A Review of Trading in the Zone

[marc walton]

A Review of Trading in the Zone – One of the BEST Forex Books Ever. Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude

By Mark Douglas. Notes supplemented by Josh Duesterbeck

Successful traders have confidence in their trades. They trust themselves to do what needs to be done without hesitation. They do not fear the erratic behavior of the markets. They learn to focus on opportunities that will help them make profit instead of focusing on the information that reinforces their fears.

The largest group of consistent losers is composed primarily of doctors, lawyers, engineers, scientists, CEOs, wealthy retirees, and entrepreneurs.

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.

You will be profoundly more successful once you fully accept the risks to trading in each trade.

For the best traders, the risks inherent in trading do not cause them to lose their discipline, focus, or sense of confidence.

Most Common Fears people have: Dying, public speaking, losing money, being wrong.

Learning to accept the risk is a trading skill – the most important you can learn.

The Four Primary Trading Fears

Being Wrong
Losing Money
Missing Out
Leaving Money on the Table.

How often do we create rules that we have to follow? (not often, which makes this a difficult job). The structure that we need to guide our behavior has to originate in your mind – as a conscious act of free will. This is where many problems begin.

The unwillingness to create rules
Failure to take responsibility
Addiction to random rewards
External vs. internal control
We cannot control our surroundings but we can control ourselves and our reactions.
Reacting to a Loss

I must believe that there is no possible way to avoid a loss, because losing is a natural consequence of trading. If I accept this risk and plan accordingly, I can have a losing trade without it affecting my attitude and confidence.

If I don’t accept the risk, it means I only considered the possibility that the market will go in my favor which is unrealistic. This is how I can feel emotionally hurt. The more energy I had about the trade, the worse it hurts.

Projecting my hopes, dreams, desires, and dreams into a trade will cause me to feel angry, frustrated, and emotionally distraught.

I have to learn for myself how to get what I want out of the markets. The first step is to take full and absolute responsibility. This means I must believe that all outcomes are self-generated. By doing this, I’ll perceive the endless stream of opportunities to enter/exit trades without self-criticism or regret. This will help put me in the best frame of mind to act in my best interest and learn from my experiences.

It’s when I’m winning that I am the most susceptible to making a mistake, overtrading, putting on too large a position, violating my rules, etc. I fall into a state of overconfidence and euphoria.


Definition of a Winning Attitude:

A positive expectation of my efforts with an acceptance that whatever results I get are a perfect reflection of my level of development and what I need to learn to do better.
I am responsible for what I have learned, as well as for everything I haven’t learned yet that’s waiting to be discovered by me.

A winning attitude opens me up to what I need to learn. Taking responsibility is the cornerstone of a winning attitude.

While the natural tendency is to think that I am trying to get what I want from the market, the best traders don’t try to get anything from the market; they simply make themselves available so they can take advantage of whatever the market is offering at any given moment.

Accepting the risk means accepting the consequences of your trades without emotional discomfort or fear.

When I make myself available to take advantage of an opportunity, I don’t impose any limitations or expectations on the market’s behavior. I must create a state of mind that is not affected by the market’s behavior.

Any degree of struggle, trying or fear associated with trading will take me out of the moment and flow, and therefore, diminish my results.

I shouldn’t perceive anything the market can do as threatening. If nothing is threatening, I have nothing to fear. If I’m not afraid, I don’t need courage. If I’m not stressed, I don’t need nerves of steel. And if I’m not afraid of my potential to get reckless (because I have the appropriate monitoring mechanisms in place), then I don’t need self-control.
Perceptions

Since memories, beliefs, and distinctions do not exist as physical matter, they must exist as some form of energy.

If I can accept the fact that the market doesn’t generate positively or negatively charged information, then the only other way info can take on a positive or negative charge is in your mind

Our minds constantly associate what’s outside of us (information) with something that’s already in our mind, making it seem as if the outside circumstance is exactly the same as the memory, distinction, or belief in our head. We must take conscious control of this association process in order to help develop and maintain a state of mind that perceives the opportunity flow of the market, free of emotional pain or overconfidence.

Continued in Part 2

[marc walton]

At the very core of one’s ability

to trade without fear or overconfidence,
Perceive what the market is offering from its perspective,
Stay completely focused in the ‘now moment opportunity flow,’ and
Spontaneously enter the ‘zone’ is a strong virtually unshakable belief in an uncertain outcome with an edge in one’s favor.

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 opportunities to trade in the direction of the trend don’t become visible until we are out of the losing trade.

To be in the Zone:

Your mind and the market are in sync.
You sense what the market is about to do as if there is no separation between yourself and the collective consciousness of everyone else in the market.
All price improvement is a function of what individual traders believe about what is high and what is low.

The best traders enter a trade knowing 3 things:


Predefined risk parameters
Able to cut his losses
Has a plan to take profits
ANYTHING CAN HAPPEN

Without this belief, my mind will automatically cause me to avoid, block, or rationalize away any information that indicates the market may do something I have not accepted as possible. (If I believe anything is possible, then there is nothing for my mind to avoid.)

By establishing a belief that anything can happen, I will be training my mind to think in probabilities.

Paradox: Random Outcome, Consistent Results

You must have 2 layers of belief:

Micro level – Must believe in the uncertainty and unpredictability of the outcomes of each individual trade.
Macro level – Must believe that the outcome over a series of trades placed is relatively certain and predictable.

The degree of certainty is based on the fixed or constant variables that are known in advance and are specifically designed to give an advantage (edge). The better the edge, the more certainty.

The most common of all trading errors is not defining the risk before going into a trade.

If I enter a trade knowing it’ll be a winner, what I’m saying is that I know who is in the market and who’s about to come into the market. I know what they believe is high or low. I know their capacity to act on those beliefs and can determine how the actions of each individual will affect price movement. This is absurd and not realistic.

Expectations come from what we know. When we expect something, we are projecting out into the future what we believe to be true. When expectations are not fulfilled, we have emotional pain.

Paradox: 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 s othat we can perceive with the greatest degree of clarity and objectivity, what the market is communicating to us from its perspective.

A probabilistic mind-set pertaining to trading consists of 5 fundamental truths:


1. Anything can happen

2. You don’t need to know what is going to happen next in order to make money

3. There is a random distribution between wins and losses for any given set of variables that define an edge

4. An edge is nothing more than an indication of a higher probability of 1 thing happening over another

5. Every moment in the market is unique

Keep in mind that your potential to experience emotional pain comes from the way you define and interpret the information you’re exposed to.

Knowing when you will exit a trade (stop loss) is one major way of knowing if you’ve fully accepted the risk of the trade.

Making yourself available means trading from the perspective that you have nothing to prove. You aren’t trying to win or avoid losing.

3 Primary Characteristics of Beliefs

Beliefs seem to take on a life of their own and, therefore resist any force that would alter their present form.
All active beliefs demand expression.
Beliefs keep on working regardless of whether or not we are consciously aware of their existence in our mental environment.

3 Stages of a Trader


Mechanical Stage
Build the self-trust necessary to operate in an unlimited environment
Learn to flawlessly execute a trading system.
Train my mind to think in probabilities (Through believing the 5 truths)
Create a strong, unshakable belief in my consistency as a trader.
Subjective Stage
Intuitive Stage

Try as hard as I can to stay focused on what I’m trying to accomplish, and in doing so, I will de-activate the conflicting belief and strengthen the belief that is consistent with my desire:

I AM A CONSISTENTLY SUCCESSFUL TRADER
I AM A CONSISTENT WINNER BECAUSE:

I objectively identify my edge.
I predefine the risk of every trade.
I completely accept the risk (I am willing to let go of the trade).
I act on my edge without reservation or hesitation.
I pay myself as the market makes money available to me.
I continually monitor my susceptibility for making errors.
I understand the absolute necessity of these principles of consistency, and therefore, I never violate them.
There are copies of the book available on amazon if you would like to read the full thing. The most important part is FOLLOW THE RULES!!