1.TRADING IN THE ZONE
PART-1
-Learning to think like a professional trader → Consistency → Steady equity curve.
-Consistent traders take loss all the time, but their drawdowns are reflection of normal losses that
any trading methodology will incur.
→Trading skill = Trading without fear.
→Everything you could do wrong is going to be the result of what you’re afraid of.
→Cutting your losses is difficult.
→Letting your winners run is tenfold difficult.
Profit gap: The gap between your potential and your results.
➔ Most people think when they realize this profit gap exists that somehow learning more
about the market is what’s going to fill the gap (that is not true).
→Your psychological skill is the gap filler.
→The consistency you seek is in your mind, not in the markets.
PART-2
Worst mistake: I wouldn’t put on a trade if I wasn’t sure it was going to be a winner.
Negative correlation: The more you learn about the market → The easier it will be to trade.
→At some point you lose often→Comeback with little profits→Gain of confidence →Fear
dissipates →Carefree state of mind →everything about trading changes.
PRO Vs TYPICAL TRADER:
- Professionals plan their trade.
- They execute their plan without error.
- They can move in and out of the market with an ease and effortlessness that would boggle the
mind of the typical trader.
Trading skills for consistency:
- Be able to identify an edge (trading method).
- Have a trading plan on how to utilize the edge.
*Risk parameters
*Money management (Position size)
*Profit objectives
- Be comfortable with trade execution.
- You don’t have to lose everything to think like you have nothing to lose.
- All you must do is commit yourself to learn how to think about trading →Fear will go away.
→take sample sets of trade→ analyse the result → repeat another sample → improve your
trading.
-Good traders keep extensive journals of what they are thinking and doing.
- Not feeling good: Scale down your position size.
- Develop the ability to recognize if you have crossed the threshold from normal self confidence
into a state of euphoria.
- When windfall profit happens, stop trading, and take a vacation.
- Believe that you don’t have to know what is going to happen next on a trade-by-trade basis to win
or make consistent money.
- Unrealistic expectations cause us to interpret market information as threatening.
→Being wrong → Losing → Missing out → Leaving money on the table.
-one wrong trade can tap into our negative emotional pain.
TRADING ERRORS:
- Hesitate- getting in too late.
- Jump the gun – get in too soon where the signal never actually develops.
- Get out of a winning trade too soon – leave money on the table.
- Let a winning trade turn into a loser without having taken any profits.
- Move stop closer to an entry point, get stopped out and the market trades back in your favour.
→ Why would you hesitate? Because you have doubt on your own strategy.
→Even after making all these errors, you could make some money, which leads to catastrophic
loss.
Three development modes of trading:
-
The mechanical stage – Rigid criteria defines your edge. All execution decisions are made in
advance of market activity. Execute only based on your plan.
The subjective stage – this a broader, more flexible mode of trading where you use
everything you have learned about the nature of price movement to determine your edges.
Intuitive stage – Advanced mode of trading - find yourself ‘in the zone’ tapped into the
collective consciousness of the market and gives you a sense of flow.
PART – 3
How prices move: imbalance in the degree of conviction between the trades who believe prices
are going up and those believe the prices are going down.
→Dynamic traders & passive traders.
-The patterns show up in every time frame, technical analysis turns the market into an unending
stream of opportunities.
- You must put sufficient amount of time to train your mind to think probabilities.
- You may understand the concepts of probabilities but not thinking in terms of probabilities.
- There is no way of determining the intentions of all traders. Yet the typical trader executes his
methodology as if he is being told what those intentions are- the professional does not.
PART-4
If a methodology gives a buy signal, what is compelling us to make trading errors?
-
Fear →Because of negative emotion connected with trade we made in the past.
Because we are expecting this trade to work.
If you think you know, you’re just making it up.
To feel different change your expectations. → Slot machine analogy.
- When you get a signal just put the trade on. There is absolutely nothing to think about.
- All change is a function of desire, if you want it bad enough, you’ll find a way to do it.
How do we change?
The degree to which we change is a function of ‘clarity of intent’.
-
Degree of conflict
How sure are we.
What are we giving up?
Sincerity.
Degree of conviction (Santa Claus and Socrates – Breath of air story).
Self-discipline (His running story)
Professional Mindset: ‘Stop analysing ‘or trying to figure out if the current opportunity to put on a
trade is going to work.
EDGE – EDUCATED GUESS.
-
If you win, you’ll think you’re right. If you lose, you’ll think you’re wrong. In either case, you
will be setting yourself up to make a trading error on the next trade.
-
By truly believing that the outcome of this trade would be different than previous trades,
you are positively managing your expectations.
Slot machine outcome- Believe in random outcome without emotion.
PART -5
Trading Exercise:
-
Take 20 trades sample size.
Have a plan that gives you edge.
Go down to stop where you are comfortable.
I have rarely met a trader who doesn’t have problem after three streaks losing trades.
Change the variables only at the end of sample size.
Keep doing this exercise until you win.
Do it until you have no conflicting thoughts and you’ll be thinking like a pro.
Successful traders love the process of trading.
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2.MIND OVER MARKET
Consistency - Nice, steadily increasing equity curve with small drawdowns.
Drawdowns - Not the result of something you didn't know about the market, result of something
you didn't know about yourself.
Your 4 unknowns:
1. EDGE - the higher probability of one thing happening over another.
2. your perspective aligned with market's (think in probabilities) [hint: it's not
about being right or wrong]
3. your inner conflicts being a successful trader
Fear generates self-doubt and not seeing a never-ending flow of opportunity.
4. your mental recognition of overconfident euphoria
Consistency is avoiding errors.
Biggest trading error: Not predefining risk (in lost dollar value) and not accepting it.
Avoidance: your mind can automatically associate any trade with every time you have been wrong
in your life.
Why we avoid risk management: being wrong can tap into your accumulated lifetime pain.
Dilemma balancing: a) gathering valid evidence of negative outcome vs positive outcome.
b) missing valid trading opportunity
Common trading errors:
1. Timing entry: too early/late
2. Failing to define risk in advance is biggest error
3. Failing to execute a defined risk by taking bigger loss.
4. Timing exit: too early / late
5. Early stop out: Moved stop out, market moves against you, triggering
exit and then advances in favor.
The nature of trading: you can make every mistake above without skill/ knowledge and still win.
(Crowd laughs)
Consistency means adopting the mindset of a successful gambler or casino events of probabilitybecome the casino.
Errors --> drawdowns --> psychological damage --> analysis paralysis --> freeze up --> growing
knowledge but poor performance.
Truly accepting risk: no conflicting energy, no rationalizing, no excuses.
Fear --> narrow focus --> miss opportunity flow
Train your mind to think in probability.
Fallacy: your false belief in random outcomes prevents you from seeing above.
Market movement: is what traders believe about the future and their degree of conviction ( in
their belief)
Knowing or believing in outcomes causes the most common errors because you are falsely
converting market data into positive or negative instead of neutral.
5 fundamental truths:
1. Anything can happen.
2. Every moment in the market is unique.
3. Edge: indication of higher probability of one thing happening
4. Wins and losses are randomly distributed.
5. you don’t need to know what is going to happen to make money
Consistency is the result of mindset: Confident, carefree, interpreting market data as neutral.
Avoiding pain is a natural mechanism so control your perceptions (fear of being wrong causes
perceptual blindness)
Inner conflict: we exit a losing trade when, fear of losing money --> fear of being wrong.
Create consistency: maintain neutral interpretation of market data.
How: active process of changing thought patterns
Learn to change your beliefs: Change your trading purpose from making money to building skill;
profit is a byproduct of your skill level,
Set up a mechanical trading system that exemplifies the 5 fundamental truths at a core level of
your trading identity without conflict.
Mindset unlocks technical analysis to the fullest potential – Mark Douglas.
Mindset comes first.
I AM A CONSISTENT WINNER