someone was experiencing fear, when from our perspective there wasn't the least bit of danger or threat. Although we may not have said it, we probably thought to ourselves that this person was being irrational.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 65, "parent_id": "c425f318e0a7e2b9c142acdff3d86b71", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "c9f19e2d7c28c8dc5a699dbf6a4ad9e8", "text": "PERCEPTION AND RISK", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 65, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "7154462efeb5394456ca3affd54566a9", "text": "If we tried to point out why there was no need to be afraid, we probably found that our words had little, if any, impact. We could easily think the same thing about the boy in our example, that he is just being irrational, because it's clear from our perspective that other possibilities exist than the one his mind has focused on. But is his fear any less rational than, let's say, your fear (or hesitation) about putting on the next trade, when your last trade was a loser? Using the same logic, a top trader would say that your fear is irrational because this \"now moment\"", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 65, "parent_id": "c9f19e2d7c28c8dc5a699dbf6a4ad9e8", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "2a757121f6c6f21f450d94d0d433f800", "text": "opportunity has absolutely nothing to do with your last trade. Each trade is simply an edge with a probable outcome, and statistically independent of every other trade. If you believe otherwise, then I can see why you're afraid; but I can assure you that your fears are completely unfounded. As you can see, one person's perception of risk can easily be perceived as irrational thinking by another. Risk is relative, but to the person who perceives it in the moment, it seems absolute and beyond question. When the child encountered his first dog, he was bubbling with excitement and curiosity. What is it about the way our minds think and process information that could automatically flip the boy into a state of fear the next time he encounters a dog, even if it's months or years later? If we look at fear as a natural mechanism warning us of threatening conditions, then what is it about the way our minds function that would automatically tell the boy that the next encounter with a dog is something to be afraid of? What happened to the boy's natural sense of curiosity? There is surely more to learn about the nature of dogs than this one experience has taught him, especially in light of the fact that our minds seem to have an unlimited capacity for learning. And why would it be virtually impossible to talk the boy out of his fear?", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 66, "parent_id": "c9f19e2d7c28c8dc5a699dbf6a4ad9e8", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "92bca7ca7c182ae691f74311b27fe34f", "text": "THE POWER OF ASSOCIATION", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 66, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "6bb372bbb7ac560114795e2505490eb2", "text": "As complex as these questions may seem at first glance, most of them can be answered quite easily. I'm sure many of you already know the answer: Our minds have an inherent design characteristic that causes us to associate and link anything that exists in the external environment that is similar in quality, characteristics, properties, or traits to anything that already exists in our mental environment as a memory or distinction. In other words, in the example of the child being afraid of dogs, the second dog or any other dog he encounters thereafter, doesn't have to be the dog that attacked in order for him to experience emotional pain. There just has to be enough of a likeness or similarity for his mind to make a connection between the two. This natural tendency for our minds to associate is an unconscious mental function that occurs automatically. It's not something we have to think about or make a decision about. An unconscious mental function would be analogous to an involuntary physical function such as a heartbeat. Just as we don't have to consciously think about the process of making our hearts beat, we don't have to think about linking experiences and our feelings about them. Its simply a natural function of the way our minds process information, and, like a heartbeat, it's a function that has a profound effect on the way we experience our lives. I'd like you to try and visualize the two-way flow of energy that reverses the cause-and-effect relationship that will make it difficult (if not impossible) for the boy to perceive any other possibilities than the one that's in his mind. To help you, I'm going to break this process down into its smallest parts, and go through what happens step by step, All of this may seem a bit abstract, but understanding this process plays a big part in unlocking your potential to achieve consistent success as a big trader. First,", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 66, "parent_id": "92bca7ca7c182ae691f74311b27fe34f", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "dbee9cb7480624c2f45ace594b90d7cb", "text": "let's get right down to the basics. There's structured energy on the outside of the boy and structured energy on the inside of the boy. The outside energy is positively charged in the form of a friendly dog that wants to express itself by playing. The inside energy is a negatively charged memory in the form of mental images and sounds that represent the boy's first experience with a dog. Both the inside and the outside energy have the potential to make themselves felt on the boy's senses and, as a result, create two different kinds of situations for him to experience. The outside energy has the potential to act as a force on the boy in a way that he could find very enjoyable. This particular dog expresses behavior characteristics like playfulness, friendliness, and even love. But keep in mind that these are characteristics that the child still has not experienced in a dog, so from his perspective they don't exist. Just as in the price chart example I presented earlier, the child won't be able to perceive what he hasn't yet learned about, unless he is in a state of mind that is conducive to learning. The inside energy also has potential and is just waiting, so to speak, to express itself. But it will act on the boy's eyes and ears in a way that causes him to feel threatened. This in turn will create an experience of emotional pain, fear, and possibly even terror. From the way I've set this up, it may seem as if the boy has a choice between experiencing fun or experiencing fear, but that's really not the case, at least not in the moment. Of the two possibilities that exist in this situation, he will undoubtedly experience the pain and fear, instead of the fun. This is true for several reasons. First, as I've already indicated, our minds are wired to automatically and instantaneously associate and link information that has similar characteristics, properties, and traits. What's outside of the child in the form of a dog, looks and sounds similar to the one that's in his mind. However, the degree of similarity that is necessary for his mind to link the two is an unknown variable, meaning I don't know the mental mechanism that determines how much or how little similarity is required for our minds to associate and link two or more sets of information. Since everyone's mind functions in a similar way, but, at the same time is unique, I would assume there is a range of tolerance for similarity or dissimilarity and each of us has a unique capacity somewhere within the range. Here's what we do know: As this next dog comes into contact with the boy's eyes or ears, if there is enough similarity between the way it looks or sounds and the dog that's embedded in his memory, then his mind will automatically connect the two. This connection, in turn, will cause the negatively charged energy in his memory to be released throughout his body, causing him to be overcome with a very uncomfortable sense of foreboding or terror. The degree of discomfort or emotional pain that he experiences will be equivalent to the degree of trauma that he suffered as a result of his first encounter with a dog. What happens next is what psychologists call a projection. I'm going to refer to it simply as another instantaneous association that makes the reality of the situation from the boy's perspective seem like the absolute, unquestionable truth. The boy's body is now filled with negatively charged energy. At the same time, he is in sensory contact with the dog. Next, his mind associates whatever sensory", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 67, "parent_id": "92bca7ca7c182ae691f74311b27fe34f", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "4b8f510f1e47a7a3c9bfd3713ba87813", "text": "information his eyes or ears perceive with the painful energy he's experiencing inside himself, which makes it seem as if the source of his pain and fear is the dog he is seeing or hearing in that moment. Psychologists call the dynamics of what I just described a projection because, in a sense, the boy is projecting the pain he is experiencing in the moment onto the dog. That painful energy then gets reflected back to him, so that he perceives a dog that is threatening, painful, and dangerous. This process makes the second dog identical in character, properties, and traits to the one that is in the boy's memory bank, even though the information the second dog is generating about its behavior is not identical, or even similar, to the behavior of the dog that actually attacked the boy. Since the two dogs, the one in the boy's mind and the one outside of the boy's mind, feel exactly the same, it's extremely unlikely the boy will be able to make any type of distinctions in the second dog's behavior that would suggest to him that it is any different than the one in his mind. So, instead of perceiving this next encounter with a dog as an opportunity to experience something new about the nature of dogs, he perceives a threatening and dangerous dog. Now, if you think about it for a moment, what is it about this process that would indicate to the boy that his experience of the situation was not the absolute, unquestionable truth? Certainly the pain and fear that he experienced in his body was the absolute truth. But what about the possibilities that he perceived? Were they true? From our perspective, they weren't. However, from the boy's perspective, how could they be anything but the true reality of the situation? What alternatives did he have? First, he can't perceive possibilities that he hasn't learned about yet. And it is extremely difficult to learn anything new if you're afraid, because, as you already well know, fear is a very debilitating form of energy. It causes us to withdraw, to get ready to protect ourselves, to run, and to narrow our focus of attention \u2014all of which makes it veiy difficult, if not impossible, to open ourselves in a way that allows us to learn something new. Second, as I have already indicated, as far as die boy is concerned, the dog is the source of his pain, and in a sense this is true. The second dog did cause him to tap into the pain that was already in his mind, but it was not the true source of that pain. This was a positively charged dog that got connected to the boy's negatively charged energy by an automatic, involuntary mental process, functioning at speeds faster than it takes to blink an eye (a process that the boy has absolutely no awareness of). So as far as he's concerned, why would he be afraid if what he perceived about the dog wasn't the absolute truth? As you can see, it wouldn't make any difference how the dog was acting, or what someone might say to the contrary about why the boy shouldn't be afraid, because he will perceive whatever information the dog is generating about itself (regardless of how positive) from a negative perspective. He will not have the slightest notion that his experience of pain, fear, and terror was completely self-generated. Now, if it's possible for the boy to self-generate his own pain and terror and, at the same time, be firmly convinced that his negative experience was coming from the environment, is it also possible for traders to self-generate their own experiences of fear and emotional pain as they interact with market information and be thoroughly convinced that their pain and fear was completely justified by the", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 68, "parent_id": "92bca7ca7c182ae691f74311b27fe34f", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "e805d6a101d5e49088eff81ba4c37aa1", "text": "circumstances? The underlining psychological dynamics work in exactly the same way. One of your basic objectives as a trader is to perceive the opportunities available, not the threat of pain. To learn how to stay focused on the opportunities, you need to know and understand in no uncertain terms the source of the threat. It's not the market. The market generates information about its potential to move from a neutral perspective. At the same time, it provides you (the observer) with an unending stream of opportunities to do something on your own behalf. If what you perceive at any given moment causes you to feel fear, ask yourself this question: Is the information inherently threatening, or are you simply experiencing the effect of your own state of mind reflected back to you (as in the above illustration)? I know this is a difficult concept to accept, so I'll give you another example to illustrate the point. Let's set up a scenario, where your last two or three trades were losers. You are watching the market, and the variables you use to indicate that an opportunity exists are now present. Instead of immediately executing the trade, you hesitate. The trade feels very risky, so risky, in fact, that you start questioning whether this is \"really\" a signal. As a result, you start gathering information to support why this trade probably won't work. This is information you normally wouldn't consider or pay attention to, and it's certainly not information that is part of your trading methodology. In the meantime, the market is moving. Unfortunately, it is moving away from your original entry point, the point at which you would have gotten into the trade if you hadn't hesitated. Now you are conflicted, because you still want to get in; the thought of missing a winning trade is painful. At the same time, as the market moves away from your entry point, the dollar value of the risk to participate increases. The tug of war inside your mind intensifies. You don't want to miss out, but you don't want to get whipsawed either. In the end, you do nothing, because you are paralyzed by the conflict. You justify your state of immobility by telling yourself that it's just too risky to chase the market, while you agonize over every tic the market moves in the direction of what would have been a nice winning trade. If this scenario sounds familiar, I want you to ask yourself whether, at the moment you hesitated, were you perceiving what the market was making available, or perceiving what was in your mind reflected back to you? The market gave you a signal. But you didn't perceive the signal from an objective or positive perspective. You didn't see it as an opportunity to experience the positive feeling you would get from winning or making money, but that's exactly what the market was making available to you. Think about this for a moment: If I change the scenario so that your last two or three trades were winners instead of losers, would you have perceived the signal any differently? Would you have perceived it more as an opportunity to win than you did in the first scenario? If you were coming off three winners in a row, would you have hesitated to put that trade on? Very unlikely! In fact, if you're like most traders, you probably would have been giving very strong consideration to loading up (putting on a position much larger than your normal size). In each situation, the market generated the same signal. But your state of mind was negative and fear-based in the first scenario, and that caused", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 69, "parent_id": "92bca7ca7c182ae691f74311b27fe34f", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "d92303971d5bde5e2f12d30aaee11dc2", "text": "you to focus on the possibility of failure, which in turn caused you to hesitate. In the second scenario, you hardly perceived any risk at all. You may even have thought the market was making a dream come true. That, in turn, would make it easy, if not compelling, to financially overcommit yourself. If you can accept the fact that the market doesn't generate positively or negatively charged information as an inherent characteristic of the way it expresses itself, then the only other way information can take on a positive or negative charge is in your mind, and that is a function of the way the information is processed. In other words, the market doesn't cause you to focus on failure and pain, or on winning and pleasure. What causes the information to take on a positive or negative quality is the same unconscious mental process that caused the boy to perceive the second dog as threatening and dangerous, when all the dog was offering was playfulness and friendship. Our minds constantly associate what's outside of us (information) with something that's already in our mind (what we know), making it seem as if the outside circumstances and the memory, distinction, or belief these circumstances are associated with are exactly the same. As a result, in the first scenario, if you were coming off two or three losing trades, the next signal the market gives you that an opportunity was present will feel overly risky. Your mind is automatically and unconsciously linking the \"now moment\" with your most recent trading experiences. The link taps you into the pain of losing, creating a fearful state of mind and causing you to perceive the information you're exposed to in that moment from a negative perspective. It seems as if the market is expressing threatening information, so, of course, your hesitation is justified. In the second scenario, the same process causes you to perceive the situation from an overly positive perspective, because you are coming off three winners in a row. The association between the \"now moment\" and the elation of the last three trades creates an overly positive or euphoric state of mind, making it seem as if the market is offering you a riskless opportunity. Of course, this justifies overcommitting yourself. In Chapter 1, I said that many of the mental patterns that cause traders to lose and make errors are so self-evident and deeply ingrained that it would never occur to us that the reason we aren't consistently successful is because of the way we think. Understanding, becoming consciously aware of, and then learning how to circumvent the mind's natural propensity to associate is a big part of achieving that consistency. Developing and maintaining a state of mind that perceives the opportunity flow of the market, without the threat of pain or the problems caused by overconfidence, will require that you take conscious control of the association process. CHAPTER 6", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 70, "parent_id": "92bca7ca7c182ae691f74311b27fe34f", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "4073ab2a94a14935ffd4c0e589dd4441", "text": "CHAPTER 6", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 71, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "ba8ffd25e6f3dddcd14f10bd3525af23", "text": "THE MARKET'S PERSPECTIVE", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 71, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "d2ac2cdcbb315606f5b76f271f3a3beb", "text": "For the most part, a typical traders perception of the risk in any given trading situation is a function of the outcome of his most recent two or three trades (depending on the individual). The best traders, on the other hand, are not impacted (either negatively or too positively) by the outcomes of their last or even their last several trades. So their perception of the risk of any given trading situation is not affected by this personal, psychological variable. There's a huge psychological gap here that might lead you to believe that the best traders have inherent design qualities in their minds that account for this gap, but I can assure you this is not the case. Every trader I've worked with over the last 18 years has had to learn how to train his 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 (meaning, this particular trading problem is not personspecific). There are other factors relating to self-esteem that may also act as obstacles to your consistent success, but what we are going to discuss now is the most important and fundamental building block to your success as a trader.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 71, "parent_id": "ba8ffd25e6f3dddcd14f10bd3525af23", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "45ee8cd878793e4aef27b7435c59fb41", "text": "THE \"UNCERTAINTY\" PRINCIPLE", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 71, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "845e954f8596ab78a21cf2f69a9c2296", "text": "If there is such a thing as a secret to the nature of trading, this is it: At the very core of one's ability 1) to trade without fear or overconfidence, 2) perceive what the market is offering from its perspective, 3) stay completely focused in the \"now moment opportunity flow,\" and 4) spontaneously enter the \"zone,\" it is a strong virtually unshakeable belief in an uncertain outcome with an edge in your favor. The best traders have evolved to the point where they believe, without a shred of doubt or internal conflict, that \"anything can happen.\" They don't just suspect that anything can happen or give lip service to the idea. Their belief in uncertainty is so powerful that it actually prevents their minds from associating the \"now moment\" situation and circumstance with the outcomes of their most recent trades.By preventing this association, they are able to keep their minds free of unrealistic and rigid expectations about how the market will express itself. Instead of generating the kind of unrealistic expectations that more often than not result in both emotional and financial pain, they have learned to \"make themselves available\" to take advantage of whatever opportunities the market may offer in any given moment. \"Making yourself available\" is a perspective from which you understand that the framework from which you are perceiving information is limited relative to what's being offered.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 71, "parent_id": "45ee8cd878793e4aef27b7435c59fb41", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "11c7eb78e693d3fc732b5d56b7b627f7", "text": "Our minds don't automatically perceive every opportunity that presents itself in any given moment. (The \"boy and the dog\" illustration from Chapter 5 is a perfect example of how our own personal versions of the truth are reflected back to us.) This same land of perceptual blindness happens all the time in trading. We can't perceive the potential for the market to continue to move in a direction that is already against our position if, for example, we are operating out of a fear of being wrong. The fear of admitting we are wrong causes us to place an inordinate amount of significance on information that tells us that we're right. This happens even if there's ample information to indicate that the market has in fact established a trend in the opposite direction of our position. A trending market is a distinction about the market's behavior we can ordinarily perceive, but this distinction can easily become invisible if we are operating out of fear. The trend and the opportunity to trade in the direction of that trend don't become visible until we are out of the trade. In addition, there are opportunities that are invisible to us because we haven't learned to make the distinctions that would allow us to perceive them. Recall our discussion in Chapter 5 of the first price chart you ever looked at. What we haven't learned yet is invisible to us, and remains invisible until our minds are open to an exchange of energy. 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. However, what you don't know is exactly how the pattern your variables identify will unfold. With the perspective of making yourself available, you know that your edge places the odds of success in your favor, but, at the same time, you completely accept the fact that you don't know the outcome of any particular trade. By making yourself available, you consciously open yourself up to find out what will happen next; instead of giving way to an automatic mental process that causes you to think you already know. Adopting this perspective leaves your mind free of internal resistance that can prevent you from perceiving whatever opportunity the market is making available from its perspective (its truth). Your mind is open for an exchange of energy. Not only can you learn something about the market that you previously didn't know, but you also set up the mental condition most conducive to entering \"the zone.\" The essence of what it means to be in \"the zone\" is that your mind and the market are in sync. As a result, you sense what the market is about to do as if there is no separation between yourself and the collective consciousness of everyone else participating in the market. The zone is a mental space where you are doing more than just reading the collective mind, you are also in complete harmony with it. If this sounds a bit strange to you, ask yourself how it is that a flock of birds or a school of fish can change direction simultaneously. There must be a way in which they are linked to one another. If it is possible for people to become linked in the same way, then there will be times when information from those with whom we are linked can and will bleed through to our consciousness. Traders who have experienced being tapped into the collective consciousness of the market can anticipate a change in direction just as a bird in the middle of a flock or a fish in the middle of a school", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 72, "parent_id": "45ee8cd878793e4aef27b7435c59fb41", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "9af023934fe5f792d0d59da56de9ddc9", "text": "will turn at the precise moment that all of the others turn. However, setting up the kind of mental conditions most conducive to experiencing this seemingly magical synchronicity between you and the market is no easy task. There are two mental hurdles to overcome. The first is the focus of this chapter: learning how to keep your mind focused in the \"now moment opportunity flow.\" In order to experience synchronicity, your mind has to be open to the market's truth, from its perspective. The second hurdle has to do with the division of labor between the two halves of our brain. The left side of our brain specializes in rational thought, based on what we already know. The right side specializes in creative thought. It is capable of tapping into an inspiration, an intuition, a hunch, or a sense of knowing that usually can't be explained at a rational level. It can't be explained because if the information is really creative in nature, then it is something that we wouldn't know at a rational level. By definition, true creativity brings forth something that didn't previously exist. There's an inherent conflict between these two modes of thought, that the rational, logical part will almost always win, unless we take specific steps to train our minds to accept and trust creative information. Without that training, we will usually find it very difficult to act on our hunches, intuitive impulses, inspirations, or sense of knowing. Acting appropriately on anything requires belief and clarity of intent, which keeps our minds and senses focused on the purpose at hand. If the source of our actions is creative in nature, and our rational mind hasn't been properly trained to trust this source, then at some point in the process of acting on this information, our rational brain will flood our consciousness with conflicting and competing thoughts. Of course, all of these thoughts will be sound and reasonable in nature, because they will be coming from what we already know at a rational level, but they will have the effect of flipping us out of \"the zone\" or any other creative state of mind. There are few things in life more frustrating than recognizing the possibilities evident from a hunch, intuition, or an inspired idea, and not taking advantage of that potential because we talked ourselves out of it. I realize that what I've just said is still much too abstract to implement on a practical basis. So, I'm going to take you step-by-step through what it means to be completely focused in the \"now moment opportunity flow.\" My objective is that by the time you've read this chapter and Chapter 7, you will understand without a shred of doubt why your ultimate success as a trader cannot be realized until you develop a resolute, unshakeable belief in uncertainty. The first step on the road toward getting your mind and the market in sync is to understand and completely accept the psychological realities of trading. This step is where most of the frustrations, disappointments, and mysteriousness associated with trading begin. Very few people who decide to trade ever take the time or expend the effort to think about what it means to be a trader. Most people who go into trading think that being a trader is synonymous with being a good market analyst. As I have mentioned, this couldn't be further from the truth. Good market analysis can certainly contribute to and play a supporting role in one's success, but it doesn't deserve the attention and importance most traders mistakenly attach to it. Beneath the market behavior patterns that are so easy to become fixated on are some very unique psychological characteristics. It's the nature", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 73, "parent_id": "45ee8cd878793e4aef27b7435c59fb41", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "c63b6f88cd816cce95761d277fbca0c7", "text": "of these psychological characteristics that determines how one needs \"to be\" in order to operate effectively in the market environment. Operating effectively in an environment that has qualities, traits, or characteristics that are different from what we're used to requires making some adjustments or changes in the way we normally think about things. For example, if you were to travel to an exotic place with certain objectives or goals to accomplish, the first thing you would do is familiarize yourself with the local traditions and customs. By doing so, you would leani about the various ways in which you would have to adapt in order to function successfully in that environment. Traders frequently ignore the fact that they may have to adapt in order to become consistently successful traders. There are two reasons for this. The first is that you need absolutely no skill of any kind to put on a winning trade. For most traders it usually takes years of pain and suffering before they figure out or finally admit to themselves that there's more to being consistent than the ability to pick an occasional winner. The second reason is that you don't have to travel anywhere to trade. All you need is access to a phone. You don't even have to roll out of bed in the morning. Even traders who normally trade from an office don't have to be in the office to put on or take off their trades. Because we can access and interact with the market from personal environments that we are intimately familiar with, it seems as if trading won't require any special adaptations in the way we think. To some degree, you are probably already aware of many of the fundamental truths (psychological characteristics) about the nature of trading. But having an awareness or an understanding of some principle, insight, or concept doesn't necessarily equate to acceptance and belief. When something has been truly accepted, it isn't in conflict with any other component of our mental environment. When we believe in something, we operate out of that belief as a natural function of who we are, without struggle or extra effort. To whatever degree there is a conflict with any other component of our mental environment, to the same degree there is a lack of acceptance. It isn't difficult, therefore, to understand why so few people make it as traders. They simply don't do the mental work necessary to reconcile the many conflicts that exist between what they've already learned and believe, and how that learning contradicts and acts as a source of resistance to implementing the various principles of successful trading. Getting into and taking advantage of the kind of free-flowing states of mind that are ideal for trading requires that those conflicts be thoroughly resolved.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 74, "parent_id": "45ee8cd878793e4aef27b7435c59fb41", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "1d2a9e50c5dcb72da23ffd4f424b582d", "text": "MARKETS MOST FUNDAMENTAL CHARACTERISTIC (IT CAN EXPRESS ITSELF IN AN ALMOST INFINITE COMBINATION OF WAYS )", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 75, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "e1df86cabf917d2956daa6ddd9687462", "text": "The market can do virtually anything at any time. This seems obvious enough, especially for anybody who has experienced a market that has displayed erratic and volatile price swings. The problem is that all of us have the tendency to take this characteristic for granted, in ways that cause us to make the most fundamental trading errors over and over again. The fact is that if traders really believed that anything could happen at any time, there would be considerably fewer losers and more consistent winners. How do we know that virtually anything can happen? This fact is easy to establish. All we have to do is dissect the market into its component parts and look at how the parts operate. The most fundamental component of any market is its traders. Individual traders act as a force on prices, making them move by either bidding a price up or offering it lower. Why do traders bid a price up or offer it lower? To answer this question we have to establish the reasons why people trade. There are many reasons and purposes behind a person s motivation to trade in any given market. However, for the purposes of this illustration, we don't have to know all the underlying reasons that compel any individual trader to act because ultimately they all boil down to one reason and one purpose: to make money. We know this because there are only two things a trader can do (buy and sell) and there are only two possible outcomes for every trade (profit or loss). Therefore, I think we can safely assume that regardless of one's reasons for trading, the bottom line is that everyone is looking for the same outcome: Profits. And there are only two ways to create those profits: Either buy low and sell high, or sell high and buy low. If we assume that everyone wants to make money, then there's only one reason why any trader would bid a price up to the next highest level: because he believes he can sell whatever he's buying at a higher price at some point in the future. The same is true for the trader who's willing to sell something at a price that is less than the last posted price (offer a market lower). He does it because he believes he can buy back whatever he's selling at a lower price at some point in the future. If we look at the market's behavior as a function of price movement, and if price movement is a function of traders who are willing to bid prices up or offer them lower, then we can say that all price movement (market behavior) is a function of what traders believe about the future. To be more specific, all price movement is a function of what individual traders believe about what is high and what is low. The underlying dynamics of market behavior are quite simple. Only three primary forces exist in any market: traders who believe the price is low, traders who believe the price is high, and traders who are watching and waiting to make up their minds about whether the price is low or high. Technically, the third group constitutes a potential force. The reasons that support any given traders belief that something is high or low are usually irrelevant, because most people who trade act in an undisciplined, unorganized, haphazard, and random manner. So, their reasons wouldn't necessarily help anyone gain a better understanding of what is going on. But, understanding what's going on isn't that difficult, if you remember that all price movement or lack of", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 75, "parent_id": "1d2a9e50c5dcb72da23ffd4f424b582d", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "8bca51dd7e61d89c7e6e8cfd58742f1c", "text": "movement is a function of the relative balance or imbalance between two primary forces: traders who believe the price is going up, and traders who believe the price is going down. If there's balance between the two groups, prices will stagnate, because each side will absorb the force of the other side's actions. If there is an imbalance, prices will move in the direction of the greater force, or the traders who have the stronger convictions in their beliefs about in what direction the price is going. Now, I want you to ask yourself, what's going to stop virtually anything from happening at any time, other than exchange-imposed limits on price movement. There's nothing to stop the price of an issue from going as high or low as whatever some trader in the world believes is possible\u2014if, of course, the trader is willing to act on that belief. So the range of the market's behavior in its collective form is limited only by the most extreme beliefs about what is high and what is low held by any given individual participating in that market. I think the implications are self-evident: There can be an extreme diversity of beliefs present in any given market in any given moment, making virtually anything possible. When we look at the market from this perspective, it's easy to see that every potential trader who is willing to express his belief about the future becomes a market variable. On a more personal level, this means that it only takes one other trader, anywhere in the world, to negate the positive potential of your trade. Put another way, it takes only one other trader to negate what you believe about what is high or what is low. That's all, only one! Here's an example to illustrate this point. Several years ago, a trader came to me for help. He was an excellent market analyst; in fact, he was one of the best I've ever met. But after years of frustration during which he lost all his money and a lot of other people's money, he was finally ready to admit that, as a trader, he left a lot to be desired. After talking to him for a while, I determined that a number of serious psychological obstacles were preventing him from being successful. One of the most troublesome obstacles was that he was a know-it-all and extremely arrogant, making it impossible for him to achieve the degree of mental flexibility required to trade effectively. It didn't matter how good an analyst he was. When he came to me, he was so desperate for money and help that he was willing to consider anything. The first suggestion I made was that instead of looking for another investor to back what ultimately would be another failed attempt at trading, he would be better off taking a job, doing something he was truly good at. He could be paid a steady income while working through his problems, and at the same time provide someone with a worthwhile service. He took my advice and quickly found a position as a technical analyst with a fairly substantial brokerage house and clearing firm in Chicago. The semiretired chairman of the board of the brokerage firm was a longtime trader with nearly 40 years of experience in the grain pits at the Chicago Board of Trade. He didn't know much about technical analysis, because he never needed it to make money on the floor. But he no longer traded on the floor and found the transition to trading from a screen difficult and somewhat mysterious. So he asked the firm's newly acquired star technical analyst to sit with him during the trading day and teach him technical trading. The new hire jumped at the opportunity to show off his abilities to such an", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 76, "parent_id": "1d2a9e50c5dcb72da23ffd4f424b582d", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "d91a48d9f000914b2d7bf1bb94be581f", "text": "experienced and successful trader. The analyst was using a method called \"point and line,\" developed by Charlie Drummond. (Among other things, point and line can accurately define support and resistance.) One day, as the two of them were watching the soybean market together, the analyst had projected major support and resistance points and the market happened to be trading between these two points. As the technical analyst was explaining to the chairman the significance of these two points, he stated in very emphatic, almost absolute terms that if the market goes up to resistance, it will stop and reverse; and if the market goes down to support, it will also stop and reverse. Then he explained that if the market went down to the price level he calculated as support, his calculations indicated that would also be the low of the day. As they sat there, the bean market was slowly trending down to the price the analyst said would be the support, or low, of the day. When it finally got there, the chairman looked over to the analyst and said, \"This is where the market is supposed to stop and go higher, right?\" The analyst responded, \"Absolutely! This is the low of the day.\" \"That's bullshit!\" the chairman retorted. \"Watch this.\" He picked up the phone, called one of the clerks handling orders for the soybean pit, and said, \"Sell two million beans (bushels) at the market.\" Within thirty seconds after he placed the order, the soybean market dropped ten cents a bushel. The chairman turned to look at the horrified expression on the analysts face. Calmly, he asked, \"Now, where did you say the market was going to stop? If I can do that, anyone can.\" The point is that from our own individual perspective as observers of the market, anything can happen, and it takes only one trader to do it. This is the hard, cold reality of trading that only the very best traders have embraced and accepted with no internal conflict. How do I know this? Because only the best traders consistently predefine their risks before entering a trade. Only the best traders cut their losses without reservation or hesitation when the market tells them the trade isn't working. And only the best traders have an organized, systematic, money-management regimen for taking profits when the market goes in the direction of their trade. Not predefining your risk, not cutting your losses, or not systematically taking profits are three of the most common\u2014and usually the most costly\u2014trading errors you can make. Only the best traders have eliminated these errors from their trading. At some point in their careers, they learned to believe without a shred of doubt that anything can happen, and to always account for what they don't know, for the unexpected. Remember that there are only two forces that cause prices to move: traders who believe the markets are going up, and traders who believe the markets are going down. At any given moment, we can see who has the stronger conviction by observing where the market is now relative to where it was at some previous moment. If a recognizable pattern is present, that pattern may repeat itself, giving us an indication of where the market is headed. This is our edge, something we know. But there's also much that we don't know, and will never know unless we learn how to read minds. For instance, do we know how many traders may be sitting on the sidelines and about to enter the market? Do we know how many of them want to buy and how many want to sell, or how many shares they are willing to buy or sell? What about the traders whose", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 77, "parent_id": "1d2a9e50c5dcb72da23ffd4f424b582d", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "44da15d19aeefb3fae77c413c3cc1c67", "text": "participation is already reflected in the current price? At any given moment, how many of them are about to change their minds and exit their positions? If they do, how long will they stay out of the market? And if and when they do come back into the market, in what direction will they cast their votes? These are the constant, never-ending, unknown, hidden variables that are always operating in every market\u2014always] The best traders don't try to hide from these unknown variables by pretending they don't exist, nor do they try to intellectualize or rationalize them away through market analysis. Quite the contrary, the best traders take these variables into account, factoring them into every component of their trading regimes. For the typical trader, just the opposite is true. He trades from the perspective that what he can't see, hear, or feel must not exist. What other explanation could account for his behavior? If he really believed in the existence of all the hidden variables that have the potential to act on prices in any given moment, then he would also have to believe that every trade has an uncertain outcome. And if every trade truly has an uncertain outcome, then how could he ever justify or talk himself into not predefining his risk, cutting his losses, or having some systematic way to take profits? Given the circumstances, not adhering to these three fundamental principles is the equivalent of committing financial and emotional suicide. Since most traders don't adhere to these principles, are we to assume that their true underlying motivation for trading is to destroy themselves? It's certainly possible, but I think the percentage of traders who either consciously or subconsciously want to rid themselves of their money or hurt themselves in some way is extremely small. So, if financial suicide is not the predominant reason, then what could keep someone from doing something that would otherwise make absolute, perfect sense? The answer is quite simple: The typical trader doesn't predefine his risk, cut his losses, or systematically take profits because the typical trader doesn't believe it's necessary. The only reason why he would believe it isn't necessary is that he believes he already knows what's going to happen next, based on what he perceives is happening in any given \"now moment.\" If he already knows, then there's really no reason to adhere to these principles. Believing, assuming, or thinking that \"he knows\" will be the cause of virtually eveiy trading error he has the potential to make (with the exception of those errors that are the result of not believing that he deserves the money). Our beliefs about what is true and real are very powerful inner forces. They control every aspect of how we interact with the markets, from our perceptions, interpretations, decisions, actions, and expectations, to our feelings about the results. It's extremely difficult to act in a way that contradicts what we believe to be true. In some cases, depending on the strength of the belief, it can be next to impossible to do anything that violates the integrity of a belief. What the typical trader doesn't realize is that he needs an inner mechanism, in the form of some powerful beliefs, that virtually compels him to perceive the market from a perspective that is always expanding with greater and greater degrees of clarity, and also compels him always act appropriately, given the psychological conditions and the nature of price movement. The most effective and functional trading belief that he can acquire is \"anything can happen.\" Aside from the fact that it is the truth, it will act as a solid", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 78, "parent_id": "1d2a9e50c5dcb72da23ffd4f424b582d", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "69c253492c1d3f0a3902501ff624d0c5", "text": "foundation for building every other belief and attitude that he needs to be a successful trader. Without that belief, his mind will automatically, and usually without his conscious awareness, cause him to avoid, block, or rationalize away any information that indicates the market may do something he hasn't accepted as possible. If he believes that anything is possible, then there's nothing for his mind to avoid. Because anything includes everything, this belief will act as an expansive force on his perception of the market that will allow him to perceive information that might otherwise have been invisible to him. In essence, he will be making himself available (opening his mind) to perceive more of the possibilities that exist from the markets perspective. Most important, by establishing a belief that anything can happen, he will be training his mind to think in probabilities. This is by far the most essential as well as the most difficult principle for people to grasp and to effectively integrate into their mental systems. CHAPTER 7", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 79, "parent_id": "1d2a9e50c5dcb72da23ffd4f424b582d", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "f3c23528ec0ba9283d866c8912262274", "text": "THE TRADER'S EDGE: THINKING IN PROBABILITIES", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 79, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "d7d550010955f5c01c3c23723533fa32", "text": "Exactly what does it mean to think in probabilities, and why is it so essential to one's consistent success as a trader? If you take a moment and analyze the last sentence, you will notice that I made consistency a function of probabilities. It sounds like a contradiction: How can someone produce consistent results from an event that has an uncertain probabilistic outcome? To answer this question, all we have to do is look to the gambling industry. Corporations spend vast amounts of money, in the hundreds of millions, if not billions, of dollars, on elaborate hotels to attract people to their casinos. If you've been to Las Vegas you know exactly what I am talking about. Gaming corporations are just like other corporations, in that they have to justify how they allocate their assets to a board of directors and ultimately to their stockholders. How do you suppose they justify spending vast sums of money on elaborate hotels and casinos, whose primary function is to generate revenue from an event that has a purely random outcome?", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 79, "parent_id": "f3c23528ec0ba9283d866c8912262274", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "be5b2035d8ea93feaf3fd4f8cd59a185", "text": "Here's an interesting paradox. Casinos make consistent profits day after day and year after year, facilitating an event that has a purely random outcome. At the same time, most traders believe that the outcome of the market's behavior is not random, yet can't seem to produce consistent profits. Shouldn't a consistent, nonrandom outcome produce consistent results, and a random outcome produce random, inconsistent results? What casino owners, experienced gamblers, and the best traders understand that the typical trader finds difficult to grasp is: even that have probable outcomes can produce consistent", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 79, "parent_id": "f3c23528ec0ba9283d866c8912262274", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "01ace6f2bcebca79b6038f31ebace2d6", "text": "CHAPTER 7", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 79, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "6569563fb9ebadd74caddeba38a33830", "text": "PROBABILITIES PARADOX: RANDOM OUTCOME, CONSISTENT RESULTS", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 79, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "afadff492161cff53ca3287b7d54fc57", "text": "results, if you can get the odds in your favor and there is a large enough sample size. The best traders treat trading like a numbers game, similar to the way in which casinos and professional gamblers approach gambling. To illustrate, let's look at the game of blackjack. In blackjack, the casinos have approximately a 4.5-percent edge over the player, based on the rules they require players to adhere to. This means that, over a large enough sample size (number of hands played), the casino will generate net profits of four and a half cents on every dollar wagered on the game. This average of four and a half cents takes into account all the players who walked away big winners (including all winning streaks), all the players who walked away big losers, and everybody in between. At the end of the day, week, month, or year, the casino always ends up with approximately 4.5 percent of the total amount wagered. That 4.5 percent might not sound like a lot, but let's put it in perspective. Suppose a total of $100 million dollars is wagered collectively at all of a casino's blackjack tables over the course of a year. The casino will net $4.5 million. What casino owners and professional gamblers understand about the nature of probabilities is that each individual hand played is statistically independent of every other hand. This means that each individual hand is a unique event, where the outcome is random relative to the last hand played or the next hand played. If you focus on each hand individually, there will be a random, unpredictable distribution between winning and losing hands. But on a collective basis, just the opposite is true. If a large enough number of hands is played, patterns will emerge that produce a consistent, predictable, and statistically reliable outcome. Here's what makes thinking in probabilities so difficult. It requires two layers of beliefs that on the surface seem to contradict each other. We'll call the first layer the micro level. At this level, you have to believe in the uncertainty and unpredictability of each individual hand. You know the truth of this uncertainty, because there are always a number of unknown variables affecting the consistency of the deck that each new hand is drawn from. For example, you can't know in advance how any of the other participants will decide to play their hands, since they can either take or decline additional cards. Any variables acting on the consistency of the deck that can't be controlled or known in advance will make the outcome of any particular hand both uncertain and random (statistically independent) in relationship to any other hand. The second layer is the macro level. At this level, you have to believe that the outcome over a series of hands played is relatively certain and predictable. The degree of certainty is based on the fixed or constant variables that are known in advance and specifically designed to give an advantage (edge) to one side or the other. The constant variables I am referring to are the rules of the game. So, even though you don't or couldn't know in advance (unless you are psychic) the sequence of wins to losses, you can be relatively certain that if enough hands are played, whoever has the edge will end up with more wins than losses. The degree of certainty is a function of how good the edge is. It's the ability to believe in the unpredictability of the game at the micro level and simultaneously believe in the predictability of the game at the macro level that makes the casino and the professional gambler effective and successful at what they do. Their belief in the uniqueness of each hand prevents them from engaging in the pointless", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 80, "parent_id": "6569563fb9ebadd74caddeba38a33830", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "608cc860cd11f29bd79025030ded5b6b", "text": "endeavor of trying to predict the outcome of each individual hand. They have learned and completely accepted the fact that they don't know what's going to happen next. More important, they don't need to know in order to make money consistently. Because they don't have to know what's going to happen next, they don't place any special significance, emotional or otherwise, on each individual hand, spin of the wheel, or roll of the dice. In other words, they're not encumbered by unrealistic expectations about what is going to happen, nor are their egos involved in a way that makes them have to be right. As a result, it's easier to stay focused on keeping the odds in their favor and executing flawlessly, which in turn makes them less susceptible to making costly mistakes. They stay relaxed because they are committed and willing to let the probabilities (their edges) play themselves out, all the while knowing that if their edges are good enough and the sample sizes are big enough, they will come out net winners. The best traders use the same thinking strategy as the casino and professional gambler. Not only does it work to their benefit, but the underlying dynamics supporting the need for such a strategy are exactly the same in trading as they are in gambling. A simple comparison between the two will demonstrate this quite clearly. First, the trader, the gambler, and the casino are all dealing with both known and unknown variables that affect the outcome of each trade or gambling event. In gambling, the known variables are the rules of the game. In trading, the known variables (from each individual trader's perspective) are the results of their market analysis. Market analysis finds behavior patterns in the collective actions of everyone participating in a market. We know that individuals will act the same way under similar situations and circumstances, over and over again, producing observable patterns of behavior. By the same token, groups of individuals interacting with one another, day after day, week after week, also produce behavior patterns that repeat themselves. These collective behavior patterns can be discovered and sub- \u00abpnii<=-nflv identified bv nsinf analvtical tools such as trend lines, moving averages, oscillators, or retracements, just to name a few of the thousands that are available to any trader. Each analytical tool uses a set of criteria to define the boundaries of each behavior pattern identified. The set of criteria and the boundaries identified are the trader's known market variables. They are to the individual trader what the rules of the game are to the casino and gambler. By this I mean, the trader's analytical tools are the known variables that put the odds of success (the edge) for any given trade in the trader's favor, in the same way that the rules of the game put the odds of success in favor of the casino. Second, we know that in gambling a number of unknown variables act on the outcome of each game. In blackjack, the unknowns are the shuffling of the deck and how the players choose to play their hands. In craps, it's how the dice are thrown. And in roulette, it's the amount of force applied to spin the wheel. All these unknown variables act as forces on the outcome of each individual event, in a way that causes each event to be statistically independent of any other individual event, thereby creating a random distribution between wins and losses. Trading also involves a number of unknown variables that act on the outcome of any particular behavior pattern a trader may identify", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 81, "parent_id": "6569563fb9ebadd74caddeba38a33830", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "c7a2d253525f7913a1b5ae0ffc182a37", "text": "and use as his edge. In trading, the unknown variables are all other traders who have the potential to come into the market to put on or take off a trade. Each trade contributes to the market's position at any given moment, which means that each trader, acting on a belief about what is high and what is low, contributes to the collective behavior pattern that is displayed at that moment. If there is a recognizable pattern, and if the variables used to define that pattern conform to a particular trader's definition of an edge, then we can say that the market is offering the trader an opportunity to buy low or sell high, based on the trader's definition. Suppose the trader seizes the opportunity to take advantage of his edge and puts on a trade. What factors will determine whether the market unfolds in the direction of his edge or against it? The answer is: the behavior of other traders! At the moment he puts a trade on, and for as long as he chooses to stay in that trade, other traders will be participating in that market. They will be acting on their beliefs about what is high and what is low. At any given moment, some percentage of other traders will contribute to an outcome favorable to our traders edge, and the participation of some percentage of traders will negate his edge. There's no way to know in advance how everyone else is going to behave and how their behavior will affect his trade, so the outcome of the trade is uncertain. The fact is, the outcome of every (legal) trade that anyone decides to make is affected in some way by the subsequent behavior of other traders participating in that market, making the outcome of all trades uncertain. Since all trades have an uncertain outcome, then like gambling, each trade has to be statistically independent of the next trade, the last trade, or any trades in the future, even though the trader may use the same set of known variables to identify his edge for each trade. Furthermore, if the outcome of each individual trade is statistically independent of every other trade, there must also be a random distribution between wins and losses in any given string or set of trades, even though the odds of success for each individual trade may be in the traders favor. Third, casino owners don't try to predict or know in advance the outcome of each individual event. Aside from the fact that it would be extremely difficult, given all the unknown variables operating in each game, it isn't necessary to create consistent results. Casino operators have learned that all they have to do is keep the odds in their favor and have a large enough sample size of events so that their edges have ample opportunity to work.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 82, "parent_id": "6569563fb9ebadd74caddeba38a33830", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "df99608113527f80e219e3ac0710c202", "text": "TRADING IN THE MOMENT", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 82, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "2553773776ee20dc665c3c9bb20b49d4", "text": "Traders who have learned to think in probabilities approach the markets from virtually the same perspective. At the micro level, they believe that each trade or edge is unique. What they understand about the nature of trading is that at any given moment, the market may look exactly the same on a chart as it did at some previous moment; and the geometric measurements and mathematical calculations used to determine each edge can be exactly the same from one edge to the next; but the", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 82, "parent_id": "df99608113527f80e219e3ac0710c202", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "cc6930678478339bbd0c96edd95df96f", "text": "actual consistency of the market itself from one moment to the next is never the same. For any particular pattern to be exactly the same now as it was in some previous moment would require that every trader who participated in that previous moment be present. What's more, each of them would also have to interact with one another in exactly the same way over some period of time to produce the exact same outcome to whatever pattern was being observed. The odds of that happening are nonexistent. It is extremely important that you understand this phenomenon because the psychological implications for your trading couldn't be more important. 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, these patterns can appear to be precisely the same in eveiy respect, both mathematically and visually. But, if the consistency of the group of traders who are creating the pattern \"now\" is different by even one person from the group that created the pattern in the past, then the outcome of the current pattern has the potential to be different from the past pattern. (The example of the analyst and chairman illustrates this point quite well.) It takes only one trader, somewhere in the world, with a different belief about the future to change the outcome of any particular market pattern and negate the edge that pattern represents. The most fundamental characteristic of the market's behavior is that each \"now moment\" market situation, each \"now moment\" behavior pattern, and each \"now moment\" edge is always a unique occurrence with its own outcome, independent of all others. Uniqueness implies that anything can happen, either what we know (expect or anticipate), or what we don't know (or can't know, unless we had extraordinary perceptual abilities). A constant flow of both known and unknown variables creates a probabilistic environment where we don't know for certain what will happen next. This last statement may seem quite logical, even self-evident, but there's a huge problem here that is anything but logical or selfevident. Being aware of uncertainty and understanding the nature of probabilities does not equate with an ability to actually function effectively from a probabilistic perspective. Thinking in probabilities can be difficult to master, because our minds don't naturally process information in this manner. Quite the contrary, our minds cause us to perceive what we know, and what we know is part of our past, whereas, in the market, every moment is new and unique, even though there may be similarities to something that occurred in the past. This means that unless we train our minds to perceive the uniqueness of each moment, tiiat uniqueness will automatically be filtered out of our perception. We will perceive only what we know, minus any information that is blocked by our fears; everything else will remain invisible. The bottom line is that there is some degree of sophistication to thinking in probabilities, which can take some people a considerable amount of effort to integrate into their mental systems as a functional thinking strategy. Most traders don't fully understand this; as a result, they mistakenly assume they are thinking in probabilities, because they have some degree of understanding of the concepts. I've worked with hundreds of traders who mistakenly assumed they thought in probabilities, but didn't. Here is an example of a trader I worked with whom I'll call Bob. Bob is a certified trading advisor (CTA) who", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 83, "parent_id": "df99608113527f80e219e3ac0710c202", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "9708bc89dc340fd24018c1cfe1b1802d", "text": "manages approximately $50 million in investments. He's been in the business for almost 30 years. He came to one of my workshops because he was never able to produce more than a 12- to 18-percent annual return on the accounts he managed. This was an adequate return, but Bob was extremely dissatisfied because his analytical abilities suggested that he should be achieving an annual return of 150 to 200 percent. I would describe Bob as being well-versed in the nature of probabilities. In other words, he understood the concepts, but he didn't function from a probabilistic perspective. Shortly after attending the workshop, he called to ask me for some advice. Here is the entry from my journal written immediately after that phone conversation. 9-28-95: Bob called with a problem. He put on a belly trade and put his stop in the market. The market traded about a third of the way to his stop and then went back to his entry point, where he decided to bail out of the trade. Almost immediately after he got out, the bellies went 500 points in the direction of this trade, but of course he was out of the market. He didn't understand what was going on. First, I asked him what was at risk. He didn't understand the question. He assumed that he had accepted the risk because he put in a stop. I responded that just because he put in a stop it didn't mean that he had truly accepted the risk of the trade. There are many things that can be at risk: losing money, being wrong, not being perfect, etc., depending on one's underlying motivation for trading. I pointed out that a person's beliefs are always revealed by their actions. We can assume that he was operating out of a belief that to be a disciplined trader one has to define the risk and put a stop in. And so he did. But a person can put in a stop and at the same time not believe that he is going to be stopped out or that the trade will ever work against him, for that matter. By the way he described the situation, it sounded to me as if this is exactly what happened to him. When he put on the trade, he didn't believe he would be stopped out. Nor did he believe the market would trade against him. In fact, he was so adamant about this, that when the market came back to his entry point, he got out of the trade to punish the market with an \"I'll show you\" attitude for even going against him by one tic. After I pointed this out to him, he said this was exactly the attitude he had when he took off the trade. He said that he had been waiting for this particular trade for weeks and when the market finally got to this point, he thought it would immediately reverse. I responded by reminding him to look at the experience as simply pointing the way to something that he needs to learn. A prerequisite for thinking in probabilities is that you accept the risk, because if you don't, you will not want to face the possibilities that you haven't accepted, if and when they do present themselves. When you've trained your mind to think in probabilities, it means you have fully accepted all the possibilities (with no internal resistance or conflict) and you always do something to take the unknown forces into account. Thinkine this way 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. In fact, the degree by which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader. Traders", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 84, "parent_id": "df99608113527f80e219e3ac0710c202", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "5662c9960d60f1e701ca22668667375a", "text": "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 think, assume, or believe are going to work and act on those; nor do they avoid the edges that for whatever reason they think, assume, or 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. They 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, just like the casinos. On the other hand, why do you think unsuccessful traders are obsessed with market analysis. They crave the sense of certainty that analysis appears to give them. Although few would admit it, the truth is that the typical trader wants to be right on every single trade. He is desperately trying to create certainty where it just doesn't exist. The irony is that if he completely accepted the fact that certainty doesn't exist, he would create the certainty he craves: He would be absolutely certain that certainty doesn't exist. When you achieve complete acceptance of the uncertainty of each edge and the uniqueness of each moment, your frustration with trading will end. Furthermore, you will no longer be susceptible to making all the typical trading errors that detract from your potential to be consistent and destroy your sense of self-confidence. For examnle not rlefminff the risk before crRftincr into a trarle is hv far rhp most common of all trading errors, and starts the whole process of trading from an inappropriate perspective. In light of the fact that anything can happen, wouldn't it make perfect sense to decide before executing a trade what the market has to look, sound, or feel like to tell you your edge isn't working? So why doesn't the typical trader decide to do it or do it every single time? I have already given you the answer in the last chapter, but there's more to it and there's also some tricky logic involved, but the answer is simple. The typical trader won't predefine the risk of getting into a trade because he doesn't believe it's necessary. The only way he could believe \"it isn't necessary\" is if he believes he knows what's going to happen next. The reason he believes he knows what's going to happen next is because he won't get into a trade until he is convinced that he's right. At the point where he's convinced the trade will be a winner, it's no longer necessary to define the risk (because if he's right, there is no risk). Typical traders go through the exercise of convincing themselves that they're right before they get into a trade, because the alternative (being wrong) is simply unacceptable. Remember that our minds are wired to associate. As a result, being wrong on any given trade has the potential to be associated with any (or every) other experience in a trader's life where he's been wrong. The implication is that any trade can easily tap him into the accumulated pain of every time he has been wrong in his life. Given the huge backlog of unresolved, negative energy surrounding what it means to be wrong that exists in most people, it's easy", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 85, "parent_id": "df99608113527f80e219e3ac0710c202", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "3e727b79931228353bbc9ef709beafb8", "text": "to see why each and every trade can literally take on the significance of a life or death situation. So, for the typical trader, determining what the market would have to look, sound, or feel like to tell him that a trade isn't working would create an irreconcilable dilemma. On one hand, he desperately wants to win and the only way he can do that is to participate, but the only way he will participate is if he's sure the trade will win. On the other hand, if he defines his risk, he is willfully gathering evidence that would negate something he has already convinced himself of. He will be contradicting the decision-making process he went through to convince himself that the trade will work. If he exposed himself to conflicting information, it would surely create some degree of doubt about the viability of the trade. If he allows himself to experience doubt, it's very unlikely he will participate. If he doesn't put the trade on and it turns out to be a winner, he will be in extreme agony. For some people, nothing hurts more than an opportunity recognized but missed because of self-doubt. For the typical trader, the only way out of this psychological dilemma is to ignore the risk and remain convinced that the trade is right. If any of this sounds familiar, consider this: When you're convincing yourself that you're right, what you're saying to yourself is, \"I know who's in this market and who's about to come into this market. I know what they believe about what is high or what is low. Furthermore, I know each individual's capacity to act on those beliefs (the degree of clarity or relative lack of inner conflict), and with this knowledge, I am able to determine how the actions of each of these individuals will affect price movement in its collective form a second, a minute, an hour, a day, or a week from now.\" Looking at the process of convincing yourself that you're right from this perspective, it seems a bit absurd, doesn't it? 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. Any of the best traders (the probability thinkers) could have just as much negative energy surrounding what it means to be wrong as the typical trader. But as long as they legitimately define trading as a probability game, their emotional responses to the outcome of any particular trade are equivalent to how the typical trader would feel about flipping a coin, calling heads, and seeing the coin come up tails. A wrong call, but for most people being wrong about predicting the flip of a coin would not tap them into the accumulated pain of every other time in their lives they had been wrong. Why? Most people know that the outcome of a coin toss is random. If you believe the outcome is random, then you naturally expect a random outcome. Randomness implies at least some degree of uncertainty. So when we believe in a random outcome, there is an implied acceptance that we don't know what that outcome will be. When we accept in advance of an event that we don't know how it will turn out, that acceptance has the effect of keeping our expectations neutral and open-ended. Now we're getting down to the very core of what ails the typical trader. Any expectation about the markets behavior that is specific, well-defined, or rigid\u2014instead of being neutral", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 86, "parent_id": "df99608113527f80e219e3ac0710c202", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "41e10da680603b99beb753143bb17924", "text": "and open-ended\u2014is unrealistic and potentially damaging. I define an unrealistic expectation as one that does not correspond with the possibilities available from the market's perspective. If each moment in the market is unique, and anything is possible, then any expectation that does not reflect these boundary-less characteristics is unrealistic.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 87, "parent_id": "df99608113527f80e219e3ac0710c202", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "5445c537c75834ad32b4296046bff5fb", "text": "MANAGING EXPECTATIONS", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 87, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "3269e449c61a0bf3908bfcaec399a604", "text": "The potential damage caused by holding unrealistic expectations comes from how it affects the way we perceive information. Expectations are mental representations of what some future moment will look, sound, taste, smell, or feel like. Expectations come from what we know. This makes sense, because we can't expect something that we have no knowledge or awareness of. What we know is synonymous with what we have learned to believe about the ways in which the external environment can express itself. What we believe is our own personal version of the truth. When we expect something, we are projecting out into the future what we believe to be true. We are expecting the outside environment a minute, an hour, a day, a week, or a month from now to be the way we have represented it in our minds. We have to be careful about what we project out into the future, because nothing else has the potential to create more unhappiness and emotional misery than an unfulfilled expectation. When things happen exactly as you expect them to, how do you feel? The response is generally wonderful (including feelings like happiness, joy, satisfaction, and a greater sense of well-being), unless, of course, you were expecting something dreadful and it manifested itself. Conversely, how do you feel when your expectations are not fulfilled? The universal response is emotional pain. Everyone experiences some degree of anger, resentment, despair, regret, disappointment, dissatisfaction, or betrayal when the environment doesn't turn out to be exactly as we expected it to be (unless, of course, we are completely surprised by something much better than we imagined). Here's where we run into problems. Because our expectations come from what we know, when we decide or believe that we know something, we naturally expect to be right. At that point, we're no longer in a neutral or open state of mind, and it's not difficult to understand why. If we're going to feel great if the market does what we expect it to do, or feel horrible if it doesn't, then we're not exactly neutral or open- minded. Quite the contrary, the force of the belief behind the expectation will cause us to perceive market information in a way that confirms what we expect (we naturally like feeling good); and our pain-avoidance mechanisms will shield us from information that doesn't confirm what we expect (to keep us from feeling bad). As I've already indicated, our minds are designed to help us avoid pain, both physical and emotional. These pain-avoidance mechanisms exist at both conscious and subconscious levels. For example, if an object is coming toward your head, you react instinctively to get out of the way. Ducking does not require a conscious decision-making process. On the other hand, if you clearly see the object and have", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 87, "parent_id": "5445c537c75834ad32b4296046bff5fb", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "fb2519a2833bacac49cfcef1362992e3", "text": "time to consider the alternatives, you may decide to catch the object, bat it away with your hand, or duck. These are examples of how we protect ourselves from physical pain. Protecting ourselves from emotional or mental pain works in the same way, except that we are now protecting ourselves from information. For example, the market expresses information about itself and its potential to move in a particular direction. If there's a difference between what we want or expect and what the market is offering or making available, then our pain-avoidance mechanisms kick in to compensate for the differences. As with physical pain, these mechanisms operate at both the conscious and subconscious levels. To protect ourselves from painful information at the conscious level, we rationalize, justify, make excuses, willfully gather information that will neutralize the significance of the conflicting information, get angry (to ward off the conflicting information), or just plain lie to ourselves. At the subconscious level, the pain-avoidance process is much more subtle and mysterious. At this level, our minds may block our ability to see other alternatives, even though in other circumstances we would be able to perceive them. Now, because they are in conflict with what we want or expect, our pain-avoidance mechanisms can make them disappear (as if they didn't exist). To illustrate this phenomenon, the best example is one I have already given you: We are in a trade where the market is moving against us. In fact, the market has established a trend in the opposite direction to what we want or expect. Ordinarily, we would have no problem identifying or perceiving this pattern if it weren't for the fact that the market was moving against our position. But the pattern loses its significance (becomes invisible) because we find it too painful to acknowledge. To avoid the pain, we narrow our focus of attention and concentrate on information that keeps us out of pain, regardless of how insignificant or minute. In the meantime, the information that clearly indicates the presence of a trend and the opportunity to trade in the direction of that trend becomes invisible. The trend doesn't disappear from physical reality, but our ability to perceive it does. Our pain-avoidance mechanisms block our ability to define and interpret what the market is doing as a trend. The trend will then stay invisible until the market either reverses in our favor or we are forced out of the trade because the pressure of losing too much money becomes unbearable. It's not until we are either out of the trade or out of danger that the trend becomes apparent, as well as all the opportunities to make money by trading in the All the distinctions that would otherwise be perceivable become perfectly clear, after the fact, when there is no longer anything for our minds to protect us from. We all have the potential to engage in self- protective painavoidance mechanisms, because they're natural functions of the way our minds operate. There may be times when we are protecting ourselves from information that has the potential to bring up deepseated emotional wounds or trauma that we're just not ready to face, or don't have the appropriate skills or resources to deal with. In these cases, our natural mechanisms are serving us well. But more often, our pain-avoidance mechanisms are just protecting us from information that would indicate that our expectations do not correspond with what is available from the environments", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 88, "parent_id": "5445c537c75834ad32b4296046bff5fb", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "84920706107f8c809553c26abd9f217e", "text": "perspective. This is where our pain-avoidance mechanisms do us a disservice, especially as traders. To understand this concept, ask yourself what exactly about market information is threatening. Is it threatening because the market actually expresses negatively charged information as an inherent characteristic of the way it exists? It may seem that way, but at the most fundamental level, what the market gives us to perceive are uptics and down-tics or up-bars and down-bars. These up and down tics form patterns that represent edges. Now, are any of these tics or the patterns they form negatively charged? Again, it may certainly seem that way, but from the market's perspective the information is neutral. Each up-tic, down-tic, or pattern is just information, telling us the market's position. If any of this information had a negative charge as an inherent characteristic of the way it exists, then wouldn't everyone exposed to it experience emotional pain? For example, if both you and I get hit on the head with a solid object, there probably wouldn't be much difference in how we would feel. We'd both be in pain. Any part of our bodies coming into contact with a solid object with some degree of force will cause anyone with a normal nervous system to experience pain. We share the experience because our bodies are constructed in basically the same way. The pain is an automatic physiological response to the impact with a tangible object. Information in the form of words or gestures expressed by the environment, or up and down tics expressed by the market, can be just as painful as being hit with a solid object; but there's an important difference between information and objects. Information is not tangible. Information doesn't consist of atoms and molecules. To experience the potential effects of information, whether negative or positive, requires an interpretation. The interpretations we make are functions of our unique mental frameworks. Everyone's mental framework is unique for two fundamental reasons. First, all of us were born with different genetically encoded behavior and personality characteristics that cause us to have different needs from one another. How positively or negatively and to what degree the environment responds to these needs creates experiences unique to each individual. Second, everyone is exposed to a variety of environmental forces. Some of these forces are similar from one individual to the next, but none are exactly the same. If you consider the number of possible combinations of genetically encoded personality characteristics we can be born with, in relation to the almost infinite variety of environmental forces we can encounter throughout our lives, all of which contribute to the construction of our mental framework, then it's not difficult to see why there is no universal mental framework common to everyone. Unlike our bodies, which have a common molecular structure that experiences physical pain, there is no universal mind-set to assure us that we will share the potential negative or positive effects of information in the same way. For example, someone could be projecting insults at you, intending to cause you to feel emotional pain. From the environment's perspective, this is negatively charged information. Will you experience the intended negative effects? Not necessarily! You have to be able to interpret the information as negative to experience it as negative. What if this person is insulting you in", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 89, "parent_id": "5445c537c75834ad32b4296046bff5fb", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "ff5f0f50caed34ad91f4cb0fd5bd0ce4", "text": "a language you don't understand, or is using words you don't know the meaning of? Would you feel the intended pain? Not until you built a framework to define and understand the words in a derogatory way. Even then, we can't assume that what you'd feel would correspond to the intent behind the insult. You could have a framework to perceive the negative intent, but instead of feeling pain, you might experience a perverse type of pleasure. I've encountered many people who, simply for their own amusement, like to get people riled up with negative emotions. If they happen to be insulted in the process, it creates a sense of joy because then they know how successful they've been. A person expressing genuine love is projecting positively charged information into the environment. Let's say the intent behind the expression of these positive feelings is to convey affection, endearment, and friendship. Are there any assurances that the person or persons this positively charged information is being projected toward will interpret and experience it as such? No, there aren't. A person with a very low sense of self-esteem, or someone who experienced a great deal of hurt and disappointment in relationships, will often misinterpret an expression of genuine love as something else. In the case of a person with low self-esteem, if he doesn't believe he deserves to be loved in such a way, he will find it difficult, if not impossible, to interpret what he is being offered as genuine or real. In the second case, where one has a significant backlog of hurt and disappointment in relationships, a person could easily come to believe that a genuine expression of love is extremely rare, if not non-existent, and would probably interpret the situation either as someone wanting something or trying to take advantage of him in some way. I'm sure that I don't have to go on and on, sighting examples of all the possible ways there are to misinterpret what someone is trying to communicate to us or how what we express to someone can be misconstrued and experienced in ways completely unintended by us. The point that I am making is that each individual will define, interpret, and consequently experience whatever information he is exposed to in his own unique way. There's no standardized way to experience what the environment may be offering\u2014whether it's positive, neutral, or negative information\u2014simply because there is no standardized mental framework in which to perceive information. Consider that, as traders, the market offers us something to perceive at each moment. In a sense, you could say that the market is communicating with us. If we start out with the premise that the market does not generate negatively charged information as an inherent characteristic of the way it exists, we can then ask, and answer, the question, \"What causes information to take on a negative quality?\" In other words, where exactly does the threat of pain come from? If it's not coming from the market, then it has to be coming from the way we define and interpret the available information. Defining and interpreting information is a function of what we assume we know or what we believe to be true. If what we know or believe is in fact true\u2014and we wouldn't believe it if it weren't\u2014then when we project our beliefs out into some future moment as an expectation, we naturally expect to be right. When we expect to be right, any information that doesn't confirm our version of the truth automatically becomes threatening. Any information that has the", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 90, "parent_id": "5445c537c75834ad32b4296046bff5fb", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "3017c155e8079c963f09c98bbea7ed81", "text": "potential to be threatening also has the potential to be blocked, distorted, or diminished in significance by our pain-avoidance mechanisms. It's this particular characteristic of the way our minds function that can really do us a disservice. As traders, we can't afford to let our pain-avoidance mechanisms cut us off from what the market is communicating to us about what is available in the way of the next opportunity to get in, get out, add to, or subtract from a position, just because it's doing something that we don't want or expect. For example, when you're watching a market (one you rarely, if ever, trade in) with no intention of doing anything, do any of the up or down tics cause you to feel angry, disappointed, frustrated, disillusioned, or betrayed in any way? No! The reason is that there's nothing at stake. You're simply observing information that tells you where the market is at that moment. If the up and down tics that you're watching form into some sort of behavior pattern you've learned to identify, don't you readily recognize and acknowledge the pattern? Yes, for the same reason: There's nothing at stake. There is nothing at stake because there's no expectation. You haven't projected what you believe, assume, or think you know about that market into some future moment. As a result, there's nothing to be either right about or wrong about, so the information has no potential to take on a threatening or negatively charged quality. With no particular expectation, you haven't placed any boundaries on how the market can express itself. Without any mental boundaries, you will be making yourself available to perceive everything you've learned about the nature of the ways in which the market moves. There's nothing for your pain-avoidance mechanisms to exclude, distort, or diminish from your awareness in order to protect you. In my workshops, I always ask participants to resolve the following primary trading paradox: In what way does a trader have to learn how to be rigid and flexible at the same time? The answer is: We have to be rigid in our rules and flexible in our expectations. We need to be rigid in our rules so that we gain a sense of self-trust that can, and will always, protect us in an environment that has few, if any, boundaries. 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. At this point, it probably goes without saying that the typical trader does just the opposite: He is flexible in his rules and rigid in his expectations. Interestingly enough, the more rigid the expectation, the more he has to either bend, violate, or break his rules in order to accommodate his unwillingness to give up what he wants in favor of what the market is offering.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 91, "parent_id": "5445c537c75834ad32b4296046bff5fb", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "76676d9d7e6cd765258282a277eccd52", "text": "ELIMINATING THE EMOTIONAL RISK", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 91, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "f696f2e3a9a72052a3a81ee6e74e0d7b", "text": "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. At the collective level, your edge may look perfect in every respect; but at the individual level, every trader who has the potential to act as a force on price movement can negate the positive", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 91, "parent_id": "76676d9d7e6cd765258282a277eccd52", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "b70ee1be77a223e95968a87cc9b1a37e", "text": "outcome of that edge. 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 pertaining to trading consists of five fundamental truths.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 92, "parent_id": "76676d9d7e6cd765258282a277eccd52", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "7a1c2df8b06468ee1b31e6fa554364c3", "text": "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. Eveiy moment in the market is unique.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 92, "parent_id": "76676d9d7e6cd765258282a277eccd52", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "8e256d4a5ce287c76c895303af2a064f", "text": "Keep in mind that your potential to experience emotional pain comes from the way you define and interpret the information you're exposed to. When you adopt these five truths, your expectations will always be in line with the psychological realities of the market environment. With the appropriate expectations, you will eliminate your potential to define and interpret market information as either painful or threatening, and you thereby effectively neutralize the emotional risk of trading. The idea is to create a carefree state of mind that completely accepts the fact that there are always unknown forces operating in the market. When you make these truths a fully functional part of your belief system, the rational part of your mind will defend these truths in the same way it defends any other belief you hold about the nature of trading. This means that, at least at the rational level, your mind will automatically defend against the idea or assumption that you can know for sure what will happen next. It's a contradiction to believe that each trade is a unique event with an uncertain outcome and random in relationship to any other trade made in the past; and at the same time to believe you know for sure what will happen next and to expect to be right. If you really believe in an uncertain outcome, then you also have to expect that virtually anything can happen. Otherwise, the moment you let your mind hold onto the notion that you know, you stop taking all of the unknown variables into consideration. Your mind won't let you have it both ways. If you believe you know something, the moment is no longer unique. If the moment isn't unique, then everything is known or knowable; that is, there's nothing not to know. However, the moment you stop factoring in what you don't or can't know about the situation instead of being available to perceive what the market is offering, you make yourself susceptible to all of the typical trading errors. For example, if you really believed in an uncertain outcome, would you ever consider putting on a trade without defining your risk in advance? Would you ever hesitate to cut a loss, if you really believed you didn't know? What about trading errors like jumping the gun? How could you anticipate a signal that hasn't yet manifested itself in the market, if you weren't convinced that you were going to miss out? Why would you ever let a winning trade turn into a loser, or not have", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 92, "parent_id": "76676d9d7e6cd765258282a277eccd52", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "d5acda080a0da5c1c449da407f4ce69e", "text": "a systematic way of taking profits, if you weren't convinced the market was going your way indefinitely? Why would you hesitate to take a trade or not put it on at all, unless you were convinced that it was a loser when the market was at your original entiy point? Why would you break your money management rules by trading too large a position relative to your equity or emotional tolerance to sustain a loss, if you weren't positive that you had a sure thing? Finally, if you really believed in a random distribution between wins and losses, could you ever feel betrayed by the market? If you flipped a coin and guessed right, you wouldn't necessarily expect to be right on the next flip simply because you were right on the last. Nor would you expect to be wrong on the next flip if you were wrong on the last. Because you believe in a random distribution between the sequence of heads and tails, your expectations would be perfectly aligned with the reality of the situation. You would certainly like to be right, and if you were that would be great, but if you were wrong then you would not feel betrayed by the flip, because you know and accept that there are unknown variables at work that affect the outcome. Unknown means \"not something your rational thinking process can take into consideration in advance of the Hi-r\" ?jXCi>v'L ^ fu!Iv accept that you don't know As a result, there is little, if any, potential to experience the kind of emotional pain that wells up when you feel betrayed. As a trader, when you're expecting a random outcome, you will always be at least a little surprised at whatever the market does\u2014 even if it conforms exactly to your definition of an edge and you end up with a winning trade. However expecting a random outcome doesn't mean that you can't use your full reasoning and analytical abilities to project an outcome, or that you can't guess what's going to happen next, or have a hunch or feeling about it, because you can. Furthermore, you can be right in each instance. You just can't expect to be right. And if you are right, you can't expect that whatever you did that worked the last time will work again the next time, even though the situation may look, sound, or feel exactly the same. Anything that you are perceiving \"now\" in the market will never be exactly the same as some previous experience that exists in your mental environment. But that doesn't mean that your mind (as a natural characteristic of the way it functions) won't try to make the two identical. There will be similarities between the \"now moment\" and something that you know from the past, but those similarities only give you something to work with by putting the odds of success in your favor. If you approach trading from the perspective that you don't know what will happen next, you will circumvent your mind's natural inclination to make the \"now moment\" identical to some earlier experience. As unnatural as it seems to do so, you can't let some previous experience (either negative or extremely positive) dictate your state of mind. If you do, it will be very difficult, if not impossible, to perceive what the market is communicating from its perspective. When I put on a trade, all I expect is that something will happen. Regardless of how good I think my edge is, I expect nothing more than for the market to move or to express itself in some way. However, there are some things that I do know for sure. I know that based on the markets past behavior, the odds of it moving in the direction of my trade are good or acceptable, at least in relationship to how much I am willing to spend to find out if it does. I", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 93, "parent_id": "76676d9d7e6cd765258282a277eccd52", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "1043bd71c5a985b3ef08c417e7ca46cb", "text": "also know before getting into a trade how much I am willing to let the market move against my position. There is always a point at which the odds of success are greatly diminished in relation to the profit potential. At that point, it's not worth spending any more money to find out if the trade is going to work. If the market reaches that point, I know without any doubt, hesitation, or internal conflict that I will exit the trade. The loss doesn't create any emotional damage, because I don't interpret the experience negatively. To me, losses are simply the cost of doing business or the amount of money I need to spend to make myself available for the winning trades. If, on the other hand, the trade turns out to be a winner, in most cases I know for sure at what point I am going to take my profits. (If I don't know for sure, I certainly have a veiy good idea.) The best traders are in the \"now moment\" because there's no stress. There's no stress because there's nothing at risk other than the amount of money they are willing to spend on a trade. They are not trying to be right or trying to avoid being wrong; neither are they trying to prove anything. If and when the market tells them that their edges aren't working or that it's time to take profits, their minds do nothing to block this information. They completely accept what the market is offering them, and they wait for the next edge. CHAP TER 8", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 94, "parent_id": "76676d9d7e6cd765258282a277eccd52", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "fab36d17dcb60c71f7ec6221251d51dd", "text": "CHAPTER 8", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 94, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "ef983f0c69f84b2b6074a0b02788c37b", "text": "WORKING WITH YOUR BELIEFS", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 94, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "da7628d071d1a824a3e2d3240a26570a", "text": "Now the task before you is to properly integrate the five fundamental truths presented in Chapter 7 in your mental environment at a functional level. To help you do that, we will take an in-depth look at beliefs\u2014their nature, properties, and characteristics. However, before we do that I will review and organize the major concepts presented thus far into a much clearer and more practical framework. What you learn from this and the next two chapters will form the foundation for understanding everything you need to do to achieve your goals as a trader.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 94, "parent_id": "ef983f0c69f84b2b6074a0b02788c37b", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "8e9a34c9d61c06c31772887bb61d63e1", "text": "DEFINING THE PROBLEM", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 94, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "a6aba09a735fa485213cf60996fb9b70", "text": "At the most fundamental level, the market is simply a series of up and down tics that form patterns. Technical analysis defines these patterns as edges. Any particular pattern defined as an edge is simply an indication that there is a higher probability that the market will move in one direction over the other. However, there is a major mental paradox here because a pattern implies consistency, or, at least, a consistent outcome. But the reality is each pattern is a unique occurrence. They may look (or measure) exactly the same from one occurrence to the next, but the similarities are only on the surface. The underlying force behind each pattern is traders, and the traders who contribute to the formation of one", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 94, "parent_id": "8e9a34c9d61c06c31772887bb61d63e1", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "9a6e24b92f3cd4095d0e64277a61df4b", "text": "pattern are always different from the traders who contribute to the next; so the outcome of each pattern is random relative to one another. Our minds have an inherent design characteristic (the association mechanism) that can make this paradox difficult to deal with. Now these edges, or the patterns they represent, flow by in every time frame, making the market a never-ending stream of opportunities to get in, get out (scratch a trade), take profits, cut losses, or add to or detract from a position. In other words, from the market's perspective, each moment presents each one of us traders with the opportunity to do something on our own behalf.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 95, "parent_id": "8e9a34c9d61c06c31772887bb61d63e1", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "3062234ba87291e39c314b06d688cada", "text": "DEFINING THE TERMS", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 95, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "37b45aea814936daa18c3fae8f0df8bd", "text": "What prevents us from perceiving each \"now moment\" as an opportunity to do something for ourselves or to act appropriately even when we do? Our fears! What is the source of our fears? We know its not the market, because from the market's perspective, the up and down tics and the patterns they create are neither positively or negatively charged. As a result, the up and down tics themselves have no capacity to cause us to enter into any particular state of mind (negative or positive), lose our objectivity, make errors, or take us out of the opportunity flow. If it's not the market that causes us to experience a negatively charged state of mind, then what does cause it? The way we define and interpret the information we perceive. If that's the case, then what determines what we perceive and how we define and interpret that information? What we believe or what we assume to be true. Our beliefs working in conjunction with the association and pain- avoidance mechanisms act as a force on our five senses, causing us to perceive, define, and interpret market information in a way that is consistent with what we expect. What we expect is synonymous with.what we believe or assume to be true. Expectations are beliefs projected into some future moment. Each moment from the market's perspective is unique; but if the information being generated by the market is similar in quality, properties, or characteristic to something that is already in our minds, the two sets of information (outside and inside) automatically become linked. When this connection is made, it triggers a state of mind (confidence, euphoria, fear, terror, disappointment, regret, betrayal, etc.) that corresponds to whatever belief, assumption, or memory the outside information was linked. This makes it seem as if what is outside is exactly the same as whatever is already inside of us. It's our state of mind that makes the truth of whatever we're perceiving outside of us (in the market) seem indisputable and beyond question. Our state of mind is always the absolute truth. If I feel confident, then I am confident. If I feel afraid, then I am afraid. We can't dispute the quality of energy flowing through our mind and body at any given moment. And because I know as an indisputable fact how I feel, you could say that I also know the truth of what I'm perceiving outside of me in the same moment. The problem is that how we feel is always the absolute truth, but the beliefs that triggered our state of mind or feeling may or may not be", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 95, "parent_id": "3062234ba87291e39c314b06d688cada", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "6dea2db838981c04f29ebfb7031d3315", "text": "true relative to the possibilities that exist in the market at any given moment. Recall the example of the boy and the dog. The boy \"knew\" for an absolute fact that each dog he encountered after the first was threatening, because of the way he felt when one came into his field of awareness. These other dogs did not cause his fear; his negatively charged memory working in conjunction with the association and his pain- avoidance mechanism caused his fear. He experienced his own version of the truth, although that did not correspond with the possibilities that existed from the environment's perspective. His belief about the nature of dogs was limited relative to the possible characteristics and traits expressed by dogs. Yet the state of mind he experienced eveiy time he encountered a dog caused him to believe thats he \"knew\" exactly what to expect from them. This same process causes us to believe that we \"know\" exactly what to expect from die market, when the reality is there are always unknown forces operating at every moment. The trouble is, the instant we think we \"know\" what to expect, we simultaneously stop taking all the unknown forces and die various possibilities created by those forces into consideration. The unknown forces are other traders waiting to enter or exit trades, based on their beliefs about the future. In other words, we really can't know exactly what to expect from the market, until we can read the minds of all the traders who have the potential to act as a force on price movement. Not a very likely possibility. As traders, we can't afford to indulge ourselves in any form of \"I know what to expect from the market.\" We can \"know\" exactly what an edge looks, sounds, or feels like, and we can \"know\" exactly how much we need to risk to find out if that edge is going to work. We can \"know\" that we have a specific plan as to how we are going to take profits if a trade works. But that's it! If what we think we know starts expanding to what the market is going to do, we're in trouble. And all that's required to put us into a negatively charged, \"I know what to expect from the market\" state of mind is for any belief, memoiy, or attitude to cause us to interpret the up and down tics or any market information as anything but an opportunity to do something on our own behalf. What Are the Objectives? Ultimately, of course, making money is everyone's objective. But if trading were only a matter of making money, reading this book wouldn't be necessary. Putting on a winning trade or even a series of winning trades requires absolutely no skill. On the other hand, creating consistent results and being able to keep what we've created does require skill. Making money consistently is a by-product of acquiring and mastering certain mental skills. The degree to which you understand this is the same degree to which you will stop focusing on the money and focus instead on how you can use your trading as a tool to master these skills. What Are the Skills? Consistency is the result of a carefree, objective state of mind, where we are making ourselves available to perceive and act upon whatever the market is offering us (from its perspective) in any given \"now moment.\" What Is a Carefree State of Mind? Carefree means confident, but not euphoric. When you are in a carefree state of mind, you won't feel any fear, hesitation, or compulsion to do anything, because", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 96, "parent_id": "3062234ba87291e39c314b06d688cada", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "9b77bc77e74dae877cb8f3be12e98557", "text": "you've effectively eliminated the potential to define and interpret market information as threatening. To remove the sense of threat, you have to accept the risk completely. When you have accepted the risk, you will be at peace with any outcome. To be at peace with any outcome, you must reconcile anything in your mental environment that conflicts with the five fundamental truths about the market. What's more, you also have to integrate these truths into your mental system as core beliefs. What Is Objectivity? Objectivity is a state of mind where you have conscious access to everything you have learned about the nature of market movement. In other words, nothing is being blocked or altered by your painavoidance mechanisms. What Does it Mean to Make Yourself Available? Making yourself available means trading from the perspective that you have nothing to prove. You aren't trying to win or to avoid losing. You aren't trying get your money back or to take revenge on the market. In other words, you come to the market with no agenda other than to let it unfold in any way that it chooses and to be in the best state of mind to recognize and take advantage of the opportunities it makes available to you. What Is the \"Now Moment'? Trading in the \"now moment\" means that there is no potential to associate an opportunity to get into, get out of, add too, or detract from a trade with a past experience that already exists in your mental environment.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 97, "parent_id": "3062234ba87291e39c314b06d688cada", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "25489c166c834f6479347035a07ebf34", "text": "HOW THE FUNDAMENTAL TRUTHS RELATE TO THE SKILLS", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 97, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "c29045d763254e5b2e67fba08a1fcbf0", "text": "1. Anything can happen. Why? Because 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. That's all: 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 a source of conflict and potentially cause you to perceive market information as threatening. 2. You don't need to know what is going to happen next in order to make money. Why? Because there is a random distribution between wins and losses for any given set of variables that define an edge. (See number 3.) 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. Keep in mind that 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", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 97, "parent_id": "25489c166c834f6479347035a07ebf34", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "a3627b03a7fe00dfab3cf5529528c387", "text": "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. Finally, 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. On the other hand, if you believe that all you need to know is: 1. the odds are in your favor before you put on a trade; 2. how much it's going to cost to find out if the trade is going to work; 3. you don't need to know what's going to happen next to make money on that trade; and 4. anything can happen; Then how can the market make you wrong? What information could the market generate about itself that would cause your pain-avoidance mechanisms to kick in so that you exclude that information from your awareness? None that I can think of. 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 perspective, effectively neutralizing your potential to experience emotional pain. By the same token, how can a losing trade or even a series of losers 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.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 98, "parent_id": "25489c166c834f6479347035a07ebf34", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "179ed7d80abe354be75a1f82932eea64", "text": "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. On the other hand, 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 if it's going to work. This, in turn, will cause you to start gathering evidence for or against the 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 if 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.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 98, "parent_id": "25489c166c834f6479347035a07ebf34", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "6e1735c57285b72c446e0c3aa4541ae3", "text": "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", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 98, "parent_id": "25489c166c834f6479347035a07ebf34", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "fc0af6022d6586acf7ab9ea1477e2fd1", "text": "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 too 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. On the other hand, 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, why would you gather \"other\" evidence for or against a trade? To a trader operating out of these two beliefs, gathering \"other\" evidence wouldn't make any sense. Or let me put it this way: 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 ten flips came up tails. Regardless of what evidence you find to support heads coming up, there is still a 50-percent 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.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 99, "parent_id": "25489c166c834f6479347035a07ebf34", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "527b05e897f242c6349c0f32bf4bf5ab", "text": "5. Every moment in the market is unique. Take a moment and think about the concept of uniqueness. \"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. As we have already discussed, 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 or every molecule would have to be in the exact same position they were in some previous moment. Not a very likely possibility. 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 I will say again, why bother trying to know?! When you try to know, you are, in essence, trying to be right. I am not implying here 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 of the problems. If you believe that you correctly predicted the market once, you will naturally try to do it again.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 99, "parent_id": "25489c166c834f6479347035a07ebf34", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "ebb76134ba685843318218bd90486b55", "text": "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 association mechanism. When you truly believe that each moment is unique, then by definition there isn't anything in your mind for the association mechanism to link that moment to. This belief acts as an internal force causing you to disassociate 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.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 100, "parent_id": "25489c166c834f6479347035a07ebf34", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "28e0c9dadfe8a67366f1234d90f41703", "text": "MOVING TOWARD \"THE ZONE\"", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 100, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "aa0eb7b9d5828c5d3fc89b442e42c52d", "text": "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's 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 be 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.\" CHAPTER 9", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 100, "parent_id": "28e0c9dadfe8a67366f1234d90f41703", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "7a6b338bd9f0e4e045d85e6d527ae082", "text": "CHAPTER 9", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 101, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "b3b335a21806984bf0df211d7d0314f2", "text": "THE NATURE OF BELIEFS", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 101, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "278c77e8425214991cd5a510ef78f083", "text": "At this point, if you can sense the benefits of adopting the five fundamental truths about trading, then the task is to learn how to properly integrate these truths into your mental system as core beliefs that are not in conflict with any other beliefs you may hold. At first glance, this may seem like a daunting task and under other circumstances I would agree with you, but it won't be, because in Chapter 11 I'll give you a simple trading exercise specifically designed to properly install these truths as beliefs at a functional level. A functional level is, one where you find yourself just naturally operating out of a carefree state of mind, perceiving exactly what you need to do and doing it without hesitation or internal conflict. However, I do have a word of caution for those of you who have already looked at the exercise. On the surface, the trading exercise looks so simple that you may be tempted to do it now, before you thoroughly understand the implications of what you are doing. I strongly suggest that you reconsider. There are some subtle yet profound dynamics involved in the process of learning how to install new beliefs and change any existing beliefs that are in conflict with the new ones. Understanding the trading exercise itself is easy. Understanding how to use the exercise to change your beliefs is another matter entirely. If you do the exercise without understanding the concepts presented in this chapter and the next, you will not achieve the desired results. It is also important that you not take for granted the amount of mental effort you may have to expend to train your mind to fully accept these principles of success, regardless of how well you understand them. Remember Bob, the CTA who believed he thoroughly understood the concept of probabilities, but didn't have the ability to function from a probabilistic perspective. Many people make the mistake of assuming that once they understand something, the insight inherent in their new understanding automatically becomes a functional part of their identity. Most of the time, understanding a concept is only a first step in the process of integrating that concept at a functional level. This is especially true of concepts that deal with diinking in probabilities. Our minds are not naturally wired to be \"objective\" or to stay in the \"now moment.\" This means we have to actively train our minds to think from these perspectives. In addition to the training involved, there may be any number of conflicting beliefs to work through. Conflicting beliefs will have the effect of sabotaging your best intentions to operate from an objective state of mind or to experience the \"now moment opportunity flow.\" For example, let's say you've spent years learning how to read the markets, or spent large sums of money developing or buying technical systems, just so you could find out what was going to happen next.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 101, "parent_id": "b3b335a21806984bf0df211d7d0314f2", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "fa5233e7173435d4f693d37b340dc941", "text": "Now you have come to understand that you don't have to know what's going to happen next, and that even trying to know will detract from your ability to be objective or to stay in the moment. What we have is a direct conflict between your old belief that you need to know what will happen next to be successful and your new understanding that you don't need to know. Now, will your new understanding suddenly neutralize all the time, money, and energy expended on reinforcing the belief that you \"need to know\"? I wish it were that easy. And for some lucky few, it may be. If you will recall in Chapter 4 when I talked about psychological distance in relationship to software code, I said that some traders may already be so close to these new perspectives that all they need is to put together a few of the missing pieces to create a mindaltering, \"ah, ha\" experience. However, based on my experience of working with well over a thousand traders, I can say that most are not close to these perspectives at all. For those of you who are not, it may take a considerable amount of mental work (over a considerable amount of time) to properly integrate your new understandings about trading into your mental environment. The good news is that, ultimately, the exercise I present in Chapter 11 will install the five fundamental truths and resolve many of the potential conflicts, but only if you know exactly what you are doing and why you are doing it. That is the subject of this and the next chapter.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 102, "parent_id": "b3b335a21806984bf0df211d7d0314f2", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "cd0a0529708e5c8953bdeed305390d3a", "text": "THE ORIGINS OF A BELIEF", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 102, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "97cc09c5b35fb84155a4f583a0967ef6", "text": "What can we learn about the nature of beliefs, and how can we use that knowledge to create a mind-set that fosters our desire to be a consistently successful trader? These are the two questions I am going to focus on answering in this chapter. First, let's look at the origin of our beliefs. As you may recall, memories, distinctions, and beliefs exist in the form of energy\u2014 specifically, structured energy. Earlier, I lumped these three mental components together to illustrate:", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 102, "parent_id": "cd0a0529708e5c8953bdeed305390d3a", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "47efffaf1954e51450e675a0b3be19fb", "text": "1. that memories, distinctions, and beliefs do not exist as physical matter; 2. that the cause-and-effect relationship that exists between ourselves and the external environment brings these components into existence; and 3. how the cause-and-effect relationship reverses so that we can perceive in the external environment what we have learned about.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 102, "parent_id": "cd0a0529708e5c8953bdeed305390d3a", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "62332d7381bba8f25ce7430e2910b2e7", "text": "To get at the origins of our beliefs, we're going to have to unbundle these components to illustrate the difference between a memory and a belief. The best way to do this is to imagine ourselves in the mind of an infant. I would think that at the very beginning of a child's life, the memories of his experiences would exist in their purest form. By that I mean that the memories of what he has seen, heard, smelled, touched, or tasted exist in his mind as pure sensory information that is not organized or attached to any specific words or concepts. Therefore, I am going to define a pure memory as sensory information", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 102, "parent_id": "cd0a0529708e5c8953bdeed305390d3a", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "d6c5e044dd3119e770f0f668b9075593", "text": "stored in its original form. A belief, on the other hand, is a concept about the nature of the way the external environment expresses itself. A concept combines pure sensory information with a symbol system we call language. For example, most infants have a pure memory of how it feels to be lovingly nurtured by a parent, but it isn't until the infant is taught to link or associate certain words with the pure sensory information stored in his memory that he will form a concept about how it feels to be lovingly nurtured. The phrase \"Life is wonderful\" is a concept. By themselves, the words make up a meaningless collection of abstract symbols. But if a child is either taught or decides to connect these words to his positively charged feelings of being nurtured, then the letters are no longer a collection of abstract symbols and the words are no longer an abstract phrase. \"Life is wonderful\" becomes a definitive distinction about the nature of existence or the way the world works. By the same token, if the child didn't get enough nurturing, relative to his needs, he could just as easily link his feelings of emotional pain to a concept like \"Life isn't fair\" or \"The world is an awful place.\" In any case, when the positive or negative energy from our memories or experiences become linked to a set of words we call a concept, the concept becomes energized and, as a result, is transformed into a belief about the nature of reality. If you consider that concepts are structured by the framework of a language and energized by our experiences, it becomes clear why I refer to beliefs as \"structured energy.\" When a belief comes into existence, what does it do? What is its function? In some ways it seems ludicrous to ask those questions. After all, we all have beliefs. We are constantly expressing our beliefs both verbally and through our actions. Furthermore, we are constantly interacting with other peoples beliefs as they express them. Yet, if I ask, \"What exactly does a belief do?\" chances are your mind will go blank. On the other hand, if I were to ask about the functions of your eyes, ears, nose, or teeth, you would have no problem answering. Since beliefs are such important component parts of our make-up (in terms of their impact on the quality of our lives), it certainly has to be one of life's great ironies that they are also the least thought about and understood. What I mean by \"least thought about\" is, if we have a problem with one of our body parts, we naturally focus our attention on that part and think about what we need to do to fix the problem. However, it doesn't necessarily occur to us that the problems we may be having with the quality of our lives (for example, lack of happiness, a sense of dissatisfaction, or lack of success in some area) are rooted in our beliefs. This lack of consideration is a universal phenomenon. One of the prominent characteristics of beliefs is that they make what we experience seem self evident and beyond question. In fact, if it weren't for your intense desire to experience consistent success as a trader, it's unlikely you would be delving into this topic at all. Usually, it takes years of extreme frustration before people begin examining their beliefs as the source of their difficulties. However, even though beliefs are an intricate part of our identity, you don't have to take this process of self analysis so personally. Consider the fact that none of us was born with any of our beliefs. They were all acquired in a combination of ways. Many of the beliefs that have the most profound impact on our lives were not even acquired by us as an", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 103, "parent_id": "cd0a0529708e5c8953bdeed305390d3a", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "a292c2be6b6af407c94ab7eca92f9970", "text": "act of free will. They were instilled by other people. And it probably won't come as a surprise to anyone that usually the beliefs that cause us the most difficulty are those that were acquired from others without our conscious consent. By that I mean beliefs that we acquired when we were too young and uninformed to realize the negative implications of what we were being taught. Regardless of the source of our beliefs, once they are born into existence they all basically function in the same way. Beliefs have certain characteristic ways in which they do their jobs, not unlike the various parts of our bodies. For example, if you compare my eyes and your eyes, or my hands and your hands, or my red blood cells and your red blood cells, we can see that they are not exactly the same, but they have characteristics in common that cause them to function in similar ways. By the same token, a belief that \"Life is wonderful\" will perform its function in the same way as a belief that \"Life is awful.\" The beliefs themselves are different and the effect that each has on the quality of the holder's life will be vastly different, but both beliefs will function in exactly the same manner.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 104, "parent_id": "cd0a0529708e5c8953bdeed305390d3a", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "954d015403097ed5a7f66cb50c8bbfd7", "text": "In the broadest sense, our beliefs shape the way we experience our lives. As I have already said, we're not born with any of our beliefs. They're acquired, and as they accumulate, we live our lives in a way that reflects what we have learned to believe. Consider how different your life would be if you had been born into a culture, religion, or political system that has very little, if anything, in common with the one you were born into. It might be hard to imagine, but what you would have learned to believe about the nature of life and how the world works may not be remotely similar to what you currently believe. Yet you would hold these other beliefs with the same degree of certainty as your current beliefs.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 104, "parent_id": "cd0a0529708e5c8953bdeed305390d3a", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "0fc75a62cb927cb6aa65b955af830780", "text": "How Beliefs Shape Our Lives", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 104, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "03b47b97c4419f1b845d46201c21a084", "text": "1. They manage our perception and interpretation of environmental information in a way that is consistent with what we believe. 2. They create our expectations. Keep in mind that an expectation is a belief projected into some future moment. Since we can't expect something we don't know about, we could also say that an expectation is what we know projected into some future moment. 3. Anything we decide to do or any outward expression of behavior will be consistent with what we believe. 4. Finally, our beliefs shape how we feel about the results of our actions.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 104, "parent_id": "0fc75a62cb927cb6aa65b955af830780", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "6fd4bca610be4892f8e0a338186f79da", "text": "There isn't much about the way we function that beliefs don't play a major role in. So what I am going", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 104, "parent_id": "0fc75a62cb927cb6aa65b955af830780", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "b6a56aaf242b4282e2ceabe231f97ba5", "text": "BELIEFS AND THEIR IMPACT ON OUR LIVES", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 104, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "8e4fde4ebd961a6c8abf8f6bc89e6c81", "text": "to do now is give you an example I used in my first book, The Disciplined Trader, to illustrate the various functions of a belief. In the spring of 1987, I was watching a locally produced television program called \"Gotcha Chicago.\" It was about some local celebrities who played practical jokes on one another. In one segment of the program, the TV station hired a man to stand on the sidewalk along Michigan Avenue holding a sign that read \"Free money. Today only.\" (For those of you who are not familiar with Chicago, Michigan Avenue is home to many fashionable, exclusive department stores and boutiques.) The TV station gave the man a considerable amount of cash, with instructions to give money to anyone who asked for it. Now, when you consider that Michigan Avenue is one of the busiest areas of the city, and if we assume that most of the people who passed the man on the street could read the sign, how many people would you think took him up on his offer and asked for some money? Of all the people who walked by and read the sign, only one person stopped, and said, \"Great! May I have a quarter to buy a bus transfer?\" Otherwise, no one would even go near the man. Eventually, the man grew frustrated because people weren't reacting the way he expected them to. He started crying out, \"Do you want any money? Please take my money; I can't give it away fast enough.\" Everyone just kept walking around him as if he didn't exist. In fact, I noticed that several people went out of their way to avoid him. As a man wearing a suit and carrying a briefcase approached, he went right up to him and said, \"Would you like some money?\" The man responded, \"Not today.\" Really frustrated now, he shot back, \"How many days does this happen? Would you please take this?\" as he tried to hand the man some cash. The man responded with a terse \"No\" and walked on. What was going on here? Why wouldn't anyone (except for the person who needed a bus transfer) ask for the money? If we assume that most or all of the passersby could read the sign, but still didn't make any effort to get the money, then one possible explanation for their behavior is that they just didn't care about money. This is extremely unlikely, though, considering how much of our lives is devoted to the pursuit of money. If we agree that people could read the sign and that money is very important to most of us, then what could have stopped these people from helping themselves? The environment was making available an experience that most people would love to have: someone giving them money with no strings attached. Yet everyone walked by, oblivious to what was awaiting them. They must not have been able to perceive what was available. That's hard to imagine, because the sign clearly stated \"Free money. Today only.\" However, it's not hard to imagine if you consider that most people have a belief (an energized concept about how the world works) that \"Free money doesn't exist.\" If free money really doesn't exist, then how does someone reconcile the obvious contradiction between that belief and the sign saying that it does? That's easy, just decide the man with the sign is crazy; what else could account for such bizarre behavior if, in fact, free money doesn't exist? The reasoning process that could compensate for the contradiction might go something like this: \"Everyone knows getting money with no strings attached rarely happens. Certainly not from a stranger on one of the busiest streets in the city. In fact, if the man were really", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 105, "parent_id": "b6a56aaf242b4282e2ceabe231f97ba5", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "e7e77913820fe6137ab12e6fcd075ced", "text": "giving away money, he would already be mobbed. He might even be endangering his life. He must be crazy. I had better take a wide path around him; who knows what he might do?\" Notice that every component of the thought process described is consistent with the belief that free money doesn't exist. 1. The words \"free money\" were neither perceived nor interpreted as they were intended from the environment s perspective. 2. Deciding the person with the sign must be crazy created an expectation of danger, or at least a perception that caution was warranted. 3. Purposefully altering one's path to avoid the person with the sign is an action that is consistent with the expectation of danger. 4. How did each person feel about the outcome? That's difficult to say without knowing each person individually, but a good generalization would be that they felt relieved that they successfully avoided an encounter with a crazy person. The feeling of relief that resulted from avoiding a confrontation is a state of mind. Remember that how we feel (the relative degree of positively or negatively charged energy flowing through our bodies and minds) is always the absolute truth. But the beliefs that prompt any particular state of mind may not be the truth with respect to the possibilities available from the environment's perspective. Relief from confrontation was not the only possible outcome in this situation. Imagine how different the experience would be if they believed that \"free money exists.\" The process described above would be the same, except it would make the belief that \"free money exists,\" seem self-evident and beyond question, just as it made the belief that \"free money doesn't exist,\" seem self-evident and beyond question. A perfect example would be the one person who said \"great, may I have a quarter for a bus transfer.\" When I saw this, I had the anybody for a quarter. A panhandler is someone who definitely believes in the existence of free money. Therefore, his perception and interpretation of the sign were exactly what was intended by the TV station. His expectation and behavior were consistent with his belief that free money exists. And how would he feel about the results? He got his quarter, so I would assume he felt a sense of satisfaction. Of course, what he didn't know is that he could have gotten a lot more. There's another possible outcome for our scenario. Let's look at a hypothetical example of someone who believes that \"free money doesn't exist,\" but who takes a \"what if approach to the situation. In other words, some people can be so intrigued and curious about the possibilities that they decide to temporarily suspend their belief that \"free money doesn't exist.\" This temporary suspension allows them to act outside the boundaries created by a belief, in order to see what happens. So instead of ignoring the man with the sign, which would be our hypothetical person\u2019s first inclination, he walks up to him and says, \"Give me ten dollars.\" The man promptly pulls a ten-dollar bill out of his pocket and gives it to him. What happens now? How does he feel, having experienced something unexpected that completely contradicted his belief? For most people, the belief that free money doesn't exist is acquired through unpleasant circumstances, to put it mildly. The most common", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 106, "parent_id": "b6a56aaf242b4282e2ceabe231f97ba5", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "78f3c8fbc20be035c24b455d7049579b", "text": "way is being told that we can't have something because it's too expensive. How many times does the typical child hear, \"Who do you think you are anyway? Money doesn't grow on trees, you know.\" In other words, it is probably a negatively charged belief. So the experience of having money handed to him with no strings attached and without any negative comments would likely create a state of mind of pure elation. In fact, most people would be so happy that they'd feel compelled to share that happiness and this new discovery with everyone they knew. I can imagine him going back to his office or going home, and the moment he encounters someone he knows, the first words out of his mouth will be \u201cYou won\u2019t believe what happened to me today,\" and even though he desperately wants those he meets to believe his story, they probably won't. Why? Because their belief that free money doesn't exist will cause them to interpret his story in a way that negates its validity. To take this example a little further, imagine what would happen to this person's state of mind if it occurred to him that he could have asked for more money. He is in a state of pure elation. However, the moment the thought either pops into his mind or someone he relates his story to offers the idea that he could have asked for a lot more money, his state of mind will immediately shift to a negatively charged state of regret or despair. Why? He tapped into a negatively charged belief about what it means to miss out on something or not get enough. As a result, instead of being happy over what he got, he will lament what he could have had but didn't get.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 107, "parent_id": "b6a56aaf242b4282e2ceabe231f97ba5", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "5bc21551d5a41d873d818808fa8d9b36", "text": "BELIEFS VS. THE TRUTH", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 107, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "6a539488940db18921c5d0ad2c098350", "text": "In all three of these examples (including the hypothetical one), everybody experienced their own unique version of the situation. If asked, each person would describe what he or she experienced from their perspective, as if it were the only true and valid version of the reality of the situation. The contradiction between these three versions of the truth suggests to me a larger philosophical issue that needs to be resolved. If beliefs limit our awareness of the information being generated by the physical environment, so that what we perceive is consistent with whatever we believe, then how do we know what the truth is? To answer this question, we have to consider four ideas: 1. The environment can express itself in an infinite combination of ways. When you combine all the forces of nature interacting with everything created by humans, then add to that the forces generated by all the possible ways people can express themselves, the result is a number of possible versions of reality that would surelv overwhelm even the most onen-minded nerson. 2. Until we have acquired the ability to perceive eveiy possible way in which the environment can express itself, our beliefs will always represent a limited version of what is possible from the environment's perspective, making our beliefs a statement about reality, but not necessarily a definitive statement of reality. 3. If you find yourself taking exception to the second statement, then consider that if our beliefs were a true, 100-percent accurate reflection of physical reality, then our expectations would always be", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 107, "parent_id": "5bc21551d5a41d873d818808fa8d9b36", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "2e99db80aa0f47e7b4986ce41caf9570", "text": "fulfilled. If our expectations were always fulfilled, we would be in a perpetual state of satisfaction. How could we feel other than happy, joyful, elated, and with a complete sense of well-being if physical reality was consistently showing up exactly as we expected it to? 4. If you can accept the third statement as being valid, then the corollary is also true. If we are not experiencing satisfaction, then we must be operating out of a belief or beliefs that don't vork very well relative to the environmental conditions. we Taking these four ideas into consideration, I can now answer the question, \"What is the truth?\" The answer is, whatever works. If beliefs impose limitations on what we perceive as possible, and the environment can express itself in an infinite combination of ways, then beliefs can only be true relative to what we are attempting to accomplish at any given moment. In other words, the relative degree of truth inherent in our beliefs can be measured by how useful they are. Each of us has internally generated forces (curiosity, needs, wants, desires, goals, and aspirations) that compel or motivate us to interact with the physical environment. The particular set of steps we take to fulfill the object of our curiosity, needs, wants, desires, goals, or aspirations is a function of what we believe to be true in any given circumstance or situation. That truth, whatever it is, will determine:", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 108, "parent_id": "5bc21551d5a41d873d818808fa8d9b36", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "175a0f30bcd21e6d7e20ec68f9db8513", "text": "1. the possibilities we perceive in relation to what is available from the environment's perspective, 2. how we interpret what we perceive, 3. the decisions we make, 4. our expectations of the outcome, 5. the action we take, and 6. how we feel about the results of our efforts.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 108, "parent_id": "5bc21551d5a41d873d818808fa8d9b36", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "3501d6d1722d495a9ed9e910fc8c82bb", "text": "At any given moment, if we find ourselves in a state of satisfaction, happiness, or well-being in relation to whatever we are attempting to accomplish, we can say that our truth (meaning whatever beliefs we are operating from) are useful because the process, as stated above, worked. What we perceived was not only consistent with our objective, it was also consistent with what was available from the environment's perspective. Our interpretation of the information we perceived resulted in a decision, expectation, and action that were in harmony with the environmental situation and circumstance. There was no resistance or counteracting force offered by the environment (or in our own mind) that would diminish the outcome we were trying to achieve. As a result, we find ourselves in a state of satisfaction, happiness, and well-being. On the other hand, if we find ourselves in a state of dissatisfaction, disappointment, frustration, confusion, despair, regret, or hopelessness, we can say that relative to the environmental situation and circumstances, the beliefs we are operating from don't work well or at all, and therefore are not useful. Simply put, the truth is a function of whatever works in relation to what we are trying to accomplish at any given moment. CHAPTER", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 108, "parent_id": "5bc21551d5a41d873d818808fa8d9b36", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "d1e0bbf0390338f5956f7217bddf0972", "text": "CHAPTER 10", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 109, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "8b2878f64b5d40aec56227498ecd6bc7", "text": "THE IMPACT OF BELIEFS ON TRADING", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 109, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "f43978a033782a28833fc3a4147b140f", "text": "If the external environment can express itself in an infinite combination of ways, then there's really no limit to the number and types of beliefs available to be acquired about the nature of our existence. That is an elaborate way of saying that there's a lot out there to be learned about. Yet, to make a general observation about the nature of humanity, I would say that we certainly don't live our lives in a manner that is consistent with that statement. If it's true that it's possible to believe almost anything, then why are we always arguing and fighting with each other? Why isn't it all right for all of us to express our lives in a way that reflects what we have learned to believe? There has to be something behind our relentless attempt to convince others of the validity of our beliefs and to deny the validity of theirs. Consider that every conflict, from the smallest to the largest, from the least to the most significant, whether between individuals, cultures, societies, or nations, is always the result of conflicting beliefs. What characteristics of our beliefs make us intolerant of divergent beliefs? In some cases, we are so intolerant that we are willing to kill each other to get our point across. My personal theory is that beliefs are not only structured energy, but also energy that seems to be conscious, at least to the extent of having some degree of awareness. Otherwise, how can we account for our ability to recognize on the outside what is on the inside? How would we know our expectations are being fulfilled? How would we know when they are not? How would we know we are being confronted with information or circumstances that contradict what we believe? The only explanation I have is that each individual belief has to have some quality of either awareness or self-awareness that causes it to function as it does. The idea of energy that has some degree of awareness may be difficult for many of you to accept. But there are several observations we can make about our individual and collective natures that support die possibility. First, everyone wants to be believed. It doesn't matter what the belief is; the experience of being believed feels good. I think these positive feelings are universal, meaning that they apply to everyone. Conversely, no one likes to be disbelieved; it doesn't feel good. If I said, \"I don't believe you,\" the negative feeling that would resonate throughout your body and mind is also universal. By the same token, none of us likes to have our beliefs challenged. The challenge feels like an attack. Everyone, regardless of the belief, seems to respond in the same way: The typical response is to argue, defend ourselves (our beliefs), and, depending on the situation, attack back. When expressing ourselves, we seem to like being listened to. If we sense our audience isn't paying attention, how does it feel? Not good! Again, I think this response is universal. Conversely, why is it so difficult to be a good listener? Because to be a good listener, we actually have to listen, without thinking about how we are going to express ourselves the moment we can either", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 109, "parent_id": "8b2878f64b5d40aec56227498ecd6bc7", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "caa72a33182e2cfedf0cef4cf476626c", "text": "politely or rudely interrupt the person who's speaking. What's the compelling force behind our inability to listen without waiting to interrupt? Don't we like being with people with similar beliefs, because it feels comfortable and secure? Don't we avoid people with dissimilar or conflicting beliefs, because it feels uncomfortable or even threatening? The bottom line implication is, the moment we acquire a belief, it seems to take on a life of its own, causing us to recognize and be attracted to its likeness and repelled by anything that is opposite or contradictory. Considering the vast number of divergent beliefs that exist, if these feelings of attraction or comfort and being repelled or threatened are universal, then each belief must somehow be conscious of its existence, and this conscious, structured energy must behave in characteristic ways that are common to all of us.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 110, "parent_id": "8b2878f64b5d40aec56227498ecd6bc7", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "b3df60af918cd4434d7425f064062f76", "text": "THE PRIMARY CHARACTERISTICS OF A BELIEF", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 110, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "513d701bee95dd10710e43bc9ec5f486", "text": "There are three basic characteristics you need to understand in order to effectively install the five fundamental truths about trading at a functional level in your mental environment:", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 110, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "7af63b529ae1a0b84ac08be84cdef0bc", "text": "1. Beliefs seem to take on a life of their own and, therefore, resist any force that would alter their present form. 2. All active beliefs demand expression. 3. Beliefs keep on working regardless of whether or not we are consciously aware of their existence in our mental environment.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 110, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "28ee064ada81603c98e041d196312136", "text": "1. Beliefs resist any force that would alter their present form. We may not understand the underlying dynamics of how beliefs maintain their structural integrity, but we can observe that they do so, even in the face of extreme pressure or force. Throughout human history, there are many examples of people whose belief in some issue or cause was so powerful that they chose to endure indignities, torture, and death rather than express themselves in a way that violated their beliefs. This is certainly a demonstration of just how powerful beliefs can be and the degree to which they can resist any attempt to be altered or violated in the slightest way. Beliefs seem to be composed of a type of energy or force that naturally resists any other force that would cause them to exist in any form other than their nresent form. Does this mean that thev can't be altered? Absolutely not! It just means that we have to understand how to work with them. Beliefs can be altered, but not in the way that most people may think. I believe that once a belief has been formed, it cannot be destroyed. In other words, there is nothing we can do that would cause one or more of our beliefs to cease to exist or to evaporate as if they never existed at all. This assertion is founded in a basic law of physics. According to Albert Einstein and others in the scientific community, energy can neither be created nor destroyed; it can only be transformed.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 110, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "24584df82b508c697041507a2b337975", "text": "If beliefs are energy\u2014structured, conscious energy that is aware of its existence\u2014then this same principle of physics can be applied to beliefs, meaning, if we tiy to eradicate them, it's not going to work. If you knew someone or something was trying to destroy you, how would you respond? You would defend yourself, fight back, and possibly become even stronger than you were before you knew of the threat. Each individual belief is a component of what we consider to be our identity. Isn't it reasonable to expect that, if threatened, each individual belief would respond in a way that was consistent with how all the parts respond collectively? The same principle holds true if we tiy to act as if a particularly troublesome belief doesn't exist. If you woke up one morning and everyone you knew ignored you and acted as if you didn't exist, how would you respond? It probably wouldn't be long before you grabbed someone and got right in their face to try to force them to acknowledge you. Again, if purposely ignored, each individual belief will act in the very same way. It will find a way to force its presence into our conscious thought process or behavior. The easiest and most effective way to work with our beliefs is to gently render them inactive or nonfunctional by drawing the energy out of them. I call this process de-activation. After de-activation, the original structure of the belief remains intact, so technically it hasn't changed. The difference is that the belief no longer has any energy. Without energy, it doesn't have the potential to act as a force on our perception of information or on our behavior. Here is a personal illustration: As a young child, I was taught to believe in both Santa Claus and the Tooth Fairy. In my mental system, both of these are perfect examples of what are now inactive, nonfunctional beliefs. However, even though they are inactive, they still exist inside my mental system, only now they exist as concepts with no energy. If you recall from the last chapter, I defined beliefs as a combination of sensory experience and words that form an energized concept. The energy can be drawn out of the concept, but the concept itself remains intact, in its original form. However, without energy, it no ! T.gCI h-15 th? nOt?ptial to act on my perception of inforlYiation or on my behavior. So, as I'm sitting here typing into my computer, if someone came up to me and said that Santa Claus was at the door, how do you think I would define and interpret this information? I would treat it as being irrelevant or a joke, of course. However, if I were five years old and my mother told me that Santa Claus was at the front door, her words would have instantly tapped me into a huge reservoir of positively charged energy that would have compelled me to jump up and run to the front door as fast as I could. Nothing would have been able to stop me. I would have overcome any obstacle in my path. At some point, my parents told me Santa Claus didn't exist. Of course, my first reaction was disbelief. I didn't believe them, nor did I want to believe them. Eventually, they convinced me. However, the process of convincing me did not destroy my belief in Santa Claus or cause it not to exist any longer; it just took all the energy out of the belief. The belief was transformed into a nonfunctional, inactive concept about how the world works. I'm not sure where all that energy went, but I know that some of it was transferred to a belief that Santa Claus doesn't exist.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 111, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "e793cb2545f94d3aaa9f0616f6ffb8e5", "text": "Now I have two contradictory distinctions about the nature of the world that exist in my mental system: one, Santa exists; two, Santa doesn't exist. The difference between them is in the amount of energy they contain. The first has virtually no energy; the second has energy. So from a functional perspective, there is no contradiction or conflict. I propose that, if it's possible to render one belief inactive, then it's possible to de-activate any belief, despite the fact that all beliefs seem to resist any force that would alter their present form. The secret to effectively changing our beliefs is in understanding and, consequently, believing that we really aren't changing our beliefs; we are simply transferring energy from one concept to another concept, one that we find more useful in helping us to fulfill our desires or achieve our goals.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 112, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "fe53175873b323a86b1b479674426a94", "text": "2. All active beliefs demand expression. Beliefs fall into two basic categories: active and inactive. The distinction between the two is simple. Active beliefs are energized; they have enough energy to act as a force on our perception of information and on our behavior. An inactive belief is just the opposite. It is a belief, that for any number of reasons, no longer has energy, or has so little energy that it's no longer able to act as a force on how we perceive information or how we express ourselves. When I say that all active beliefs demand expression, I don't mean to imply that every belief in our mental environment is demanding to express itself simultaneously. For example, if I ask you to think about what's wrong with the world today, the word \"wrong\" would bring to your mind ideas about the nature of the world that reflect what you believe to be troubling or disturbing. Unless, of course, there is nothing about the state of the world you find troubling. The point is, if there is something you do believe is wrong, you weren't necessarily thinking about those ideas before I asked the question; but the moment I did, your beliefs about these issues instantly moved to the forefront of your conscious thinking process. In effect, they demanded to be heard. I say that beliefs \"demand\" to be expressed because once something causes us to tap into our beliefs, it seems as if we can't stop the flood of energy that's released. This is especially true of emotionally sensitive issues or beliefs we feel particularly passionate about. You might ask, \"Why would I want to hold back expressing my beliefs?\" There could be several reasons. Consider a scenario in which you're this person is saying something that you completely disagree with, or even find utterly absurd. Will you express your truth or hold back? That will depend on the beliefs you have about what is proper in such a situation. If your beliefs dictate that speaking up would be inappropriate, and those beliefs have more energy than the ones that are being contradicted, then you'll probably hold back and not argue openly. You might be looking at this person (the boss) and nodding your head in agreement. But is your mind in agreement? More to the point, is your mind silent? Absolutely not! Your position on the issues being presented are effectively countering each point the boss is making. In other words, your beliefs are still demanding expression, but they aren't being expressed externally (in the environment) because other beliefs are acting as a counteracting; force. However O O ' they will soon find a way to get out, won't they? As soon as you are out of the situation, you will probably", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 112, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "3f713334fb1e0deab2d12c1f105243f7", "text": "find a way to \"unload,\" or even spew out your side of the argument. You will probably describe what you had to endure to anyone you think will lend a sympathetic ear. This is an example of how our beliefs demand to be expressed when they are in conflict with the external environment. But what happens when one or more of our beliefs are in conflict with our intents, goals, dreams, wants, or desires? The implications of such a conflict can have a profound effect on our trading. As we have already learned, beliefs create distinctions in how the external environment can express itself. Distinctions, by definition, are boundaries. Human consciousness, on the other hand, seems to be larger than the sum total of everything we have learned to believe. This \"larger than\" quality of human consciousness gives us the ability to think in any direction we choose, either inside or outside of the boundaries imposed by our beliefs. Thinking outside of the boundaries of our beliefs is commonly referred to as creative thinking. When we purposely choose to question a belief (question what we know), and sincerely desire an answer, we make our minds available to receive a \"brilliant idea,\" \"inspiration,\" or \"solution\" to the issue at hand. Creativity, bv definition, brings forth something- that didn't we will (by definition, automatically) receive ideas or thoughts that are outside of anything that already exists in our rational mind as a belief or memory. As far as I know, there is no consensus among artists, inventors, or the religious or scientific communities as to exactly where creatively generated information comes from. However, what I do know is that creativity seems to be limitless and without boundaries. If there are any limits on the ways we can think, we certainly haven't found them yet. Consider the staggering pace at which technology has developed in the last 50 years alone. Every invention or development in the evolution of humanity was born in the minds of people who were willing to think outside the boundaries dictated by what they had learned to believe. If all of us have the inherent ability to think creatively (and I believe that we do), then we also have the potential to encounter what I call a \"creative experience.\" I define a creative experience as the experience of anything new or outside the boundaries imposed by our beliefs. It could be a new sight\u2014something we've never seen before, but from the environment's perspective was always there. Or we could experience a new sound, smell, taste, or touch. Creative experiences, like creative thoughts, inspirations, hunches, and brilliant ideas, can occur as a surprise or can be the result of our conscious direction. In either case, when we experience them we can be confronted with a major psychological dilemma. A creative occurrence, whether in the form of a thought or an experience, can cause us to be attracted to or desire something that is in direct conflict with one or more of our beliefs. To illustrate the point, let's return to the example of the boy and dog. Recall that the boy has had several painful experiences with dogs. The first experience was real from the environment's perspective. The others, however, were the result of how his mind processed information (based on the operation of the association and painavoidance mechanisms). The end result is that he experiences fear every time he encounters a dog. Let's suppose that the boy was a toddler when he", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 113, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "7299bb8bc3851152f606451c24185c6f", "text": "had his first negatively charged experience. As he grows up and begins associating specific words and concepts with his memories, he will form a belief about the nature of dogs. It would be reasonable to assume that he adopted a belief something like, \"All dogs are dangerous.\" With the use of the word \"all,\" the boy's belief is structured in a way that assures that he will avoid all dogs. He has no reason to question this belief, because every experience has confirmed and reinforced its validity. However, he (and everyone else on the planet) is susceptible to a creative experience. Under normal circumstances, the boy will do everything possible to make sure he does not encounter a dog. But what if something unexpected and unintended occurs? Suppose the boy is walking with his parents and, as a result, feels safe and protected. Now, suppose he and his parents come to a blind corner and cannot see what is on the other side. They encounter a scene in which several children of about the same age as the boy are playing with some dogs and, furthermore, they are obviously having a great deal of fun. This is a creative experience. The boy is confronted with indisputable information that what he believes about the nature of dogs isn't true. What happens now? First, the experience was not at the boy's conscious direction. He didn't make a decision to willingly expose himself to information that contradicted what he believed to be true. We might call this an inadvertent creative experience, because the external environment forced him to confront other possibilities that he didn't believe existed. Second, the experience of seeing other children playing with dogs and not getting hurt will throw his mind into a state of confusion. After the confusion wears off, meaning as he begins to accept the possibility that not all dogs are dangerous, several scenarios are possible. Seeing other children his own age (with whom he could strongly identify) having such a great time playing with dogs could cause the boy to decide that he wants to be like the other children and have fun with dogs, too. If that's the case, this inadvertent creative encounter has caused him to become attracted to express himself in a way that he formerly didn't believe was possible (interacting with dogs). In fact, the notion was so impossible that it wouldn't have even occurred to him to consider it. Now, he not only considers it, he desires it. Will he be able to express himself in a way that is consistent with his desire? The answer to this question is a matter of energy dynamics. There are two forces within the boy that are in direct conflict with each other, competing for expression: his belief that \"all dogs are dangerous\" and his desire to have fun and be like the other children. What he will do the next time he encounters a dog will be determined by which has more energy: his belief or his desire. Given the intensity of the energy in his belief that \"All dogs are dangerous,\" we can reasonably assume that his belief will have far more energy than his desire. If that's the case, then he will find his next encounter with a dog very frustrating. Even though he may want to touch or pet the dog, he'll find that he can't interact with it in any way. The word \"all\" in his belief will act as a paralyzing force, preventing him from fulfilling his desire. He might be well aware of the fact that the dog he wants to pet is not dangerous and won't hurt him;", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 114, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "5660d0ee418063c0f9a7607168a81555", "text": "but he won't be able to pet it until the balance of energy tips in favor of his desire. If the boy genuinely wants to interact with dogs, he will have to overcome his fear. This means that he will have to de-activate his belief that all dogs are dangerous so he can properly install a belief about dogs that is more consistent with his desire. We know that dogs can express themselves in a wide range of ways, from loving and gentle to mean and nasty. However, very few dogs on a percentage basis fall into the mean and nasty category. A good belief for the boy to adopt, then, would be something like, \"Most dogs are friendly, but some can be mean and nasty.\" This belief would allow him to learn to recognize characteristics and behavior patterns that will tell him which dogs he can play with and which ones to avoid. However, the larger issue is, how can the boy de-activate the \"all\" in the belief that \"All dogs are dangerous\" so he can overcome his fear? Remember that all beliefs naturally resist any force that would alter their present form, but, as I indicated above, the appropriate approach is not to try to alter the belief, but rather to draw the energy out of it and channel that energy into another belief that is better suited to our purposes. To de-activate the concept the word \"all\" represents, the boy will have to create a positively charged experience with a dog; at some point, he will have to step through his fear and touch one. Doing this might require a great deal of effort on the boy's part over a considerable amount of time. Early in the process, his new realization about dogs might be strong enough only to allow him to be in the presence of a dog, at a distance, and not run away. However, each encounter with a dog, even at a distance, that doesn't result in a negative outcome will draw more and more of the negative energy out of his belief that \"All dogs are dangerous.\" Eventually, each new positive experience will allow him to close the gap between himself and a dog, little by little, to the point that he can actually touch one. From an energy dynamics perspective, he will be able to touch a dog when his desire to do so is at least one degree greater in intensity than his belief that all dogs are dangerous. The moment he actually does touch a dog, it will have the effect of drawing most of the remaining negative energy out of the \"all\" concept and transfer it to a belief that reflects his new experience. Although it's probably not that common, there are people who, for various reasons, are motivated enough to purposely put themselves through the above described process. However, they may not be consciously aware of the dynamics involved. People who work through a childhood fear of this magnitude usually do so somewhat haphazardly over a period of years, without knowing for sure exactly how they did it (unless they seek and get competent professional help). Later on, as adults, if they are asked or if they happen to encounter a situation that reminds them of their past (for instance, observing a child who is terrified of dogs), they typically characterize the process they went through as \"I remember when I was afraid of dogs, but I grew out of it.\" The end result of the first scenario was that the boy worked through his fear by de-activating his limiting belief about the nature of dogs. This allowed him to express himself in a way that he finds pleasing and that otherwise would have been impossible. The second scenario that could result from the child's inadvertent creative experience with dogs is that he isn't attracted to the possibility of playing with a", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 115, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "7ced6bd6cf4069d1c6a984b69e17993e", "text": "dog. In other words, he could not care less about being like the other children or interacting with dogs. In this case, his belief that all dogs are dangerous and his new realization that all dogs are not dangerous will exist in his mental environment as contradictory concepts. This is an example of what I call an active contradiction, when two active beliefs are in direct conflict with each other, both demanding expression. In this example, the first belief exists at a core level in the boy's mental environment, with a great deal of negatively charged energy. The second belief is at a more superficial level, and has very little positively charged energy. The dynamics of this situation are interesting, and extremely important. We have stated that beliefs control our perception of information. Under normal circumstances, the boy would have been perceptually blinded to the possibility of interacting with dogs, but the experience of seeing other children playing with them created a positively charged concept in his mental environment that dogs are not all dangerous; some can be friendly. However, he hasn't done anything to de-activate the \"all\" in his belief that \"All dogs are dangerous,\" and, as far as I know, beliefs have no capacity to de-activate themselves. As a result, beliefs exist in our mental environment from the moment they are born to the moment we die, unless we consciously take steps to deactivate them. However, in this scenario, the boy has no desire and consequently no motivation to step through his fear. Therefore, the boy is left with an active contradiction where his minimally charged belief that not all dogs are dangerous gives him the ability to perceive the possibility of playing with a dog, but his powerfully charged belief that all dogs are dangerous still causes him to experience some level of fear every time he encounters a dog (maybe not enough fear to cause him to run in terror, because some of that fear will be offset by the other belief, but there will certainly be enough fear to cause a great deal of discomfort). The ability to \"see\" and consequently know that a situation is not dangerous, but at the same time find ourselves immobilized with fear, can be quite baffling if we don't understand that what we discover as the result of thinking creatively or realize from an inadvertent creative experience doesn't necessarily have enough energy to become a dominant force in our mental environment. In other words, our new awareness or discovery could very well have enough energy to act as a credible force on our perception of information, thereby causing us to perceive possibilities that would otherwise be invisible; but it might not have enough energy to act as a credible force on our behavior. In making this statement, I am operating out of the assumption that it takes more energy to act or express ourselves than the amount of energy it takes to observe something. On the other hand, new awareness and discoveries instantly and effortlessly become dominant forces if there's nothing inside us that's in conflict with them. But if there are conflicting beliefs and we aren't willing to de-activate the conflicting forces (expending some effort), especially if they're negatively charged, then acting on what we've discovered will be a struggle at the very least, and perhaps down right impossible. What I have just described is the psychological dilemma that virtually every trader has to resolve. Let's say you have a firm grasp of the nature of probabilities", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 116, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "9e53d62eb3a64993ba28a3dde229b7bb", "text": "and, as a result, you \"know\" that the next trade is simply another trade in a series of trades that has a probable outcome. Yet you find you're still afraid to put that next trade on, or you're still susceptible to several of the fear-based trading errors we've discussed in previous chapters. Remember that the underlying cause of fear is the potential to define and interpret market information as threatening. What is the source of our potential to interpret market information as threatening? Our expectations! When the market generates information that doesn't conform to what we expect, the up and down tics seem to take on a threatening quality (become negatively charged). Consequently, we experience fear, stress, and anxiety. What is the underlying source of our expectations? Our beliefs. In light of what you now understand about the nature of beliefs, if you are still experiencing negative states of mind when you trade, you can assume there's a conflict between what you \"know\" about probable outcomes and any number of other beliefs in your mental environment that are arguing (demanding expression) for something else. Keep in mind that all active beliefs demand expression, even if we don't want them to. To think in probabilities, you have to believe that every moment in the market is unique, or more specifically, that every edge has a unique outcome. When you believe at a functional level that every edge has a unique outcome (meaning that it's a dominant belief without any other beliefs arguing for something different), you will experience a state of mind that is free of fear, stress, and anxiety when you trade. It really can't work any other way. A unique outcome is not something we have already experienced, therefore it is not something we can already know. If it were known, it could not be defined as unique. When you believe that you don't know what is going to happen next, what exactly are you expecting from the market? If you said \"I don't know,\" you are absolutely right. If you believe that something will happen and that you don't need to know exactly what that something is to make money, then where s the potential to define and interpret market information as threatening and painful? If you said \"There is none,\" you are absolutely right again. Here is one more example of how beliefs demand expression. Let's look at a situation where a child's first encounter with a dog was a very positive experience. As a result, he has absolutely no problem interacting with dogs (any dog for that matter), because he has not encountered one that's unfriendly. Therefore, he has no concept (an energized belief) that it is possible for a dog to inflict any damage or cause him to experience pain. As he learns to associate words with his memories, he will probably acquire a belief along the lines of \"all dogs are friendly and fun.\" Therefore, every time a dog comes into his field of awareness, this belief will demand expression. From the perspective of someone who fi with a do?, it will seem as if this child has an attitude of reckless abandon. If you tried to convince the child that he'll get bitten someday if he doesn't exercise caution, his belief will cause him to either discount or completely disregard your advice. His response would be something like \"No way!\" or \"It can't happen to me.\" Let's say at some point in his life he approaches an unfamiliar dog that wants to be left alone. The dog growls. The warning will go unheeded and the dog attacks the boy. From the perspective of the boy's belief system, he's just had", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 117, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "553bb889127a72b56a0bc5f516991ffd", "text": "a creative experience. What effect will this experience have on his belief that \"all dogs are friendly\"? Will he now be afraid of all dogs as the child in the first example was? Unfortunately, the answers to these questions are not cut and dried, because there may be other beliefs, also demanding expression, that don't have anything specifically to do with dogs that come into play in a situation like this. For example, what if this child has a highly developed belief in betrayal (he believes he's been betrayed by some very significant people in some very significant situations that have caused him to experience intense emotional pain). If he associates the attack by this one dog as a \"betrayal\" by dogs in general (in essence a betrayal of his belief in dogs), then he could easily find himself afraid of all dogs. All of the positive energy contained in his original belief could instantly be transformed into negatively charged energy. The boy could justify this shift with a rationalization like \"If one dog can betray me, then any dog can.\" However, I do think this is an extreme and very unlikely occurrence. What is more likely is the word \"all\" in his original belief will instantly be de-activated and that energy will get transferred to a new belief that better reflects the true nature of dogs. This new experience caused an energy shift that forced him to learn something about the nature of dogs that he otherwise refused to consider possible. His belief in the friendliness of dogs remains intact. He will still play with dogs, but he will now exercise some discretion by consciously looking for signs of friendliness or unfriendliness. I think that a fundamental truth about the nature of our existence is every moment in the market, as well as in evervdav life, has elements of what we know (similarities) and elements that we don't or can't know because we haven't experienced it yet. Until we actively train our minds to expect a unique outcome, we will continue experiencing only what we know; everything else (other information and possibilities that are not consistent with what we know and expect) will pass us by, unperceived, discounted, distorted, outright denied, or attacked. When you truly believe that you don't need to know, you will be thinking in probabilities (the market perspective) and will have no reason to block, discount, distort, deny, or attack anything the market is offering about its potential to move in any particular direction. If you are not experiencing the quality of mental freedom implied in that statement, and it is your desire to do so, then you must take an active role in training your mind to believe in the uniqueness of each moment, and you must de-activate any other belief that argues for something different. This process isn't any different from the one the boy in the first scenario went through, nor is it going to happen by itself. He wanted to interact with dogs without fear, but to do so he had to create a new belief and de-activate the conflicting ones. This is the secret to achieving consistent success as a trader.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 118, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "3b39dc0c4dd7420e670221e5ae107633", "text": "3. Beliefs keep on working regardless of whether we are consciously aware of their existence in our mental environment. In other words, we don't have to actively remember or have conscious access to any particular belief for that belief to act as a force on our perception of information or on our", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 118, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "efeb907ac912eb3684d18c3501b36a67", "text": "behavior. I know it s hard to \"believe\" that something we can't even remember can still have an impact on our lives. But when you think about it, much of what we learn throughout our lives is stored at an unconscious or subconscious level. If I asked you to remember each specific skill you had to learn so that you could drive a car with confidence, chances are you wouldn't remember all the things you needed to concentrate and focus on while you were in the process of learning. The first time I had the opportunity to teach a teenager how to drive, I was absolutely amazed at how much there was to learn, how much of the process I took for granted and no longer thought about at a conscious level. Possibly the best example that illustrates this characteristic is people who drive under the influence of alcohol. On any given day or night, there are probably thousands of people who have had so much to drink that they have no idea that they have no conscious awareness of how they drove from point A to point B. It is difficult to imagine how this is possible, unless you consider that driving skills and one's belief in his ability to drive operate automatically on a much deeper level than waking consciousness. Certainly, some percentage of these drunk drivers get into accidents, but when you compare the accident rate with the estimated number of people driving under the influence of alcohol, it's remarkable that there aren't a great many more accidents. In fact, a drunk driver is probably most likely to cause an accident when he either falls asleep or something requires a conscious decision and a fast reaction. In other words, the driving conditions are such that operating out of one's subconscious skills is not enough.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 119, "parent_id": "b3df60af918cd4434d7425f064062f76", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "b8a50e9e5c452efb012c2b05c2c8a6da", "text": "SELF EVALUATION AND TRADING", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 119, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "e533a50a553462dc526cf37a6cf8a1c5", "text": "How this characteristic applies to our trading is also quite profound. The trading environment offers us an arena of unlimited opportunities to accumulate wealth. But just because the money is available and we can perceive the possibility of getting it, that doesn't necessarily mean that we (as individuals) have an unlimited sense of selfvaluation. In other words, there could be a huge gap between how much money we desire for ourselves, how much we perceive is available, and how much we actually believe we are worth or deserve. Everyone has a sense of self-valuation. The easiest way to describe this sense is to list every active belief, both conscious and subconscious, that has the potential to argue either for or against accumulating or achieving greater and greater levels of success and prosperity. Then match the energy from the positively charged beliefs against the energy from the negatively charged beliefs. If you have more positively charged energy arguing for success and prosperity than negatively charged energy arguing against them, then you have a positive sense of self-valuation. Otherwise, you have a negative sense of self-valuation. The dynamics of how these beliefs interact with one another is not nearly so simple as I'm making it sound. In fact, it can be so complex that it could take years of sophisticated mental work to organize and sort out. What you need to know is that it's almost impossible to grow up in any social environment and not acquire some negatively charged beliefs that would argue against success or accumulating vast sums of money.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 119, "parent_id": "b8a50e9e5c452efb012c2b05c2c8a6da", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "70ffab9662ed7d9136eae3b89b4e79dc", "text": "Most of these self-sabotaging beliefs have long been forgotten and operate at a subconscious level, but the fact that we may have forgotten them doesn't mean they've been de-activated. How do we acquire self-sabotaging beliefs? Unfortunately, it's extremely easy. Probably the most common way is when a child engages in some activity that a parent or teacher doesn't want him to do and the child accidently injures himself. Many parents, to get their point across to the child, will respond to a situation like this by saying, \"This (whatever pain you are experiencing) wouldn't have happened to you if you didn't deserve it,\" or \"You disobeyed me and look what happened, God punished you.\" The problem with making or hearing statements like this is that there's a potential for the child to associate every future injury with these same statements and, subsequently, form a belief that he must be an unworthy person, undeserving of success, happiness, or love. Anything we feel guilty about can have an adverse effect on our sense of self-worth. Usually guilt is associated with being a bad person, and most people believe that bad people should be punished, certainly not rewarded. Some religions teach children that having a lot of money isn't godly or spiritual. Some people believe that making money in certain ways is wrong, even though it may be perfectly legal and moral from society's perspective. Again, you may not have a speoifir recollection of learning something that would argue against the success you perceive as possible, but that doesn't mean that what you learned is no longer having an effect. The way these subconscious self-sabotaging beliefs manifest themselves in our trading is usually in the form of lapses in focus or concentration, resulting in any number of trading errors, like putting in a buy for a sell or vice versa, or allowing yourself to give in to distracting thoughts that compel you to leave the screen, only to find out when you return that you missed the big trade of the day. I've worked with many traders who achieved various levels of consistent success, but found they just couldn't break through certain thresholds in acquiring equity. They discovered an invisible but very real barrier similar to the proverbial glass ceiling that many women executives experience in the corporate world. Every time these traders hit the barrier, they experienced a significant draw down, regardless of the market conditions. However, when asked about what happened, they typically blamed their sudden run of bad luck on just that\u2014luck or the vagaries of the market. Interestingly, they typically created a steadily rising equity curve, sometimes over a period of several months, and the significant draw down always occurred at the same spot in their equity curve. I describe this psychological phenomenon as being in a \"negative zone.\" As magically as money can flow into a trader's accounts when he is \"in the zone,\" it can just as easily flow out, if he is in a negative zone where unresolved self-valuation issues mysteriously act on his perception of information and behavior. I am not implying here that you have to de-activate every belief that would argue against your ever-expanding positive sense of selfvaluation, because you don't. But you must be aware of the presence of such beliefs, and take specific steps in your trading regimen to compensate when they start expressing themselves. CHAPTER", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 120, "parent_id": "b8a50e9e5c452efb012c2b05c2c8a6da", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "8462057c2beb73eb24a3aea60f62e0fb", "text": "CHAPTER 11", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 121, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "829be6371ee6d48ef97a19e3c6119a64", "text": "THINKING LIKE A TRADER", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 121, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "1b1a57b9b3a388323451ac8415d0d644", "text": "If you asked me to distill trading down to its simplest form, I would say that it is a pattern recognition numbers game. We use market analysis to identify the patterns, define the risk, and determine when to take profits. The trade either works or it doesn't. In any case, we go on to die next trade. It's that simple, but it's certainly not easy. In fact, trading is probably the hardest thing you'll ever attempt to be successful at. That's not because it requires intellect; quite the contrary! But because the more you think you know, the less successful you'll be. Trading is hard because you have to operate in a state of not having to know, even though your analysis may turn out at times to be \"perfectly\" correct. To operate in a state of not having to know, you have to properly manage your expectations. To properly manage your expectations, you must realign your mental environment so that you believe without a shadow of a doubt in the five fundamental truths. In this chapter, I am going to give you a trading exercise that will integrate these truths about the market at a functional level in your mental environment. In the process, I'll take you through the three stages of development of a trader. The first stage is the mechanical stage. In this stage, you:", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 121, "parent_id": "829be6371ee6d48ef97a19e3c6119a64", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "4d579eefb876269f1d1225830ce01ae1", "text": "1. Build the self-trust necessary to operate in an unlimited environment. 2. Learn to flawlessly execute a trading system. 3. Train your mind to think in probabilities (the five fundamental truths). 4. Create a strong, unshakeable belief in your consistency as a trader.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 121, "parent_id": "829be6371ee6d48ef97a19e3c6119a64", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "2d2f20dee98af08d71e18bd8862d1a41", "text": "Once you have completed this first stage, you can then advance to the subjective stage of trading. In this stage, you use anything you have ever learned about the nature of market movement to do whatever it is you want to do. There's a lot of freedom in this stage, so you will have to learn how to monitor your susceptibility to make the kind of trading errors that are the result of any unresolved self- valuation issues I referred to in the last chapter. The third stage is the intuitive stage. Trading intuitively is the most advanced stage of development. It is the trading equivalent of earning a black belt in the martial arts. The difference is that you can't try to be intuitive, because intuition is spontaneous. It doesn't come from what we know at a rational level. The rational part of our mind seems to be inherently mistrustful of information received from a source that it doesn't understand. Sensing that something is about to happen is a form of knowing that is very different from anything we know rationally. I've worked with many traders who frequently had a very strong intuitive sense of what was going to happen next, only", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 121, "parent_id": "829be6371ee6d48ef97a19e3c6119a64", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "832afd02f8d93c068b10a5628d66fc97", "text": "to be confronted with the rational part of themselves that consistently, argued for another course of action. Of course, if they had followed their intuition, they would have experienced a very satisfying outcome. Instead, what they ended up with was usually very unsatisfactory, especially when compared with what they otherwise perceived as possible. The only way I know of that you can try to be intuitive is to work at setting up a state of mind most conducive to receiving and acting on your intuitive impulses.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 122, "parent_id": "829be6371ee6d48ef97a19e3c6119a64", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "59cd764b6969326b98a8d87f9af5d3c6", "text": "THE MECHANICAL STAGE", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 122, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "084aaafc3bc81fbbcf20a7110bd5493d", "text": "The mechanical stage of trading is specifically designed to build the kind of trading skills (trust, confidence, and thinking in probabilities) that will virtually compel you to create consistent results. I define consistent results as a steadily rising equity curve with only minor draw downs that are the natural consequence of edges that didn't work. Other than finding a pattern that puts the odds of a winning trade in your favor, achieving a steadily rising equity curve is a function of systematically eliminating any susceptibility you may have to making the kind of fear, euphoric or self-valuation based trading errors I have described throughout this book. Eliminating the errors and expanding your sense of self-valuation will require the acquisition of skills that are all psychological in nature. The skills are psychological because each one, in its purest form, is simply a belief. Remember that the beliefs we operate out of will determine our state of mind and shape our experiences in ways that constantly reinforce what we already believe to be true. How truthful a belief is (relative to the environmental conditions) can be determined by how well it serves us; that is, the degree to which it helps us satisfy our objectives. If producing consistent results is your primary objective as a trader, then creating a belief (a conscious, energized concept that resists change and demands expression) that \"I am a consistently successful trader\" will act as a primaiy source of energy that will manage your perceptions, interpretations, expectations, and actions in ways that satisfy the belief and, consequently, the objective. Creating a dominant belief that \"I am a consistently successful trader\" requires adherence to several principles of consistent success. Some of these principles will undoubtedly be in direct conflict with some of the beliefs you've already acquired about trading. If this is the case, then what you have is a classic example of beliefs that are in direct conflict with desire. The energy dynamic here is no different from what it was for the boy who wanted to be like the other children who were not afraid to play with dogs. He desired to express himself in a way that he found, at least initially, virtually impossible. To satisfy his desire, he had to step into an active process of transformation. His technique was simple: He tried as hard as he could to stay focused on what he was trying to accomplish and, little by little, he de-activated the conflicting belief and strengthened the belief that was consistent with his desire. At some point, if that is your desire, then you will have to step into the process of transforming yourself", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 122, "parent_id": "59cd764b6969326b98a8d87f9af5d3c6", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "95ec68377ca3e825524f9ed54a6b5b1c", "text": "into a consistent winner. When it comes to personal transformation, the most important ingredients are your willingness to change, the clarity of your intent, and the strength of your desire. Ultimately, for this process to work, you must choose consistency over eveiy other reason or justification you have for trading. If all of these ingredients are sufficiently present, then regardless of the internal obstacles you find yourself up against, what you desire will eventually prevail.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 123, "parent_id": "59cd764b6969326b98a8d87f9af5d3c6", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "ac45697f56464c4134df79a7d09ca94c", "text": "Observe Yourself", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 123, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "36b9d17cf8a71c60133618cad911ebd3", "text": "The first step in the process of creating consistency is to start noticing what you're thinking, saying, and doing. Why? Because everything we think, say, or do as a trader contributes to and, therefore, reinforces some belief in our mental system. Because the process of becoming consistent is psychological in nature, it shouldn't come as a surprise that you'll have to start paying attention to your various psychological processes. The idea is eventually to learn to become an objective observer of your own thoughts, words, and deeds. Your first line of defense against committing a trading error is to catch yourself thinking about it. Of course, the last line of defense is to catch yourself in the act. If you don't commit yourself to becoming an observer to these processes, your realizations will always come after the experience, usually when you are in a state of deep regret and frustration. Observing yourself objectively implies doing it without judging about yourself. This might not be so easy for some of you to do considering the harsh, judgmental treatment you may have received from other people throughout your life. As a result, one quickly learns to associate any mistake with emotional pain. No one likes to be in a state of emotional pain, so we typically avoid acknowledging what we have learned to define as a mistake for as long as possible. Not confronting mistakes in our everyday lives usually doesn't have the same disastrous consequences it can have if we avoid confronting our mistakes as traders. For example, when I am working with floor traders, the analogy I use to illustrate how precarious a situation they are in is to ask them to imagine themselves walking across a bridge over the Grand Canyon. The width of the bridge is directly related to the number of contracts they trade. So, for example, for a one-contract trader the bridge is very wide, say 20 feet. A bridge 20 feet wide allows you a great deal of tolerance for error, so you don't have to be inordinately careful or focused on each step you take. Still, if you do happen to stumble and trip over the edge, the drop to the canyon floor is one mile. I don't know how many people would walk across a narrow bridge with no guardrails, where the ground is a mile down, but my guess is relatively few. Similarly, few people will take the kinds of risks associated with trading on the floor of the futures exchanges. Certainly a one-contract floor trader can do a great deal of damage to himself, not unlike falling off a mile-high bridge. But a one-contract trader also can give himself a wide tolerance for errors, miscalculations, or unusually violent market moves where he could find himself on the wrong side. On the other hand, one of the biggest floor traders I ever worked with trades for his own account with an average position of 500 Treasury bond futures at a", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 123, "parent_id": "ac45697f56464c4134df79a7d09ca94c", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "61c00977cf868ec4e38e390813b34e20", "text": "time. He often puts on a position of well over a thousand contracts. A position of 1,000 T-bond contracts amounts to $31,500 per tic (the smallest incremental price change that a bond contract can make). Of course, T-bond futures can be very volatile and can trade several tics in either direction in a matter of seconds. As the size of a traders position increases, the width of our bridge over the Grand Canyon narrows. In the case of the large bond trader, the bridge has narrowed to the size of a thin wire. Obviously, he has to be extremely well-balanced and very focused on each step that he takes. The slightest misstep or gust of wind could cause him to fall off the wire. Next stop, one mile down. Now, when he's in the trading pit, that tiny misstep or slight gust of wind is the equivalent to one distracting thought. That's all, just a thought or anything else where he allows himself to lose his focus for even a second or two. In that moment of distraction, he could miss his last favorable opportunity to liquidate his position. The next price level with enough volume to take him out of his trade could be several tics away, either creating a huge loss or forcing him to give a substantial winning trade back to the market. If producing consistent results is a function of eliminating errors, then it is an understatement to say that you will encounter great difficulty in achieving your objective if you can't acknowledge a mistake. Obviously, this is something very few people can do, and it accounts for why there are so few consistent winners. In fact, the tendency not to acknowledge a mistake is so pervasive throughout mankind, it could lead one to assume that it's an inherent characteristic of human nature. I do not believe this is the case, nor do I believe we are born with the capacity to ridicule or think less of ourselves for making a mistake, miscalculation, or error. Making mistakes is a natural function of living and will continue to be until we reach a point at which:", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 124, "parent_id": "ac45697f56464c4134df79a7d09ca94c", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "ff173c61d414bb56bf406fd05a0fd6e1", "text": "1. all our beliefs are in absolute harmony with our desires, and 2. all our beliefs are structured in such a way that they are completely consistent with what works from the environment's perspective. Obviously, if our beliefs are not consistent with what works from the environments perspective, the potential for making a mistake is high, if not inevitable. We won't be able to perceive the appropriate set of steps to our objective. Worse, we won't be able to perceive that what we want may not be available, or available in the quantity we desire or at the time when we want it. On the other hand, mistakes that are the result of beliefs that are in conflict with our objectives aren't always apparent or obvious. We know they will act as opposing forces, expressing their versions of the truth on our consciousness, and they can do that in many ways. The most difficult to detect is a distracting thought that causes a momentary lapse in focus or concentration. On the surface this may not sound significant. But, as in the analogy of the bridge over the canyon, when there's a lot at stake, even a slightly diminished capacity to stay focused can result in an error of disastrous proportions. This principle applies whether it's trading, sporting events, or computer programming. When our intent is clear and undiminished by any opposing energy, then our", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 124, "parent_id": "ac45697f56464c4134df79a7d09ca94c", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "cc7bae5ceac73a2a4ccf66e249c3c70b", "text": "capacity to stay focused is greater, and the more likely it is that we will accomplish our objective. Earlier I defined a winning attitude as a positive expectation of our efforts, with an acceptance that whatever results we do get are a perfect reflection of our level of development and what we need to learn to do better. What separates the \"consistently great\" athletes and performers from everyone else is their distinct lack of fear of making a mistake. The reason they aren't afraid is that they don't have a reason to think less of themselves when they do make a mistake, meaning they don't have a reservoir of negatively charged energy waiting to well up and pounce on their conscious thought process like a lion waiting for the right moment to pounce on its intended prey. What accounts for this uncommon capacity to quickly move beyond their errors without criticizing themselves? One explanation may be that they grew up with extremely unusual parents, teachers, and coaches, who by their words and examples taught them to correct their miscalculations and errors with genuine love, affection, and acceptance. I say \"extremely unusual\" because many of us grew up with just the opposite experience. We were taught to correct our mistakes or miscalculations with anger, impatience, and a distinct lack of acceptance. Is it possible that, for the great athletes, their past positive experiences with respect to mistakes caused them to acquire a belief that mistakes simply point the way to where they need to focus their efforts to grow and improve themselves? With a belief like that, there's no source of negatively charged energy and consequently no source for self-denigrating thoughts. However, the rest of us, who did grow up experiencing a plethora of negative reactions to our actions, would naturally acquire beliefs about mistakes: \"Mistakes must be avoided at all costs,\" \"There must be something wrong with me if I make a mistake,\" \"I must be a screw-up,\" or \"I must be a bad person if I make a mistake.\" Remember that every thought, word, and deed reinforces some belief we have about ourselves. If, by repeated negative self-criticism, we acquire a belief that we're \"screw-ups,\" that belief will find a way to express itself in our thoughts, causing us to become distracted and to screw up; on our words, causing us to say things about ourselves or about others (if we notice the same characteristics in them) that reflect our belief; and on our actions, causing us to behave in ways that are overtly self-sabotaging. If you're going to become a consistent winner, mistakes can't exist in the kind of negatively charged context in which they are held by most people. You have to be able to monitor yourself to some degree, and that will be difficult to do if you have the potential to experience emotional pain if and when you find yourself in the process of making an error. If this potential exists, you have two choices:", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 125, "parent_id": "ac45697f56464c4134df79a7d09ca94c", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "9fb09c9f925d59b05dbaa0062d083a18", "text": "1. You can work on acquiring a new set of positively charged beliefs about what it means to make a mistake, along with de-activating any negatively charged beliefs that would argue otherwise or cause you to think less of yourself for making a mistake. 2. If you find this first choice undesirable, you can compensate for the potential to make errors by the way you set up your trading regime.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 125, "parent_id": "ac45697f56464c4134df79a7d09ca94c", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "ab2aed46704d7cb3e8550b605ef0c3b3", "text": "This means that if you're going to trade and not monitor yourself, but at the same time you desire consistent results, then trading exclusively from the mechanical stage will resolve the dilemma. Otherwise, learning how to monitor yourself is a relatively simple process once you have rid yourself of negatively charged energy associated with mistakes. In fact, it's easy. All you have to do is decide why you want to monitor yourself, which means you first need to have a clear purpose in mind. When you're clear about your purpose, simply start directing your attention to what you think, say, or do. If and when you notice that you're not focused on your objective or on the incremental steps to accomplish your objective, choose to redirect your thoughts, words, or actions in a way that is consistent with what you are trying to accomplish. Keep redirecting as often as necessary. The more willfully you engage in this process, especially if you can do it with some degree of conviction, the faster you will create a mental framework free to function in a way that is consistent with your objectives, without any resistance from conflicting beliefs.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 126, "parent_id": "ac45697f56464c4134df79a7d09ca94c", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "1f8f43360bf4dc15cbbc99734235bcc1", "text": "THE ROLE OF SELF-DISCIPLINE", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 126, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "3e5ade57ef50b0611e7319bcb2cd4baf", "text": "I call the process I just described self-discipline. I define self-discipline as a mental technique to redirect (as best we can) our focus of attention to the object of our goal or desire, when that goal or desire conflicts with some other component (belief) of our mental environment. The first thing you should notice about this definition is that self-discipline is a technique to create a new mental framework. It is not a personality trait; people aren't born with self-discipline. In fact, when you consider how I define it, being born with discipline isn't even possible. However, as a technique to be used in the process of personal transformation, anybody can choose to use self-discipline. Here is an example from my life that illustrates the underlying dynamics of how this technique works. In 1978 I decided that I wanted to become a runner. I don't exactly remember what my underlying motivation was, except that I had spent the previous eight years in a very inactive life style. I wasn't involved with any sports or hobbies, unless you call watching television a hobby. Previously in both high school and at least part of college I was very active in sports, especially ice hockey. However, coming out of college, my life was unfolding in the way that was very different from what I had expected. It was not to my liking, but at the time I felt powerless to do anything about it. This led to a period of inactivity, which is a nice way of saying that I was severely depressed. Again, I'm not sure what prompted me to suddenly want to become a runner (maybe I saw some TV program that sparked my interest). I do, however, remember that the motivation was verv strong. So, I went out and bought myself some running shoes, put them on, and went out to run. The first thing I discovered was that I couldn't do it. I didn't have the physical stamina to run more than fifty or sixty yards. This was very surprising. I didn't realize, nor would I have ever believed, that I was so out of shape that I couldn't run even a hundred yards. This realization was so disheartening that I didn't attempt to run again for two or three weeks.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 126, "parent_id": "1f8f43360bf4dc15cbbc99734235bcc1", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "81d6ec2ebeea4ab8c89c8f8926274dee", "text": "The next time out, I still couldn't run more than fifty or sixty yards. I tried again the next day with, of course, the same result. I became so discouraged about my deteriorated physical condition that I didn't run again for another four months. Now, it's the spring of 1979. I'm once again determined to become a runner, but, at the same time, very frustrated with my lack of progress. As I was contemplating my dilemma, it occurred to me that one of my problems was that I didn't have a goal to work towards. Saying that I wanted to be a runner was great, but what did that mean? I really didn't know; it was too vague and abstract. I had to have something more tangible to work towards. So I decided that I wanted to be able to run five miles by the end of the summer. Five miles seemed insurmountable at the time, but thinking that I might be able to do it generated a lot of enthusiasm. This increased level of enthusiasm gave me enough impetus to run four times that week. At the end of this first week, I was really surprised to discover even a little bit of exercise improved my stamina and ability to run a little farther each time. This created even more enthusiasm, so I went out and bought a stop watch and blank book to be used as a running diary. I set up a two-mile course, and marked off each quarter mile. In the diary I entered the date, my distance, my time, and how I felt physically each time I ran. Now I thought I was well on my way to the five miles, until I literally ran into my next set of problems. The biggest were the conflicting and distracting thoughts that flooded my consciousness every time I decided I wanted to go out and run. I was amazed at the number (and intensity) of the reasons I found for not doing it: \"It's hot [or] cold outside,\" \"It looks like it's going to rain,\" \"I'm still a little tired from the last time I ran (even though it was three days ago),\" \"Nobody else I know is doing this,\" or the most prevalent, \"I'll go as soon as this TV program is over\" (of course I never went). I didn't know any other way to deal with this conflicting mental energy except to redirect my conscious attention on what I was trying to accomplish. I really wanted to get to five miles by the end of the summer. I found that sometimes my desire was stronger than the conflict. As a result, I managed to get my running shoes on, actually step outside, and start running. However, more times than not, my conflicting and distracting thoughts caused me to stay put. In fact, in the beginning stages, I estimate that two-thirds of the time I was unable to get past the conflicting energy. The next problem I encountered was that when I started approaching the point where I was able to run one mile, I was so thrilled with myself that it occurred to me I was going to need an additional mechanism to get me to the five miles. I reasoned that once I got to the point where I could run two or maybe three miles, I would be so overwhelmingly pleased with myself that I wouldn't feel any need to fulfill my five-mile objective. So I made a rule for myself. You could call it the five-mile rule. \"If I managed to get my running shoes on and get outside in spite of all the conflicting thoughts trying to talk me out of it, I committed myself to running at least one step farther than the last time I ran.\" It was certainly all right if I ran more than one step further, but it couldn't be less than one step, no matter what. As it turns out, I never broke this rule, and by the end of the summer, I made it to five miles.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 127, "parent_id": "1f8f43360bf4dc15cbbc99734235bcc1", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "3383cfd3bfa19b2055d2bf82359658ae", "text": "But then, something really interesting and completely unanticipated happened before I got there. As I got closer to fulfilling my five-mile objective, little by little, the conflicting thoughts began to dissipate. Eventually they didn't exist at all. At that point, I found that if I wanted to run, I was completely free to do so without any mental resistance, conflict, or competing thoughts. Given what a struggle it had been, I was amazed (to say the least). The result: I went on to run on a very regular basis for the next 16 years. For those of you who may be interested, I don't run so much now because five years ago I decided to start playing ice hockey again. Hockey is an extremely strenuous sport. Sometimes I play as many as four times a week. Considering my age (over u\\j) and the level of exertion the sport requires, it usually takes me a day or two to recover, which doesn't leave much room for running any more. Now, if you take these experiences and put them into the context of what we now understand about the nature of beliefs, there are a number of observations we can make:", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 128, "parent_id": "1f8f43360bf4dc15cbbc99734235bcc1", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "d2171acce1a5510b75a4c585eebeb0e3", "text": "1. Initially, my desire to be a runner had no foundation of support in my mental system. In other words, there was no other source of energy (an energized concept demanding expression) consistent with my desire. 2. I actually had to do something to create that support. To create a belief that \"I am a runner\" required that I create a series of experiences consistent with the new belief. Remember that everything we think, say, or do contributes energy to some belief in our mental system. Each time I experienced a conflicting thought and was able to successfully refocus on my objective, with enough conviction to get me into my running shoes and out the door, I added energy to the belief that \"I am a runner.\" And, just as important, I inadvertently drew energy away from all of the beliefs that would argue otherwise. I say inadvertently because there are various techniques specifically designed to identify and de-activate conflicting beliefs, but at that time in my life, I didn't understand the underlying dynamics of the process of transformation I was going through. So, it wouldn't have occurred to me to avail myself of such techniques. 3. Now I can effortlessly (from a mental perspective) express myself as a runner, because \"I am a runner.\" That energized concept is now a functioning part of my identity. When I first started out, I happened to have a number of conflicting beliefs about running. As a result, I needed the technique of self-discipline to bfCCITic One. Now I don't need self-discipline because \"bHn\" a. rj^iicr\" 'c \"who I L - ~o am.\" When our bfeliers are completely aligned with our goals or desires, there's no source of conflicting energy. If there's no source of conflicting energy, then there's no source of distracting thoughts, excuses, rationalizations, justifications, or mistakes (conscious or subconscious). 4. Beliefs can be changed, and if it's possible to change one belief, then it's possible to change any belief, if you understand that you really aren't changing them, but are only transferring energy from one concept to another. (The form of the belief targeted for change remains intact.) Therefore, two completely contradictory beliefs can exist in your mental system, side by side. But if you've drawn the", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 128, "parent_id": "1f8f43360bf4dc15cbbc99734235bcc1", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "52b7886c3198c513b9968098f5420cc3", "text": "energy out of one belief and completely energized the other, no contradiction exists from a functional perspective; only the belief that the energy will have the capacity to act as a force on your state of mind, on your perception and interpretation of information, and your behavior. Now, the sole purpose of trading mechanically is to transform yourself into a consistently successful trader. If there's anything in your mental environment that's in conflict with the principles of creating the belief that \"I am a consistently successful trader,\" then you will need to employ the technique of self-discipline to integrate these principles as a dominant, functioning part of your identity. Once the principles become \"who you are,\" you will no longer need self-discipline, because the process of \"being consistent\" will become effortless. Remember that consistency is not the same as the ability to put on a winning trade, or even a string of winning trades for that matter, because putting on a winning trade requires absolutely no skill. All you have to do is guess correctly, which is no different than guessing the outcome of a coin toss, whereas consistency is a state of mind that, once achieved, won't allow you to \"be\" any other way. You won't have to try to be consistent because it will be a natural function of your identity. In fact, if you have to try, it's an indication that you haven't completely integrated the principles of consistent success as dominant, unconflicted beliefs. For example, predefining your risk is a step in the process of \"being consistent.\" If it takes any special effort to predefine your risk, if you have to consciously remind yourself to do it, if you experience any conflicting thoughts (in essence, trying to talk you out of doing it), or if you find yourself in a trade where you haven't predefined your risk, then this principle is not a dominant, functioning part of your identity. It isn't \"who you are.\" If it were, it wouldn't even occur to you not to predefine your risk. If and when all of the sources of conflict have been de-activated, there's no longer a potential for you to \"be\" any other way. What was once a struggle will become virtually effortless. At that point, it may seem to other people that you are so disciplined (because you can do something they find difficult, if not impossible), but the reality is that you aren't being disciplined at all; you are simply functioning from a different set of beliefs that compel you to behave in a way that is consistent with your desires, goals, or objectives.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 129, "parent_id": "1f8f43360bf4dc15cbbc99734235bcc1", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "96c39f59d836b9fff1d2191c0cb012f2", "text": "CREATING A BELIEF IN CONSISTENCY", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 129, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "0f69df24ed5767e3a4b26cb96199887f", "text": "Creating a belief that \"I am a consistent winner\" is the primary objective, but like my intention to become a runner, it's too broad and abstract to implement without breaking it down into a step-by-step process. So what I'm going to do is break this belief down into its smallest definable parts and then give you a plan to integrate each part as a dominant belief. The following sub-beliefs are the building Thinking Like a Trader 185 blocks that provide the underlying structure for what it means \"to be a consistent winner.\"", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 129, "parent_id": "96c39f59d836b9fff1d2191c0cb012f2", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "2205ba71717bf7ec6999534d5e2e48a2", "text": "I AM A CONSISTENT WINNER BECAUSE:", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 130, "parent_id": "96c39f59d836b9fff1d2191c0cb012f2", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "8af3a3b8330469a8f2569c3ef79022d7", "text": "1. I objectively identify my edges. 2. I predefine the risk of every trade. 3. I completely accept risk or I am willing to let go of the trade. 4. I act on my edges without reservation or hesitation. 5. I pay myself as the market makes money available to me. 6. I continually monitor my susceptibility for making errors. 7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 130, "parent_id": "96c39f59d836b9fff1d2191c0cb012f2", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "7dbaecd50a1013722a2c9b3c453663b0", "text": "These beliefs are the seven principles of consistency. To integrate these principles into your mental system at a functional level requires that you purposely create a series of experiences that are consistent with them. This is no different from the boy who wanted to play with dogs or my desire to be a runner. Before he could play with a dog, the boy first had to make several attempts just to get close to one. Eventually, as the balance of energy in his mental system shifted, he could play with dogs without any internal resistance. To become a runner, I had to create the experience of running in spite of everything inside me that argued otherwise. Eventually, as the energy shifted more and more in favor of this new definition of myself, running became a natural expression of my identity. Obviously, what we're trying to accomplish here is far more complex than becoming a runner or petting a dog, but the underlying dynamics of the process are identical. We'll start with a specific objective. The first principle of consistency is the belief, \"I objectively identify my edges.\" The key word here is objectively. Being objective means there's no potential to define, interpret, and therefore perceive any market information from either a painful or euphoric perspective. The way to be objective is to operate out of beliefs that keep your expectations neutral and to always take the unknown forces into consideration. Remember, you have to specifically train your mind to be objective and to stay focused in the \"now moment opportunity flow.\" Our minds are not naturally wired to think this way, so to be an objective observer you have to learn to think from the market's perspective. From the market's perspective, there are always unknown forces (traders) waiting to act on price movement. Therefore, from the market's perspective, \"every moment is truly unique,\" even though the moment may look, sound, or feel exactly the same as some moment logged away in your memory bank. The instant you either decide or assume you know what's going to happen next, you will automatically expect to be right. However, what you know, at least at the rational level of thinking, can only take into consideration your unique past, which may not have any relationship to what is actually happening from the markets perspective. At that point, any market information that is not consistent with your expectation has the potential to be defined and interpreted as painful. To avoid experiencing the pain,", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 130, "parent_id": "96c39f59d836b9fff1d2191c0cb012f2", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "6b4874b71d60470a73886f4875f419e4", "text": "your mind will automatically compensate, with both conscious and subconscious pain-avoidance mechanisms, for any differences between what you expect and what the market is offering. What you will experience is commonly referred to as an \"illusion.\" In a state of illusion, you are neither objective nor connected to the \"now moment opportunity flow.\" Instead, you become susceptible to committing all the typical trading errors (hesitating, jumping the gun, not predefining your risk, defining your risk but refusing to take the loss and letting the trade turn into a bigger loser, getting out of a winning trade too soon, not taking any profits out of a winning trade, letting a winning trade turn into a loser, moving a stop closer to your entry point, getting stopped out and watching the market trade back in your favor, or trading too large a position in relationship to your equity). The five fundamental truths about the market will keep your expectations neutral, focus your mind in the \"now moment opportunity flow\" (by disassociating die present moment from your past), and, therefore, eliminate your potential to commit these errors. When you stop making trading errors, you'll begin trusting yourself. As your sense of self-trust increases, so will your sense of selfconfidence. The greater your confidence, the easier it will be to execute your trades (act on your edges without reservation or hesitation). The five truths will also create a state of mind in which you will genuinely accept the risks of trading. When you genuinely accept the risks, you will be at peace with any outcome. When you're at peace with any outcome, you will experience a carefree, objective state of mind, where you make yourself available to perceive and act upon whatever the market is offering you (from its perspective) at any given \"now moment.\" The first objective is to integrate as a dominant belief, \"I objectively identify my edges.\" The challenge now is, how do you get there? How do you transform yourself into a person who can consistently think in the market's perspective? The process of transformation starts with your desire and your willingness to refocus on the object of your desire (self-discipline). Desire is a force. It does not have to coincide or agree with anything that you currently believe to be true about the nature of trading. A clear desire aimed squarely at a specific objective is a very powerful tool. You can use the force of your desire to create an entirely new version or dimension to your identity; shift energy between two or more conflicting concepts; or change the context or polarity of your memories from negative to positive. I'm sure you are familiar with the saying, \"Make up your mind.\" The implication of \"making up our minds\" is that we decide exactly what we desire with so much clarity (absolutely no lingering doubts) and with so much conviction that literally nothing stands in our way, either internally or externally. If there's enough force behind our resolve, it's possible to experience a major shift in our mental structure virtually instantaneously. De-activating internal conflicts is not a function of time; it's a function-focused desire (although it can take a considerable amount of time to get to the point where we really make up our minds). Otherwise, in the absence of extreme clarity and conviction, the technique of self-discipline, over time, will do the job quite nicely (if, of course, you're willing to use it). To get there, you must \"make up your mind,\"", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 131, "parent_id": "96c39f59d836b9fff1d2191c0cb012f2", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "339f2b3312b4d2342e7cf1253ac33b4d", "text": "with as much conviction and clarity as possible, that more than anything else you desire consistency (the state of mind of trust, confidence, and objectivity) from your trading. This is necessary because if you're like most traders, you're going to be up against some very formidable conflicting forces. For example, if you've been trading to get high from the euphoria of catching a big move, to impress your family and friends, to be a hero, to fulfill an addiction to random rewards, to be right about your predictions, or for any other reason that has nothing to do with being consistent, then you'll find the force of these other motivations will not only act as an obstacle making the trading exercise I'm about to give you veiy difficult, but it could very well be strong enough even to keep you from doing the exercise at all. Remember the boy who had no desire to be like the other children and interact with dogs? In essence, he decided to live with the active contradiction between his minimally charged positive belief that not all dogs are dangerous and his core, negatively charged belief that all dogs are dangerous. He had the ability to perceive friendly dogs, but at the same time found it impossible to interact with them. Unless he desires to change it, the imbalance of energy between these two beliefs will stay exactly as it is for his entire life. To even start this process, you have to want consistency so much that you would be willing to give up all the other reasons, motivations, or agendas you have for trading that aren't consistent with the process of integrating the beliefs that create consistency. A clear, intense desire is an absolute prerequisite if you're going to make this process work for you.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 132, "parent_id": "96c39f59d836b9fff1d2191c0cb012f2", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "59c2a6ff997fea08246d07dec3bf15ca", "text": "EXERCISE: LEARNING TO TRADE AND EDGE LIKE A CASINO\u2019", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 132, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "cb315f00b0082610fb88583265d2a3b9", "text": "The object of this exercise is to convince yourself that trading is just a simple game of probabilities (numbers), not much different from pulling the handle of a slot machine. At the micro level, the outcomes to individual edges are independent occurrences and random in relationship to one another. At the macro level, the outcomes over a series of trades will produce consistent results. From a probabilities perspective, this means that instead of being the person playing the slot machine, as a trader, you can be the casino, if:", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 132, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "ListItem", "element_id": "42499683f0ac8d81ad06ff8645efd1a0", "text": "1. you have an edge that genuinely puts the odds of success in your favor; 2. you can think about trading in the appropriate manner (the five fundamental truths); and 3. you can do everything you need to do over a series of trades. Then, like the casinos, you will own the game and be a consistent winner.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 132, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "5c5f80d50d7710f6e671f6a723bb570c", "text": "SETTING UP THE EXERCISE Pick a market. Choose one actively traded stock or futures contract to trade. It doesn't matter what it is, as long as it's liquid and you can afford the margin requirements for trading at least three hundred shares or three futures contracts per trade.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 133, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "d42679adaf653f3046b270958cd8d28d", "text": "Choose a set of market variables that define an edge. This can be any trading system you want. The trading system or methodology you choose can be mathematical, mechanical, or visual (based on patterns in price charts). It doesn't matter whether you personally design the system or purchase it from someone else, nor do you need to take a long time or be too picky trying to find or develop the best or right system. This exercise is not about system development and it is not a test of your analytical abilities. In fact, the variables you choose can even be considered mediocre by most traders' standards, because what you are going to learn from doing this exercise is not dependent upon whether you actually make money. If you consider this exercise an educational expense, it will cut down on the amount of time and effort you might otherwise expend trying to find the most profitable edges. For those of you who might be wondering, I'm not going to make any specific recommendations about what system or variables you should use, because I assume that most of the people reading this book are already well schooled in technical analysis. If you need additional assistance, there are hundreds of books available on the topic, as well as system vendors who are more than willing to sell you their ideas. However, if you've made a genuine attempt to do this on your own but are still having problems picking a system, you can contact me at markdouglas.com or tradinginthezone.com and I will make some recommendations. Whatever system you choose to use has to fit within the following specifications.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 133, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "3b7c734d33877c653aa807026ed306f9", "text": "Trade Entry. The variables you use to define your edge have to be absolutely precise. The system has to be designed so that it does not require you to make any subjective decisions or judgments about whether your edge is present. If the market is aligned in a way that conforms with the rigid variables of your system, then you have a trade; if not, then you don't have a trade. Period! No other extraneous or random factors can enter into the equation.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 133, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "4558a77c2f86b0429866ccf36aa45d0e", "text": "Stop-Loss Exit. The same conditions apply to getting out of a trade that's not working. Your methodology has to tell you exactly how much you need to risk to find out if the trade is going to work. There is always an optimum point at which the possibility of a trade not working is so diminished, especially in relationship to the profit potential, that you're better off taking your loss and getting your mind clear to act on the next edge. Let the market structure determine where this optimum point is, rather than using an arbitrary dollar amount that you are willing to risk on a trade. In any case, whatever system you choose, it has to be absolutely exact, requiring no subjective decision making.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 133, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "0be74a99bc881dffa8f98308ff804046", "text": "Again, no extraneous or random variables can enter into the equation.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 134, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "b880659bf00c7304b5deb90b8628efc5", "text": "Time Frame. Your trading methodology can be in any time frame that suits you, but all your entry and exit signals have to be DUSCCi Hi cne same time frame. For example, if you use variables that identify a particular support and resistance pattern on a 30-minute bar chart, then your risk and profit objective calculations also have to be determined in a 30-minute time frame. However, trading in one time frame does not preclude you from using other time frames as filters. For example, you could have as a filter a rule that states you're only going to take trades that are in the direction of the major trend. There's an old trading axiom that \"The trend is your friend.\" It means that you have a higher probability of success when you trade in the direction of the major trend, if there is one. In fact, the lowest-risk trade, with the highest probability of success, occurs when you are buying dips (support) in an up-trending market or selling rallies (resistance) in a down-trending market. To illustrate how this rule works, let's say that you've chosen a precise way of identifying support and resistance patterns in a 30- minute time frame as your edge. The rule is that you are only going to take trades in the direction of the major trend. A trending market is defined as a series of higher highs and higher lows for an up-trending market and a series of lower highs and lower lows for a downtrending market. The longer the time frame, the more significant the trend, so a trending market on a daily bar chart is more significant than a trending market on a 30-minute bar chart. Therefore, the trend on the daily bar chart would take precedence over the trend on the 30-minute bar chart and would be considered the major trend. To determine the direction of the major trend, look at what is happening on a daily bar chart. If the trend is up on the daily, you are only going to look for a sell-off or retracement down to what your edge defines as support on the 30-minute chart. That's where you will become a buyer. On the other hand, if the trend is down on the daily, you are only going to look for a rally up to what your edge defines as a resistance level to be a seller on the 30-minute chart. Your objective is to determine, in a down- trending market, how far it can rally on an intraday basis and still not violate the symmetry of the longer trend. In an up-trending market, your objective is to determine how far it can sell off on an intraday basis without violating the symmetry of the longer trend. There's usually very little risk associated with these intraday support and resistance points, because you don't have to let the market go very far beyond them to tell you the trade isn't working.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 134, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "8a8b6cdcb86b2b53db19c8d3bbfdd466", "text": "Taking Profits. Believe it or not, of all the skills one needs to learn to be a consistently successful trader, learning to take profits is probably the most difficult to master. A multitude of personal, often very complicated psychological factors, as well as the effectiveness of one's market analysis, enter into the equation. Unfortunately, sorting out this complex matrix of issues goes way beyond the scope of this book. I point this out so that those of you who might be inclined to beat yourselves up for leaving money on the table can relax and give yourselves a break. Even after you've acquired all the other skills, it might take a very long time before you get this one down pat. Don't despair. There is a way to", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 134, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "f75f5febb7e44f8c2095bdb7a9107b6a", "text": "set up a profit-taking regime that at least fulfills the objective of the fifth principle of consistency (\"I pay myself as the market makes money available to me\"). If you're going to establish a belief in yourself that you're a consistent winner, then you will have to create experiences that correspond with that belief. Because the object of the belief is winning consistently, how you take profits in a winning trade is of paramount importance. This is the only part of the exercise in which you will have some degree of discretion about what you do. The underlying premise is that, in a winning trade, you never know how far the market is going to go in your direction. Markets rarely go straight up or straight down. (Many of the NASDAQ Internet stocks in the fall of 1999 were an obvious exception to this statement.) Typically, markets go up and then retrace some portion of the upward move; or go down and then retrace some portion of the downward move. These proportional reiracerr^nts can make it very difficult to stay in a winning trade. You would have to be an extremely sophisticated and objective analyst to make the distinction between a normal retracement, when the market still has the potential to move in the original direction of your trade, and a retracement that isn't normal, when the potential for any further movement in the original direction of your trade is greatly diminished, if not nonexistent. If you never know how far the market is going to go in your direction, then when and how do you take profits? The question of when is a function of your ability to read the market and pick the most likely spots for it to stop. In the absence of an ability to do this objectively, the best course of action from a psychological perspective is to divide your position into thirds (or quarters), and scale out the position as the market moves in your favor. If you are trading futures contracts, this means your minimum position for a trade is at least three (or four) contracts. For stocks, the minimum position is any number of shares that is divisible by three (or four), so you don't end up with an odd-lot order. Here's the way I scale out of a winning position. When I first started trading, especially during the first three years (1979 through 1981), I would thoroughly and regularly analyze the results of my trading activities. One of the things I discovered was that I rarely got stopped out of a trade for a loss, without the market first going at least a little way in my direction. On average, only one out of every ten trades was an immediate loser that never went in my direction. Out of the other 25 to 30 percent of the trades that were ultimately losers, the market usually went in my direction by three or four tics before revising and stopping me out. I calculated that if I got into the habit of taking at least a third of my original position off every time the market gave me those three or four tics, at the end of the year the accumulated winnings would go a long way towards paying my expenses. I was right. To this day, I always, without reservation or hesitation, take off a portion of a winning position whenever the market gives me a little to take. How much that might be depends on the market; it will be a different amount in each case. For example, in Treasury bond futures, I take a third of my position off when I get four tics. In the S&P futures, I take a third off for a profit of one and a half to two full points. In a bond trade, I usually don't risk more than six tics to find out if the trade is going to work. Using a three-contract trade as an", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 135, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "ba8b60d8a98e5467975729e17a6b4f9c", "text": "example, here's how it works: If I get into a position and the market immediately goes against me without giving me at least four tics first, I get stopped out of the trade for an 18-tic loss, but as I've indicated, this doesn't happen often. More likely, the trade goes in my favor by some small amount before becoming a loser. If it goes in my favor by at least four tics, I take those four tics on one contract. What I have done is reduce my total risk on the other two contracts by 10 tics. If the market then stops me out of the last two contracts, the net loss on the trade is only 8 tics. If I don't get stopped out on the last two contracts and the market moves in my direction, I take the next third of the position off at some predetermined profit objective. This is based on some longer time frame support or resistance, or on the test of a previous significant high or low. When I take profits on the second third, I also move the stop-loss to my original entry point. Now I have a net profit on the trade regardless of what happens to the last third of the position. In other words, I now have a \"risk-free opportunity.\" I can't emphasize enough nor can the publisher make the words on this page big enough to stress how important it is for you to experience the state of \"risk-free opportunity.\" When you set up a situation in which there is \"risk-free opportunity,\" there's no way to lose unless something extremely unusual happens, like a limit up or limit down move through your stop. If, under normal circumstances, there's no way to lose, you get to experience what it really feels like to be in a trade with a relaxed, carefree state of mind. To illustrate this point, imagine that you are in a winning trade; the market made a fairly significant move in your direction, but you didn't take any profits because you thought it was going even further. However, instead of going further, the market trades all the way back to or very close to your original entry point. You panic and, as a result, liquidate the trade, because you don't want to let what was once a winning trade turn into a loser. But as soon as you're out, the market bounces right back into what would have been a winning trade. If you had locked in some profits by scaling out, putting yourself in a riskfree opportunity situation, it s very unlikely that you would have panicked or felt any stress or anxiety for that matter. I still have a third of my position left. What now? I look for the most likely place for the market to stop. This is usually a significant high or low in a longer time frame. I place my order to liquidate just below that spot in a long position or just above that spot in a short position. I place my orders just above or just below because I don't care about squeezing the last tic out of the trade. I have found over the years that trying to do that just isn't worth it. One other factor you need to take into consideration is your risk-to-reward ratio. The risk-to-reward ratio is the dollar value of how much risk you have to take relative to the profit potential. Ideally, your risk-to-reward ratio should be at least 3:1, which means you are only risking one dollar for every three dollars of profit potential. If your edge and the way you scale out of your trades give you a 3:1 risk-to-reward ratio, your winning trade percentage can be less than 50 percent and you will still make money consistently. A 3:1 risk-to-reward ratio is ideal. However, for the purposes of this exercise, it doesn't matter what it is, nor does it matter how effectively you scale out, as long as you do it. Do the best you can to pay yourself at reasonable profit levels when the market makes the money available. Every portion of a trade that you take off as a", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 136, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "8e809d47ba306d7fc6eaa2676bc4a262", "text": "winner will contribute to your belief that you are a consistent winner. All the numbers will eventually come into better alignment as your belief in your ability to be consistent becomes stronger.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 137, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "b759d6b2b78f41e7fc4d1c847d413460", "text": "Trading in Sample Sizes. The typical trader practically lives or dies (emotionally) on the results of the most recent trade. If it was a winner, he'll gladly go to the next trade; if it wasn't, he'll start questioning the viability of his edge. To find out what variables work, how well they work, and what doesn't work, we need a systematic approach, one that doesn't take any random variables into consideration. This means that we have to expand our definition of success or failure from the limited trade-by-trade perspective of the typical trader to a sample size of 20 trades or more. Any edge you decide on will be based on some limited number of market variables or relationships between those variables that measure the market's potential to move either up or down. From the market's perspective, each trader who has the potential to put on or take off a trade can act as a force on price movement and is, therefore, a market variable. No edge or technical system can take into consideration every trader and his reasons for putting on or taking off a trade. As a result, any set of market variables that defines an edge is like a snapshot of something very fluid, capturing only a limited portion of all the possibilities. When you apply any set of variables to the market, they may work very well over an extended period of time, but after a while you may find that their effectiveness diminishes. That's because the underlying dynamics of the interaction between all the participants (the market) is changing. New traders come into the market with their own unique ideas of what is high and what is low, and other traders leave. Little by little, these changes affect the underlying dynamics of how the market moves. No snapshot (rigid set of variables) can take these subtle changes into consideration. You can compensate for these subtle changes in the underlying dynamics of market movement and still maintain a consistent approach by trading in sample sizes. Your sample size has to be large enough to give your variables a fair and adequate test, but at the same time small enough so that if their effectiveness diminishes, you can detect it before you lose an inordinate amount of money. I have found that a sample size of at least 20 trades fulfills both of these requirements.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 137, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "1f04a7eababb6fd7ad406e829126071d", "text": "Testing. Once you decide on a set of variables that conform to these specifications, you need to test them to see how well they work. If you have the appropriate software to do this, you are probably already familiar with the procedures. If you don't have testing software, you can either forward test your variables or hire a testing service to do it for you. If you need a recommendation for a testing service, contact me at markdouglas.com or tradinginthezone.com for a referral. In any case, keep in mind that the object of the exercise is to use trading as a vehicle to learn how to think objectively (in the market's perspective), as if you were a casino operator. Right now, the bottom-line performance of your system isn't very important, but it is important that you have a good idea of what you can expect in the way of a win-to-loss ratio (the number of winning trades relative to the number of losing trades", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 137, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "c8519b2f34d3b76c62e5f57dc7d8c677", "text": "for your sample size).", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 138, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "076e3970d82754cf452f5b514122500f", "text": "Accepting the Risk. A requirement of this exercise is that you know in advance exactly what your risk is on each trade in your 20- trade sample size. As you now know, knowing the risk and accepting the risk are two different things. I want you to be as comfortable as possible with the dollar value of the risk you are taking in this exercise. Becuse the exercise requires that you use a 20-trade sample size, the potential risk is that you will lose on all 20 trades. This is obviously the worst-case scenario. It is as likely an occurrence as that you willwin on all 20 trades, which means it isn't very likely. Nevertheless, it is a possibility. Therefore, you should set up the exercise in such a way that you can accept the risk (in dollar value) of losing on all 20 trades. For example, if you're trading S&P futures, your edge might require that you risk three full points per contract to find out if the trade is going to work. Since the exercise requires that you trade a minimum of three contracts per trade, the total dollar value of the risk per trade is $2,250, if you use big contracts. The accumulated dollar value of risk if you lose on all 20 trades is $45,000, You may not be comfortable risking $45,000 on this exercise. If you're not comfortable, you can reduce the dollar value of the risk by trading S&P mini contracts (E- Mini). They are one-fifth the value of the big contracts, so the total dollar value of the risk per trade goes down to $450 and the accumulated risk for all 20 trades is $9,000. You can do the same thing if you are trading stocks: Just keep on reducing the number of shares per trade until you get to a point where you are comfortable with the total accumulated risk for all 20 trades. What I don't want you to do is change your established risk parameters to satisfy your comfort levels. If, based on your research, you have determined that a three-point risk in the S&Ps is the optimum distance you must let the market trade against your edge to tell you it isn't worth staying in the position, then leave it at three points. Change this variable only if it is warranted from a technical analysis perspective. If you've done everything possible to reduce your position size and find that you still aren't comfortable with the accumulated dollar value of losing on all 20 trades, then I suggest you do the exercise with a simulated brokerage service. With a simulated brokerage service, everything about the process of putting on and taking off trades, including fills and brokerage statements, is exactly the same as with an actual brokerage firm, except that the trades are not actually entered into the market. As a result, you don't actually have any money at risk. A simulated brokerage service is an excellent tool to practice with in real time, under real market conditions; it is also an excellent tool for forward testing a trading system. There may be others, but the only service of this nature that I know of is", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 138, "parent_id": "59c2a6ff997fea08246d07dec3bf15ca", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "637caf62073872baaebc16137d7c6e93", "text": "Auditrack.com.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 138, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "32abb806ff82808814e30c90e594b5e5", "text": "Doing the Exercise. When you have a set of variables that conforms to the specifications described, you know exactly what each trade is going to cost to find out if it's going to work, you have a plan for taking profits, and you know what you can expect as a win-loss ratio for your sample size, then you are", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 138, "parent_id": "637caf62073872baaebc16137d7c6e93", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "1a8ad58ad3ddb4ea16c1cd83fef9e5d3", "text": "ready to begin the exercise. The rules are simple: Trade your system exactly as you have designed it. This means you have to commit yourself to trading at least the next 20 occurrences of your edge\u2014not just the next trade or the next couple of trades, but all 20, no matter what. You cannot deviate, use or be influenced by any other extraneous factors, or change the variables that define your edge until you have completed a full sample size. By setting up the exercise with rigid variables that define your edge, relatively fixed odds, and a commitment to take every trade in your sample size, you have created a trading regime that duplicates how a casino operates. Why do casinos make consistent money on an event that has a random outcome? Because they know that over a series of events, the odds are in their favor. They also know that to realize the benefits of the favorable odds, they have to participate in every event. They can't engage in a process of picking and choosing which hand of blackjack, spin of the roulette wheel, or roll of the dice they are going to participate in, by trying to predict in advance the outcome of each of these individual events. If you believe in the five fundamental truths and you believe that trading is just a probability game, not much different from pulling the handle of a slot machine, then you'll find that this exercise will be effortless\u2014effortless because your desire to follow through with your commitment to take every trade in your sample size and your belief in the probabilistic nature of trading will be in complete harmony. As a result, there will be no fear, resistance, or distracting thoughts. What could stop you from doing exactly what you need to do, when you need to do it, without reservation or hesitation? Nothing! On the other hand, if it hasn't already occurred to you, this exercise is going to create a head-on collision between your desire to think objectively in probabilities and all the forces inside you that are in conflict with this desire. The amount of difficulty you have in doing this exercise will be in direct proportion to the degree to which these conflicts exist. To one degree or another, you will experience the exact opposite of what I described in the previous paragraph. Don't be surprised if you find your first couple of attempts at doing this exercise virtually impossible. How should you handle these conflicts? Monitor yourself and use the technique of self-discipline to refocus on your objective. Write down the five fundamental truths and the seven principles of consistency, and keep them in front of you at all times when you are trading. Repeat them to yourself frequently, with conviction. Every time you notice that you are thinking, saying, or doing something that is inconsistent with these truths or principles, acknowledge the conflict. Don't try to deny the existence of conflicting forces. They are simply parts of your psyche that are (understandably) arguing for their versions of the truth. When this happens, refocus on exactly what you are trying to accomplish. If your purpose is to think objectively, disrupt the association process (so you can stay in the \"now moment opportunity flow\"); step through your fears of being wrong, losing money, missing out, and leaving money on the table (so you can stop making errors and start trusting yourself), then you'll know exactly what you need to do. Follow the rules of your trading regime as best you can. Doing exactly what your rules call for while focused on the five fundamental truths will eventually resolve all your conflicts about the true nature of trading. Every time you actually do", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 139, "parent_id": "637caf62073872baaebc16137d7c6e93", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "2d2846ac6d0be7b7fa9c6f8262637bfd", "text": "something that confirms one of the five fundamental truths, you will be drawing energy out of the conflicting beliefs and adding energy to a belief in probabilities and in your ability to produce consistent results. Eventually, your new beliefs will become so powerful that it will take no conscious effort on your part to think and act in a way that is consistent with your objectives. You will know for sure that thinking in probabilities is a functioning part of your identity when you will be able to go through one sample size of at least 20 or more trades without any difficulty, resistance, or conflicting thoughts distracting you from doing exactly what your mechanical system calls for. Then, and only then, will you be ready to move into the more advanced subjective or intuitive stages of trading.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 140, "parent_id": "637caf62073872baaebc16137d7c6e93", "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "Title", "element_id": "7d1c7c6a0f952b8c02320af0169ecd58", "text": "A FINAL NOTE", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 140, "filename": "Trading in the Zone - Mark Douglas.pdf" } }, { "type": "NarrativeText", "element_id": "39202ac3d62a7ff1239495f1fb7a617a", "text": "Try not to prejudge how long it will take before you can get through at least one sample size of trades, following your plan without deviation, distracting thoughts, or hesitation to act. It will take as long as it takes. If you wanted to be a professional golfer, it wouldn't be unusual to dedicate yourself to hitting 10,000 or more golf balls until the precise combination of movements in your swing were so ingrained in your muscle memory that you no longer had to think about it consciously. When you're out there hitting those golf balls, you aren't playing an actual game against someone or winning the big tournament. You do it because you believe that skill acquisition and practice will help you win. Learning to be a consistent winner as a trader isn't any different. I wish you great prosperity, and would say \"good luck,\" but you really won't need luck if you work at acquiring the appropriate skills.", "metadata": { "filetype": "application/pdf", "languages": [ "eng" ], "page_number": 140, "parent_id": "7d1c7c6a0f952b8c02320af0169ecd58", "filename": "Trading in the Zone - Mark Douglas.pdf" } } ]