Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude

by Mark Douglas

Here’s what the technical analyst knew that it took the mainstream market community generations to catch on to. A finite number of traders participate in the markets on any given day, week, or month. Many of these traders do the same kinds of things over and over in their attempt to make money. In other words, individuals develop behavior patterns, and a group of individuals, interacting with one another on a consistent basis, form collective behavior patterns. These behavior patterns are observable and quantifiable, and they repeat themselves with statistical reliability.

If you are unable to trade without the slightest bit of emotional discomfort (specifically, fear), then you have not learned how to accept the risks inherent in trading. This is a big problem, because to whatever degree you haven’t accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully.

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

When you learn the trading skill of risk acceptance, the market will not be able to generate information that you define or interpret as painful. If the information the market generates doesn’t have the potential to cause you emotional pain, there’s nothing to avoid. It is just information, telling you what the possibilities are.

Ninety-five percent of the trading errors you are likely to make—causing the money to just evaporate before your eyes—will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.

If you’re afraid of being wrong, your fear will act upon your perception of market information in a way that will cause you to do something that ends up making you wrong.

If we aren’t aware of, or don’t understand, how our beliefs and attitudes affect our perception of market information, it will seem as if it is the market’s behavior that is causing the lack of consistency. As a result, it would stand to reason that the best way to avoid losses and become consistent would be to learn more about the markets.

I am not suggesting that we don’t need some form of market analysis or methodology to define opportunities and allow us to recognize them; we certainly do. However, market analysis is not the path to consistent results. It will not solve the trading problems created by lack of confidence, lack of discipline, or improper focus.

When you operate from the assumption that more or better analysis will create consistency, you will be driven to gather as many market variables as possible into your arsenal of trading tools. But what happens then? You are still disappointed and betrayed by the markets, time and again, because of something you didn’t see or give enough consideration to. It will feel like you can’t trust the markets; but the reality is, you can’t trust yourself.

You have two choices: You can try to eliminate risk by learning about as many market variables as possible. (I call this the black hole of analysis, because it is the path of ultimate frustration.) Or you can learn how to redefine your trading activities in such a way that you truly accept the risk, and you’re no longer afraid.

When you eliminate the potential to define market information in painful ways, you also eliminate the tendency to rationalize, hesitate, jump the gun, hope that the market will give you money, or hope that the market will save you from your inability to cut your losses.

To prevent the possibility of exposing ourselves to damage, we need to create an internal structure in the form of specialized mental discipline and a perspective that guides our behavior so that we always act in our own best interests. This structure has to exist within each of us, because unlike society, the market doesn’t provide it.

In trading, no one (except yourself) is going to force you to decide in advance what your risk is. In fact, what we have is a limitless environment, where virtually anything can happen at any moment and only the consistent winners define their risk in advance of putting on a trade.

In trading, prices are in constant motion, nothing begins until you decide it should, it lasts as long as you want, and it doesn’t end until you want it to be over. Regardless of what you may have planned or wanted to do, any number of psychological factors can come into play, causing you to become distracted, change your mind, become scared or overconfident: in other words, causing you to behave in ways that are erratic and unintended.

The Unwillingness to Create Rules

In the process of instilling structure, many of our natural impulses to move, express, and learn about the nature of our existence through our own direct experience were denied. Many of these denied impulses were never reconciled and still exist inside of us as frustration, anger, disappointment, guilt, or even hatred.

In other words, the very reason we are attracted to trading in the first place—the unlimited freedom of creative expression—is the same reason we feel a natural resistance to creating the kinds of rules and boundaries that can appropriately guide our behavior. It’s as if we have found a Utopia in which there is complete freedom, and then someone taps us on the shoulder and says, “Hey, you have to create rules, and not only that, you also have to have the discipline to abide by them.”

It usually takes a great deal of pain and suffering to break down the source of our resistance to establishing and abiding by a trading regime that is organized, consistent, and reflects prudent money-management guidelines.

Failure to Take Responsibility

The hard reality of trading is that, if you want to create consistency, you have to start from the premise that no matter what the outcome, you are completely responsible.

Addiction to Random Rewards

An addiction to random rewards is particularly troublesome for traders, because it is another source of resistance to creating the kind of mental structure that produces consistency.

External versus Internal Control

Now, if we’ve become effective at fulfilling our needs, wants and desires by learning how to control and manipulate our environment, but suddenly find ourselves, as traders, in an environment that does not know, care, or respond to anything that is important to us, where does that leave us? You’re right if you said up the proverbial creek without a paddle.

TAKING RESPONSIBILITY

Taking responsibility in your trading and learning the appropriate principles of success are inextricably connected. You have to understand, with every fiber of your being, the ways in which you are and are not responsible for your success as a trader. Only then can you take on the characteristics that will allow you to join the select group of traders who are consistently successful in the markets.

SHAPING YOUR MENTAL ENVIRONMENT

If we start from the premise that to create consistency traders must focus their efforts on developing a trader’s mind-set, then it is easy to see why so many traders don’t succeed. Instead of learning to think like traders, they think about how they can make more money by learning about the markets.

REACTING TO LOSS

Expectations are our mental representations of how some future moment in the environment is going to look, sound, feel, smell, or taste. Depending upon how much energy is behind the expectation, it can hurt a lot when it isn’t fulfilled.

Taking responsibility means acknowledging and accepting, at the deepest part of your identity, that you—not the market—are completely responsible for your success or failure as a trader.

He doesn’t realize it, but as soon as he made the assumption that knowing something about the market can prevent him from experiencing pain or can help satisfy his desire for revenge or to prove something, he sealed his fate to become a loser.

The cycle will continue until he either quits trading in disgust or recognizes that the root cause of his trading problems is his perspective, not his lack of market knowledge.

Remember our definition of a winning attitude: a positive expectation of your efforts with an acceptance that whatever results you get are a perfect reflection of your level of development and what you need to learn to do better.

Did you ever wonder why leaving money on the table is often more painful than taking a loss? When we lose, there are any number of ways in which we can shift the blame to the market and not accept responsibility. But when we leave money on the table, we can’t blame the market. The market didn’t do anything but give us exactly what we wanted, but for whatever reason, we weren’t capable of acting on the opportunity appropriately. In other words, there’s no way to rationalize the pain away.

The most efficient path to discovering what you need to be successful is to develop a winning attitude, because it’s an inherently creative perspective. Not only does a winning attitude open you up to what you need to learn; it also produces the kind of mind-set that is most conducive to discovering something no one else has experienced.

CONSISTENCY: A STATE OF MIND

The best traders stay in the flow because they 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.

The threat of pain generates fear, and fear is the source of 95 percent of the errors you are likely to make.

REALLY UNDERSTANDING RISK

Accepting the risk means accepting the consequences of your trades without emotional discomfort or fear. This means that you must learn how to think about trading and your relationship with the markets in such a way that the possibility of being wrong, losing, missing out, or leaving money on the table doesn’t cause your mental defense mechanisms to kick in and take you out of the opportunity flow.

When you make yourself available to take advantage of an opportunity, you don’t impose any limitations or expectations on the market’s behavior. You are perfectly satisfied to let the market do whatever it’s going to do.

This is where professional traders really separate themselves from the crowd. When you accept the risk the way the pros do, you won’t perceive anything that the market can do as threatening. If nothing is threatening, there’s nothing to fear. If you’re not afraid, you don’t need courage.

Everyone has heard the expression, “People see what they want to see.” I would put it a little differently: People see what they’ve learned to see, and everything else is invisible until they learn how to counteract the energy that blocks their awareness of whatever is unlearned and waiting to be discovered.

THE “UNCERTAINTY” PRINCIPLE

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.

We can’t perceive the potential for the market to continue to move in a direction that is already against our position if, for example, we are operating out of a fear of being wrong. The fear of admitting we are wrong causes us to place an inordinate amount of significance on information that tells us that we’re right. This happens even if there’s ample information to indicate that the market has in fact established a trend in the opposite direction of our position.

your ultimate success as a trader cannot be realized until you develop a resolute, unshakeable belief in uncertainty.

When something has been truly accepted, it isn’t in conflict with any other component of our mental environment. When we believe in something, we operate out of that belief as a natural function of who we are, without struggle or extra effort. To whatever degree there is a conflict with any other component of our mental environment, to the same degree there is a lack of acceptance.

It isn’t difficult, therefore, to understand why so few people make it as traders. They simply don’t do the mental work necessary to reconcile the many conflicts that exist between what they’ve already learned and believe, and how that learning contradicts and acts as a source of resistance to implementing the various principles of successful trading.