Book Review: Trading in the Zone by Mark Douglas
Some say that trading is 10% mechanical and 90% psychological. One of my mentors once said "The simpler we make trading, the more profitable it seems to be." and it was a profound statement to me at the time... It was one of those "I heard the exact thing I needed to hear at the exact time" moments and it changed the way I traded.
It is in our nature to over-complicate things because we have been conditioned to think that profitable ventures must be complex ventures from a very early age. How many times have we heard "You can't do that... only rich people get to _____." "You'll never be able to get _____ without a college education and years of hard work (working for *someone else*!)." And of course, "If trading were so easy, everybody would be doing it." We are surrounded by negative ninnies nullifying our natural need to succeed.
Well, I believe trading indeed is easy, but becoming a trader... now that indeed is the hard part. In an earlier article I talk about Backtesting and its importance in determining if your trading system works, answering the question "Can this system generate a *reliable* income week after week?" Once you determine that, the question is "Can I work the system?" And that question, my fellow traders, is all about psychology. (And the point of the book at hand: Trading in the Zone.)
This article rounds out what I believe will be my two most important book reviews. In my previous review of Price Action Breakdown I highlighted the processes of technical analysis as presented by the author. Using Supply and Demand we can find the movement of money in the markets and reliably place trade after trade right behind the big institutions who move those markets. There are many ways to trade using a Supply and Demand methodology. I myself came up with my own method which I call Sabre which I formulated from my years of experience standing on the shoulders of giants, following rules, managing risk, and "sharpening the saw" as the late great Steven Covey would say.
However, no matter how good a system is, if not followed properly, (and in some cases if not followed to the *letter*) even the best 'systems' will produce mediocre or even negative results. For instance, there are plenty of great weight loss and weight management 'systems' out there (Keto, Paleo, Atkins, Whole 30, ...) but if one does not have a good psychology, they won't "work the system" even though they know that "the system works." It isn't until a person's *psychology* is right (i.e. that the PAIN of being overweight/unfit is greater than the perceived pain of following a system) that they will follow a prescribed system of weight management or fitness.
Mark Douglas opens his book on this very topic, saying that "The consistent winners think differently from everyone else." It's not smarts, or market analysis, or a super-duper indicator that separates the successful from the unsuccessful, but one's State Of Mind, and primarily a state of mind that thinks in probabilities.
Trading, says Douglas, is very similar to a casino. The only difference is that we need to think like the person behind the table dealing the cards, not the rube playing the cards. Once you get behind the table, then you can play with the Law of Large Numbers by your side: you don't care how many hands you lose... you just know that overall in the course of 100 deals / shuffles / spins that you will come out ahead if you have an edge - a system that allows you to play where the odds are stacked in your favor.
For instance, if you have a trading system that is only right 30% of the time, but your winners consistently generate a minimum of 5R of profit, are you going to be upset that seven out of every ten of your trades are losers? You shouldn't be, because for every 7R in losses (7 losses x 1R) you will generate at least 15R in winnings (5 wins x 3R). Your main goal then would to find as many trades as possible to get into each and every day! (If you are not familiar with the method of trading in "R", or 'aaRrrrrr' as we pirates call it, you can review my "Trade like a Pirate" article...)
The essential ingredient in developing this successful probabilistic mindset is to indeed, have a successful trading system, an edge that overall in the game of large numbers will allow you you rake in more winnings than are drawn out by your losses. And as my favorite quote from Douglas says, "Once you learn to identify patterns and read the market, you find there are *limitless* opportunities to make money."
Our primary job as traders, then, is to manage risk, that our edge only allows us to take trades that meet the demands of our system, and we take every trade that meeds those qualifications. It is a rare thing, however, to find a "trader in training" willing to think that way... the beginning trader wants to find out how to be right all the time. They want to experience certainty in an environment which is random, which will lead to ultimate disappointment.
Think of trading like flipping a coin, (a random event): If you can get someone to play with you where for every time the coin comes up heads they have to pay you $300 and for every time it comes up tails you have to pay them $100, would you play? Of course! Because you know that at the end of the day the money is going to consistently flow in your direction, that overall for every 2 flips you have the expectation of making $200, if 50% of the time it comes up heads (making $300) and 50% of the time it comes up tails (losing $100).
If you had a magical money machine that would play with you, with these kind of odds, would you simply flip that coin 5 times and call it a day? If I could make a friendly assumption, I would say that you would sit there in front of that machine flipping that quarter hour after hour until that machine ran out of money!
We traders, however, aren't playing a person. We are playing the market. And the market has (for all practical purposes) unlimited piles of money. And if we have an "edge" that pays us 3R for every time we have to pay the market 1R what would you do? You will take every...single...trade... that comes your way that meets your criteria. An amateur at a poker table might walk away because he lost all of his winnings. The market won't run out of money and will play along with you as long as you desire – at least until you reach your goals.
Douglas summarizes his point saying that we will be a consistently profitable trader if we can "learn how to redefine your trading activities in such a way that you truly accept the risk, and you’re no longer afraid." And that "the consistency you seek is in your mind, not in the markets."
If we want to be "In the Zone" and make ourselves available to this infinite opportunity flow, we need to develop a carefree state of mind that doesn't have any expectation about any individual trade except that "something will happen." Our goal is not to win or not to not lose, but to "get in the water" - to put on every trade that represents our edge and wait for that "something" to happen. And if your trade happens to be a loser, then get excited because that means you are that much closer to a win. With this carefree, probabilistic mindset, "losing" trades will never again produce a negative emotion. In fact, "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."
Trading, according to Douglass, is ultimately a "pattern recognition numbers game." As long as we insist on "having to know" what will happen with any particular trade we will experience stress and have unfulfilled expectations. When we begin thinking (and acting) in probabilities and a series of trades, we will begin to develop an "unshakable belief in our consistency as a trader."
I've recently heard it said that "Trading is one of the most amazing, rewarding, and enriching professions there is. But I wouldn't wish it on anybody!" For the most part, trading is highly psychological. As Yoda said, "You must unlearn what you have learned." What makes one a successful doctor, engineer, lawyer, Fill-in-the-blank.... those skills will contribute *nothing* to being a better trader.
Finally, just like one trip to the gym won't make you healthy and fit, a single read of this book won't give you a strong mental edge to complement the technical edge of your trading system. I make it a habit to read/listen to this book at least once per quarter alongside Price Action Breakdown. Take notes. Apply. Rinse. Repeat. That's my one bit of advice for you: Don't just read this book once... read it regularly...
Like with the Napoleon Hill's book Think and Grow Rich... If you ask anyone if they've ever read it and they said yes, ask them "How many times? Because you obviously aren't rich yet!" Even Napoleon Hill stressed that you should read his book over and over if you are going to exercise your "thinking meat" and make it stronger and stronger day by day. (By the way... you should read that book as well... but that's a review for another day.)
Trade well!
-Anthony
It is in our nature to over-complicate things because we have been conditioned to think that profitable ventures must be complex ventures from a very early age. How many times have we heard "You can't do that... only rich people get to _____." "You'll never be able to get _____ without a college education and years of hard work (working for *someone else*!)." And of course, "If trading were so easy, everybody would be doing it." We are surrounded by negative ninnies nullifying our natural need to succeed.
Well, I believe trading indeed is easy, but becoming a trader... now that indeed is the hard part. In an earlier article I talk about Backtesting and its importance in determining if your trading system works, answering the question "Can this system generate a *reliable* income week after week?" Once you determine that, the question is "Can I work the system?" And that question, my fellow traders, is all about psychology. (And the point of the book at hand: Trading in the Zone.)
This article rounds out what I believe will be my two most important book reviews. In my previous review of Price Action Breakdown I highlighted the processes of technical analysis as presented by the author. Using Supply and Demand we can find the movement of money in the markets and reliably place trade after trade right behind the big institutions who move those markets. There are many ways to trade using a Supply and Demand methodology. I myself came up with my own method which I call Sabre which I formulated from my years of experience standing on the shoulders of giants, following rules, managing risk, and "sharpening the saw" as the late great Steven Covey would say.
However, no matter how good a system is, if not followed properly, (and in some cases if not followed to the *letter*) even the best 'systems' will produce mediocre or even negative results. For instance, there are plenty of great weight loss and weight management 'systems' out there (Keto, Paleo, Atkins, Whole 30, ...) but if one does not have a good psychology, they won't "work the system" even though they know that "the system works." It isn't until a person's *psychology* is right (i.e. that the PAIN of being overweight/unfit is greater than the perceived pain of following a system) that they will follow a prescribed system of weight management or fitness.
Mark Douglas opens his book on this very topic, saying that "The consistent winners think differently from everyone else." It's not smarts, or market analysis, or a super-duper indicator that separates the successful from the unsuccessful, but one's State Of Mind, and primarily a state of mind that thinks in probabilities.
Trading, says Douglas, is very similar to a casino. The only difference is that we need to think like the person behind the table dealing the cards, not the rube playing the cards. Once you get behind the table, then you can play with the Law of Large Numbers by your side: you don't care how many hands you lose... you just know that overall in the course of 100 deals / shuffles / spins that you will come out ahead if you have an edge - a system that allows you to play where the odds are stacked in your favor.
For instance, if you have a trading system that is only right 30% of the time, but your winners consistently generate a minimum of 5R of profit, are you going to be upset that seven out of every ten of your trades are losers? You shouldn't be, because for every 7R in losses (7 losses x 1R) you will generate at least 15R in winnings (5 wins x 3R). Your main goal then would to find as many trades as possible to get into each and every day! (If you are not familiar with the method of trading in "R", or 'aaRrrrrr' as we pirates call it, you can review my "Trade like a Pirate" article...)
The essential ingredient in developing this successful probabilistic mindset is to indeed, have a successful trading system, an edge that overall in the game of large numbers will allow you you rake in more winnings than are drawn out by your losses. And as my favorite quote from Douglas says, "Once you learn to identify patterns and read the market, you find there are *limitless* opportunities to make money."
Our primary job as traders, then, is to manage risk, that our edge only allows us to take trades that meet the demands of our system, and we take every trade that meeds those qualifications. It is a rare thing, however, to find a "trader in training" willing to think that way... the beginning trader wants to find out how to be right all the time. They want to experience certainty in an environment which is random, which will lead to ultimate disappointment.
Think of trading like flipping a coin, (a random event): If you can get someone to play with you where for every time the coin comes up heads they have to pay you $300 and for every time it comes up tails you have to pay them $100, would you play? Of course! Because you know that at the end of the day the money is going to consistently flow in your direction, that overall for every 2 flips you have the expectation of making $200, if 50% of the time it comes up heads (making $300) and 50% of the time it comes up tails (losing $100).
If you had a magical money machine that would play with you, with these kind of odds, would you simply flip that coin 5 times and call it a day? If I could make a friendly assumption, I would say that you would sit there in front of that machine flipping that quarter hour after hour until that machine ran out of money!
We traders, however, aren't playing a person. We are playing the market. And the market has (for all practical purposes) unlimited piles of money. And if we have an "edge" that pays us 3R for every time we have to pay the market 1R what would you do? You will take every...single...trade... that comes your way that meets your criteria. An amateur at a poker table might walk away because he lost all of his winnings. The market won't run out of money and will play along with you as long as you desire – at least until you reach your goals.
Douglas summarizes his point saying that we will be a consistently profitable trader if we can "learn how to redefine your trading activities in such a way that you truly accept the risk, and you’re no longer afraid." And that "the consistency you seek is in your mind, not in the markets."
If we want to be "In the Zone" and make ourselves available to this infinite opportunity flow, we need to develop a carefree state of mind that doesn't have any expectation about any individual trade except that "something will happen." Our goal is not to win or not to not lose, but to "get in the water" - to put on every trade that represents our edge and wait for that "something" to happen. And if your trade happens to be a loser, then get excited because that means you are that much closer to a win. With this carefree, probabilistic mindset, "losing" trades will never again produce a negative emotion. In fact, "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."
Trading, according to Douglass, is ultimately a "pattern recognition numbers game." As long as we insist on "having to know" what will happen with any particular trade we will experience stress and have unfulfilled expectations. When we begin thinking (and acting) in probabilities and a series of trades, we will begin to develop an "unshakable belief in our consistency as a trader."
I've recently heard it said that "Trading is one of the most amazing, rewarding, and enriching professions there is. But I wouldn't wish it on anybody!" For the most part, trading is highly psychological. As Yoda said, "You must unlearn what you have learned." What makes one a successful doctor, engineer, lawyer, Fill-in-the-blank.... those skills will contribute *nothing* to being a better trader.
Finally, just like one trip to the gym won't make you healthy and fit, a single read of this book won't give you a strong mental edge to complement the technical edge of your trading system. I make it a habit to read/listen to this book at least once per quarter alongside Price Action Breakdown. Take notes. Apply. Rinse. Repeat. That's my one bit of advice for you: Don't just read this book once... read it regularly...
Like with the Napoleon Hill's book Think and Grow Rich... If you ask anyone if they've ever read it and they said yes, ask them "How many times? Because you obviously aren't rich yet!" Even Napoleon Hill stressed that you should read his book over and over if you are going to exercise your "thinking meat" and make it stronger and stronger day by day. (By the way... you should read that book as well... but that's a review for another day.)
Trade well!
-Anthony
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Feeling generous? Buy me a Coffee:
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Want more? Trade with us!
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