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

by Mark Douglas

(1) you don’t need to know what’s going to happen next to make money; (2) anything can happen; and (3) every moment is unique, meaning every edge and outcome is truly a unique experience. The trade either works or it doesn’t. In any case, you wait for the next edge to appear and go through the process again and again.

The edge means there is a higher probability of one outcome than another. The greater your confidence, the easier it will be to execute your trades.

Fundamental analysis attempts to take into consideration all the variables that could affect the relative balance or imbalance between the supply of and the possible demand for any particular stock, commodity, or financial instrument. Using primarily mathematical models that weigh the significance of a variety of factors (interest rates, balance sheets, weather patterns, and numerous others), the analyst projects what the price should be at some point in the future.

The problem with these models is that they rarely, if ever, factor in other traders as variables. People, expressing their beliefs and expectations about the future, make prices move—not models.

Furthermore, at any given moment, much of their trading activity is prompted by a response to emotional factors that are completely outside the parameters of the fundamental model. In other words, the people who trade (and consequently move prices) don’t always act in a rational manner.

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.

Technical analysis is a method that organizes this collective behavior into identifiable patterns that can give a clear indication of when there is a greater probability of one thing happening over another. In a sense, technical analysis allows you to get into the mind of the market to anticipate what’s likely to happen next, based on the kind of patterns the market generated at some previous moment.

As a method for projecting future price movement, technical analysis has turned out to be far superior to a purely fundamental approach. It keeps the trader focused on what the market is doing now in relation to what it has done in the past, instead of focusing on what the market should be doing based...

technical analysis not only closes this reality gap, but also makes available to the trader a virtually unlimited number of possibilities to take advantage of. The technical approach opens up many more possibilities because it identifies how the same repeatable behavior patterns occur in every time frame—moment-to-moment, daily, weekly, yearly, and every time span in between. In other words, technical analysis turns the market into an endless stream of opportunities to enrich oneself.

There’s a big difference between predicting that something will happen in the market (and thinking about all the money you could have made) and the reality of actually getting into and out of trades. I call this difference, and others like it, a “psychological gap”

Since the markets are in constant motion, this money is also constantly flowing, which makes the possibilities for success greatly magnified and seemingly within your grasp.

For those who have learned how to be consistent, or have broken through what I call the “threshold of consistency,” the money is not only within their grasp; they can virtually take it at will. I’m sure that some will find this statement shocking or difficult to believe, but it is true. There are some limitations, but for the most part, money flows into the accounts of these traders with such ease and effortlessness that it literally boggles most people’s minds.

If I had to distill all of the reasons down to one, I would simply say that the best traders think differently from the rest.

The defining characteristic that separates the consistent winners from everyone else is this: The winners have attained a mind-set—a unique set of attitudes—that allows them to remain disciplined, focused, and, above all, confident in spite of the adverse conditions. As a result, they are no longer susceptible to the common fears and trading errors that plague everyone else.

The best traders can put on a trade without the slightest bit of hesitation or conflict, and just as freely and without hesitation or conflict, admit it isn’t working. They can get out of the trade—even with a loss—and doing so doesn’t resonate the slightest bit of emotional discomfort. In other words, the risks inherent in trading do not cause the best traders to lose their discipline, focus, or sense of confidence. 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 how to redefine your trading activities in a way that allows you to completely accept the risk is the key to thinking like a successful trader. 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. This is called an objective perspective—one that is not skewed or distorted by what you are afraid is going to happen or not happen.

Movement and information provide each of us with the opportunity to do something, but that’s all!

“faulty trading attitudes and perspectives.” Faulty attitudes that foster fear instead of trust and confidence.

I don’t think I could put the difference between the consistent winners and everyone else more simply than this: The best traders aren’t afraid. They aren’t afraid because they have developed attitudes that give them the greatest degree of mental flexibility to flow in and out of trades based on what the market is telling them about the possibilities from its perspective. At the same time, the best traders have developed attitudes that prevent them from getting reckless.

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.

But when it comes to trading, your fears will act against you in such a way that you will cause the very thing you are afraid of to actually happen.

When you are fearful, no other possibilities exist.

Yet understanding the relationship between beliefs, attitudes, and perception is as fundamental to trading as learning how to serve is to tennis, or as learning how to swing a club is to golf.

that is as true as the statement I just made: You don’t have to know anything about yourself or the markets to put on a winning trade,

We need technique to achieve consistency.

This bit of logic is a trap that almost all traders fall into at some point, and it seems to make perfect sense. But this approach doesn’t work. The market simply offers too many—often conflicting—vari—ables to consider. Furthermore, there are no limits to the market’s behavior. It can do anything at any moment.

Unless you learn to completely accept the possibility of an uncertain outcome, you will try either consciously or unconsciously to avoid any possibility you define as painful.

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.

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’ve achieved a state of mind where you truly accept the risk, you won’t have the potential to define and interpret market information in painful ways. 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.

The irony is that, when you have the appropriate attitude, when you have acquired a “trader’s mind-set” and can remain confident in the face of constant uncertainty, trading will be as easy and simple as you probably thought it was when you first started out.

So, what is the solution? You will need to learn how to adjust your attitudes and beliefs about trading in such a way that you can trade without the slightest bit of fear, but at the same time keep a framework in place that does not allow you to become reckless.

The successful trader that you want to become is a future projection of yourself that you have to grow into. Growth implies expansion, learning, and creating a new way of expressing yourself.

Trading is an activity that offers the individual unlimited freedom of creative expression, a freedom of expression that has been denied most of us for most of our lives.

“But why would having access to such an unrestricted environment result in fairly consistent failure?” I answered, “Because unlimited possibilities coupled with the unlimited freedom to take advantage of those possibilities present the individual with unique and specialized psychological challenges, challenges that very few people are properly equipped to deal with, or have any awareness of for that matter, and people can’t exactly work on overcoming something if they don’t even know it’s a problem.”

Natural attractions are simply those things about which we feel a natural or passionate interest.

Where does passionate interest come from? My personal view is that it comes from the deepest level of our being—at the level of our true identity. It comes from the part of us that exists beyond the characteristics and personality traits we acquire as a result of our social upbringing.

What happens when we’re denied the opportunity to express ourselves in the way we want to, or we’re forced to express ourselves in a way that doesn’t correspond with the natural selection process? The experience creates an upset. Being “up-set” implies an imbalance.

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.

The markets provide structure in the form of behavior patterns that indicate when an opportunity to buy or sell exists. But that’s where the structure ends—with a simple indication.

The market is like a stream that is in constant motion. It doesn’t start, stop, or wait.

All gambling games have specified beginnings, middles, and endings, based on a sequence of events that determine the outcome of the game.

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.

Because gambling games have a formal ending, they force the participant to be an active loser.

Trading has no formal ending. The market will not take you out of a trade. Unless you have the appropriate mental structure to end a trade in a manner that is always in your best interest, you can become a passive loser. This means that, once you’re in a losing trade, you don’t have to do anything to keep on losing. You don’t even have to watch. You can just ignore the situation, and the market will take everything you own—and more.

One of the many contradictions of trading is that it offers a gift and a curse at the same time. The gift is that, perhaps for the first time in our lives, we’re in complete control of everything we do. The curse is that there are no external rules or boundaries to guide or structure our behavior.

The structure we need to guide our behavior has to originate in your mind, as a conscious act of free will. This is where the many problems begin.

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.

Remember, nothing happens until we decide to start; it lasts as long as we want; and it doesn’t end until we decide to stop.