How to improve trading from Mark Douglas
1. The four trading fears
95% of the trading errors you are likely to make will stem from your
attitudes about being wrong, losing money, missing out, and leaving money on
the table – the four trading fears
2. The proverbial empathy
gap
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.
3. 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.
4. The flaws of fundamental
analysis
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.
5. A good trader is a
confident trader
I’ve worked with countless traders who would spend hours doing market
analysis and planning trades for the next day Then, instead of putting on
the trades they planned, they did something else. The trades they did put
on were usually ideas from friends or tips from brokers. I probably don’t have
to tell you that the trades they originally planned, but didn’t act on,
were usually the big winners of the day. This is a classic example of how
we become susceptible to unstructured, random trading—because we want to
avoid responsibility.
6. Anything could happen
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.
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.
7. Most people are obsessed
with being right
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 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.
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.
8. Trading has nothing to do
with being right or wrong on any individual trade
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.
9. 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.
10. Market losses are simply
the cost of doing business
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 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 very 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.