Trading in the Zone Mark Douglas Agenda Agenda Why are we so rubbish? What makes traders successful? How to execute them? Testing if you really understand the book 在座各位都係垃圾 Common errors in trades Have you ever... Trading without a plan? 唔set SL? Set左SL但走去郁佢? When the price goes from losing back to entry point, you immediately close the position 打大左個lot size? 輸左搞到好嬲豬? But were you like this when you first started? Novice trader Skilled people usually win but 黑馬 is not uncommon Novice trader "We start out carefree, then become scared, and our fears continually diminish our potential." Novice traders may end up is usual beliefs: "need to avoid losing money! But this is impossible because we cannot avoid risks (unless we do not trade at all) Then how to break the vicious cycle? Novice trader BREAKING THE CYCLE: It's not about knowledge but perspective. How to establish good mentality and thus be a successful trader? First, define "successful trader": Definition: INCORRECT: profitable Trader Classification CORRECT: consistently profitable (because you do not need skills to win... just like 賭大細) So, CONSISTENCY is the key!!! P.S. Not that being consistent can lead to success immediately but being consistent allows you to eliminate errors 30-40% 40-50% 10-30% Consistent Boom and Consistent loser buster winner Successful trader Being "boom and buster" is dangerous! In an experiment: Fixed reward – keep doing Fixed punishment – keep avoiding Random reward – keep doing Random reward is a barrier to forming consistency because it is attractive for us to keep doing what we are doing now Therefore, we need CONSISTENCY. Trader Classification 30-40% 40-50% 10-30% Consistent Boom and Consistent loser buster winner What is consistency? I AM A CONSISTENT WINNER BECAUSE 1. I objectively identify my edges. 2. I predefine the risk of every trade. 3. I completely accept the 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. If adding criteria other than your own system, you're adding random variables to your trading regime, not knowing what works and what doesn't I AM A CONSISTENT WINNER BECAUSE 我有accept risk架 我次次都set SL~ 2. I predefine the risk of every trade. WRONG 3. I completely accept the risk or I am willing to let go of the trade. 1. I objectively identify my edges. 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. Consistent winner 正確 明白 客觀 失敗 市場 自省 觀 主導 Consistent winner Being objective 正確 明白 客觀 失敗 市場 自省 觀 主導 Being objective... Means eliminating fear-based errors Market information does not generate happy or painful information. It is you who interpret it and feel the emotions Therefore, how to interpret information is important. Example: A: happy! Because he chose to short B: unhappy! Because he chose to long and now SL We have to see the market objectively and without distortion, so we must not feel fearful 正確失敗觀: Why should I not be disappointed when 估錯方向/輸錢? Consistent winner 正確 明白 客觀 失敗 市場 自省 觀 主導 How does the market work? Market = zero-sum game (you win = he loses; he wins = you lose) 升友 > 淡友 = 升; 升友 < 淡友 = 跌 If we know the number of 升友 vs 淡友, and the moments that they will intervene the market, we can know the market's direction!! But the above thought is IMPOSSIBLE as we will never know all the variables How does the market work? Given that: Every trader contributes to moving prices Every trader wants to win money It means: Anything can happen. Every moment in the market in unique. Although sometimes situations and graphs look alike, each moment is still unique. Things won't be in your favor. "Market has no responsibililty and is impossible to let everyone win every time." Otherwise: you are expecting 全部人讓晒你 :) How does the market work? **Story from a trader: A asked B to guess the market's direction B guessed uptrend A made a call and then the market dropped a lot The market is UNCERTAIN!!! CORRECT mindset = "你唔知架喎"; truly accepting the risk P.S. We don't need to predict the market correctly in order to make money. That’s why we have to accept risks Definition: Accepting consequences of your trades WITHOUT emotional discomfort or fear Example: 1. When 輸錢, you thought: 早知xxx啦 2. 輸錢 and felt disappointed but was able to comfort yourself and got back on the track WRONG WRONG 「早知」「如果」「應該」implies there were some moments invisible to you and these moments become painfully evident after the fact that the oportunity is long gone Truly accepting risks is crucial... Because good trades should be effortless and without struggles For those who use too many indicators can be struggling For those who are fearful can be struggling too The market works in an uncertain way. If we truly believe: The only certainty in the market is UNCERTAINTY 輸錢 is always possible Then we will = Not pretend to know outcomes Not ignore possible outcomes But think in probabilities Understand there is random distribution between wins and loses Take every edge without hesitation and objectively 所有決定都係由自己(而非市場)負責, 要夠M If you understand it, you should not... •Refuse to set SL •Move the SL •Hesitate to cut loss •Jump the gun 早左走 •Interpret not-yet-complete signals •Bet too much money per lot •Not systematically take profits •Feel betrayed by the market 市場無常 所以更要尊重市場 俾市場主導 Consistent winner 正確 明白 客觀 失敗 市場 自省 觀 主導 If you let the market decide... You should always "make yourself available" (i.e. 常在線!!) You know you never know, so you consciously open yourself up to find out what will happen next, instead of thinking you know You focus in the 'now moment opportunity flow' You understand that you are just a small little bird in a 雀仔群 and you alone cant switch the direction but to observe everyone. Feel the market! Feel the 雀仔群! (aka in the zone) Consistent winner 如何自省 (自屌)? 正確 明白 客觀 失敗 市場 自省 觀 主導 Monitoring your susceptibility for making errors The very first step = Notice self-thought / observe yourself e.g. using comment box in tradingview (Be an objective observer of your own thoughts) Because in order to correct mistakes, you have to first catch them before committing **Do not judge or criticize 我知我應該要XXX, 但我都仲係XXX喎, 點算? How to effectively change your belief? Consistent winner 正確 明白 客觀 失敗 市場 自省 觀 主導 方法 同自己講要客觀D 話俾自己聽失敗is okay WRONGGGGG First thing first, what is belief? Belief is an energy that can store POSITIVE / NEUTRAL / NEGATIVE energy. 狗仔好得意 狗仔好惡 Beliefs shape our perception and interpretation, and thus shape our lives. 狗仔好得意 莎莎都會好得意 莎莎乖: 果然係得意 莎莎惡: 咁岩莎莎惡姐/ 惡都好得意 繼續同狗仔玩 狗仔好惡 莎莎會好惡 莎莎乖: 咁岩莎莎姐/ 佢睇落都係好惡 莎莎惡: 果然真係好惡 繼續避免同狗仔玩 First thing first, what is belief? One more example from the book - "Gotcha Chicago" at Michigan Avenue: Someone gave out free money Held a sign "Free money. Today Only." and asked people "would you take some money?" Belief Interpretation Behavior There is no free money. The man is crazy. Avoid the man and feel relieved. There is free money. There is free money. Take the money. It is hard to suddenly change your belief. Asking "what if" helps you get closer to the "truth", but it is hard For those who believe "狗係惡", even if they think "what if dogs are not?", they won't just suddenly start interacting with dogs and thus change their beliefs For those who believe "there is no free money", even if they think "what if there really is free money?", they won't just suddenly ask the man for the money BECAUSE... Beliefs like to express themselves. They don't like being challenged. They make you like being with people with similar beliefs. They are conscious. When they feel that they are going to disappear, they try even harder to 刷存在感. They do not need you to be aware of them to exist. How to effectively change your belief then? In a nutshell, make your active beliefs inactive. METHOD: Suddenly breaking up with your active belief? e.g. to repeat "risk is unavoidable!" In your brain and ask your brain to stop thinking "I don't want risk" --> WRONG Draw energy out of the belief -- DEACTIVATION e.g. to understand the reasons behind "risk is unavoidable", the mechanism within the reasons, etc --> CORRECT Just like breaking up with a girl... 強硬分手 = wrong; 慢慢丟淡 = correct Active • With energy BELIEF Inactive • Without energy If two beliefs are stuggling... The result depends on how strong the energy in your belief is Example: You originally think "莎莎好惡" (Old belief) But you see friends playing with 莎莎 and look happy (INCIDENT) You want to play with your friends, but yet to, believe in "莎莎好得意" (New belief), so you try to deactivate the old belief by thinking 成班frd玩得好開心喎 and look at 莎莎條尾 and think 都好多毛丫 唔錯丫幾得意丫 If old > new, stay the same. ==> meaning 你未夠想 "playing with your friends" If new > old, belief changed. If two beliefs are stuggling... Conclusion: 要夠想 •點解被打SL仲會唔開心啊？點解落盤仲會猶豫不決啊？點解仲會驚睇錯方向輸錢啊？ •因為你未夠想be a consistent trader, i.e. 未夠想成功!!!!! •Then what should you do ah? •Deactivate your original belief! By drawing energy in it! In summary, trading is... Trading is... Analyzing the market in a state of not having to know if your analysis comes true even though the analysis may be perfectly-constructed A simple pattern-recognition numbers game Step 1. Identify the patterns Step 2. Define risks Step 3. Determine if taking profits is needed An exercise to help you achieve consistency Road to consistency Mechanical Stage (like our CP2) • For building self-trust (If consistently no on9 errors, you start to trust yourself) • Execute a trading system flawlessly • Train your mind to think in probabilities • Create a strong and unshakeable belief in your consistency as a trader Subjective Stage (like CP7) • Use things learnt • At the same time, a lot of freedom Intuitive (like us now) • Intuition has become spontaneous Road to consistency Mechanical Stage (like our CP2) • For building self-trust (If consistently no on9 errors, you start to trust yourself) • Execute a trading system flawlessly • Train your mind to think in probabilities • Create a strong and unshakeable belief in your consistency as a trader Subjective Stage (like CP7) • Use things learnt • At the same time, a lot of freedom Intuitive (like us now) • Intuition has become spontaneous Your trading system Should define "an edge" Trade entry SL exit Timeframe TP In the exercise, Pick a market Define an edge (零主觀) Based on your trading system and consistency beliefs, collect a sample size with 20 trades or above Keep monitoring yourself Consolidating our long-term memory Summarizing our agenda Why are we so rubbish? What makes traders successful? How to execute them? Testing if you really understand the book Exact quotes from the book - Fill in the blanks The consistency you seek is in your mind, not in the m_____ . Your attitudes and beliefs about being w_____ , losing money, and the tendency to become reckless when you’re feeling good are the things that cause the most losses – not technique or market k_____ . If the information the market generates doesn’t have the potential to cause you e_____ pain, there’s nothing to avoid. It is just information, telling you what the p_____ are. This is called an o_____ perspective – one that is not skewed or distorted by what you are afraid is going to happen or not happen. When you learn the trading skill of r_____ acceptance, the market will not be able to generate i_____ that you define or interpret as p_____ . Exact quotes from the book - Fill in the blanks The problem is that preventing pain by avoiding l_____ can’t be done. The market generates behavior patterns and the patterns r_____ themselves, but not every time . So again, there is no p_____ way to avoid losing or being wrong. We have to be r_____ in our rules and f_____ in our expectations. We need to be r_____ (the same as the first one) 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 f_____ (the same as the second one) 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. 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 c_____ yourself thinking about it. Of course, the last line of defense is to c_____ (the same as the first one) yourself in the act. If you don’t commit yourself to becoming an o_____ of these processes, your rea___tions will always come after the experience, usually when you are in a state of deep regret or frustration. Exact quotes from the book – explaining DEMO: 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. Intelligence and good market analysis can certainly contribute to success, but they are not the defining factors that separate the consistent winners from everyone else. 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 – the consistent winners think differently from everyone else. 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.