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

by Mark Douglas

Those traders who have confidence in their own trades, who trust themselves to do what needs to be done without hesitation, are the ones who become successful. They no longer fear the erratic behavior of the market. They learn to focus on the information that helps them spot opportunities to make a profit, rather than focusing on the information that reinforces their fears. While this may sound complicated, it all boils down to learning to believe that: (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. With this approach you will learn in a methodical, non-random fashion what works and what doesn’t. And, just as important, you will build a sense of self-trust so that you won’t damage yourself in an environment that has the unlimited qualities the markets have.

I had five major objectives in mind in writing Trading in the Zone: • To prove to the trader that more or better market analysis is not the solution to his trading difficulties or lack of consistent results. • To convince the trader that it’s his attitude and “state of mind” that determine his results. • To provide the trader with the specific beliefs and attitudes that are necessary to build a winner’s mindset, which means learning how to think in probabilities. • To address the many conflicts, contradictions, and paradoxes in thinking that cause the typical trader to assume that he already does think in probabilities, when he really doesn’t. • To take the trader through a process that integrates this thinking strategy into his mental system at a functional level.

Technical analysis has been around for as long as there have been organized markets in the form of exchanges. But the trading community didn’t accept technical analysis as a viable tool for making money until the late 1970s or early 1980s. 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. 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 solely on what is logical and reasonable as determined by a mathematical model. On the other hand, fundamental analysis creates what I call a “reality gap” between “what should be” and “what is.” The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct. In contrast, 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.

Think about the number of times you’ve looked at a price chart and said to yourself, “Hmmm, it looks like the market is going up (or down, as the case may be),” and what you thought was going to happen actually happened. But you did nothing except watch the market move while you anguished over all the money you could have made. 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” that can make trading one of the most difficult endeavors you could choose to undertake and certainly one of the most mysterious to master.

The big question is: Can trading be mastered? Is it possible to experience trading with the same ease and simplicity implied when you are only watching the market and thinking about success, as opposed to actually having to put on and take off trades? Not only is the answer an unequivocal “yes,” but that’s also exactly what this book is designed to give you—the insight and understanding you need about yourself and about the nature of trading.

But learning how to identify an opportunity to buy or sell does not mean that you have learned to think like a trader. 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. Everyone who trades ends up learning something about the markets; very few people who trade ever learn the attitudes that are absolutely essential to becoming a consistent winner. Just as people can learn to perfect the proper technique for swinging a golf club or tennis racket, their consistency, or lack of it, will without a doubt come from their attitude

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.

Admitting we are wrong and losing money to boot can be extremely painful, and certainly something to avoid. Yet as traders, we are confronted with these two possibilities virtually every moment we are in a trade. Now, you might be saying to yourself, “Apart from the fact that it hurts so much, it’s natural to not want to be wrong and lose something; therefore, it’s appropriate for me to do whatever I can to avoid it.” I agree with you. But it is also this natural tendency that makes trading (which looks like it should be easy) extremely difficult.

I’m sure there isn’t one trader reading this book who hasn’t gotten into trades too soon—before the market has actually generated a signal, or too late—long after the market has generated a signal. What trader hasn’t convinced himself not to take a loss and, as a result, had it turn into a bigger one; or got out of winning trades too soon; or found himself in winning trades but didn’t take any profits at all, and then let the trades turn into losers; or moved stop-losses closer to his entry point, only to get stopped out and have the market go back in his direction? These are but a few of the many errors traders perpetuate upon themselves time and time again.

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. Everyone else is afraid, to some degree or another. When they’re not afraid, they have the tendency to become reckless and to create the kind of experience for themselves that will cause them to be afraid from that point on. 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.

Physically, it causes us to freeze or run. Mentally, it causes us to narrow our focus of attention to the object of our fear. This means that thoughts about other possibilities, as well as other available information from the market, get blocked.

Furthermore, there are no limits to the market’s behavior. It can do anything at any moment. As a matter of fact, because every person who trades is a market variable, it can be said that any single trader can cause virtually anything to happen. This means that no matter how much you learn about the market’s behavior, no matter how brilliant an analyst you become, you will never learn enough to anticipate every possible way that the market can make you wrong or cause you to lose money. So if you are afraid of being wrong or losing money, it means you will never learn enough to compensate for the negative effects these fears will have on your ability to be objective and your ability to act without hesitation. In other words, you won’t be confident in the face of constant uncertainty. The hard, cold reality of trading is that every trade has an uncertain outcome. 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.

Now, 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.

Learning how to analyze the market’s behavior is simply not the appropriate training.

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.

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. That’s exactly what this book is designed to teach you.

“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.”

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.

Traders who are not ready to accept responsibility for the outcomes of their interpretations and actions will find themselves in a dilemma: How does one participate in an activity that allows complete freedom of choice, and at the same time avoid taking responsibility if the outcome of one’s choices are unexpected and not to one’s liking? 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.

Randomness is unstructured freedom without responsibility. When we trade without well-defined plans and with an unlimited set of variables, it’s very easy to take credit for the trades that turn out to our liking (because there was “some” method present). At the same time, it’s very easy to avoid taking responsibility for the trades that didn’t turn out the way we wanted (because there’s always some variable we didn’t know about and therefore couldn’t take into consideration beforehand).

If the market’s behavior were truly random, then it would be difficult if not impossible to create consistency. If it’s impossible to be consistent, then we really don’t have to take responsibility. The problem with this logic is that our direct experience of the markets tells us something different. The same behavior patterns present themselves over and over again. Even though the outcome of each individual pattern is random, the outcome of a series of patterns is consistent (statistically reliable). This is a paradox, but one that is easily resolved with a disciplined, organized, and consistent approach.

I’ve worked with countless traders who would spend hours doing market analysis and planning trades for the next day Then, instead of putting on the trades they planned, they did something else. The trades they did put on were usually ideas from friends or tips from brokers. I probably don’t have to tell you that the trades...

When we act on our own ideas, we put our creative abilities on the line and we get instant feedback on how well our ideas worked. It’s very difficult to rationalize away any unsatisfactory results. On the other hand, when we enter an unplanned, random trade, it’s much easier to shift the responsibility by blaming the friend or the broker for their bad ideas.

Several studies have been done on the psychological effects of random rewards on monkeys. For example, if you teach a monkey to do a task and consistently reward it every time the task is done, the monkey quickly learns to associate a specific outcome with the efforts. If you stop rewarding it for doing the task, within a very short period of time the monkey will simply stop doing the task. It won’t waste its energy doing something that it has now learned it won’t be rewarded for. However, the monkey’s response to being cut off from the reward is very different if you start out on a purely random schedule, instead of a consistent one.

One of the principal reasons so many successful people have failed miserably at trading is that their success is partly attributable to their superior ability to manipulate and control the social environment, to respond to what they want.

The market doesn’t respond to control and manipulation (unless you’re a very large trader). However, we can control our perception and interpretation of market information, as well as our own behavior. Instead of controlling our surroundings so they conform to our idea of the way things should be, we can learn to control ourselves. Then we can perceive information from the most objective perspective possible, and structure our mental environment so that we always behave in a manner that is in our own best interest.

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.

The tools you will use to create this new version of yourself are your willingness and desire to learn, fueled by your passion to be successful. If the willingness and desire to learn are your primary tools, then what is your medium? An artist creating a sculpture can choose to work in a number of mediums—clay marble, or metal, for example—but if you want to create a new version of your personality that expresses itself as a consistently successful trader, you have only your beliefs and attitudes. The medium for your artistic endeavor will be your mental environment, where with your desire to learn, you can restructure and install the beliefs and attitudes that are necessary to achieve your ultimate goal. I am assuming your ultimate goal is consistency. If you’re like most traders, you don’t realize the fullest potential of the opportunities available to you. To realize more and more of that potential, to make it more and more of a reality in your life, your primary goal has to be to learn how to think like a consistently successful trader.

Remember, the best traders think in a number of unique ways. They have acquired a mental structure that allows them to trade without fear and, at the same time, keeps them from becoming reckless and committing fear-based errors. This mind-set has a number of components, but the bottom line is that successful traders have virtually eliminated the effects of fear and recklessness from their trading.

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. It’s almost impossible not to fall into this trap. There are a number of psychological factors that make it very easy to assume that it’s what you don’t know about the markets that causes your losses and lack of consistent results. However, that’s just not the case. The consistency you seek is in your mind, not in the markets.

Attitude produces better overall results than analysis or technique. Of course, the ideal situation is to have both, but you really don’t need both, because if you have the right attitude—the right mind-set—then everything else about trading will be relatively easy, even simple, and certainly a lot more fun.

This lack of fear translates into a carefree state of mind, similar to the state of mind many great athletes describe as a “zone.” If you’ve ever had the occasion to experience the zone in some sport, then you know it is a state of mind in which there is absolutely no fear and you act and react instinctively. You don’t weigh alternatives or consider consequences or second-guess yourself. You are in the moment and “just doing it.” Whatever you do turns out to be exactly what needed to be done.

Even though you cannot force or will yourself into a zone, you can set up the kind of mental conditions that are most conducive to experiencing “the zone,” by developing a positive winning attitude. I define a positive winning attitude as expecting a positive result from 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.

That’s what the great athletes have: a winning attitude that allows them to easily move beyond their mistakes and keep going. Others get bogged down in negative self-criticism, regret, and self-pity. Not many people ever develop a positive winning attitude. The curious anomaly of trading is that, if you start with a winning trade, you will automatically experience the kind of carefree mind-set that is a by-product of a winning attitude, without having developed the attitude itself. I know this may sound a bit confusing, but it has some profound implications.

If a few winning trades can cause you to enter into the kind of carefree state of mind that is an essential component to your success, but is not founded on the appropriate attitudes, then what you have is a prescription for extreme misunderstanding about the nature of trading that inevitably results in both emotional and financial disaster. Putting on a few (or more) winning trades does not mean you have become a trader, but that’s the way it feels, because it taps us into a state of mind that only the most accomplished people experience on a consistent basis. The fact is, you don’t need the slightest bit of skill to put on a winning trade, and if it’s possible to put on one winning trade without the slightest bit of skill, it is certainly possible to put on another and another. I know of several people who started their trading careers with fairly substantial strings of winning trades. When you’re feeling confident and unencumbered by fears and worries, it isn’t difficult to put on a string of winning trades...

And, of course, because you have no fear, you can execute your trades with no inter...

What makes trading so fascinating and, at the same time, difficult to learn is that you really don’t need lots of skills; you just need a genuine winning attitude. Experiencing a few or more winning trades can make you feel like a winner, and that feeling is what sustains the winning streak. This is why it is possible for a novice trader to put on a string of winning trades, when many of the industry’s best market analysts would give their right arms for a string of winning trades. The analysts have the skills, but they don’t have the winning attitude. They’re operating out of fear. The novice trader experiences the feeling of a winning attitude because he’s not afraid. But that doesn’t mean he has a winning attitude; it only means he hasn’t experienced any pain from his trading activities to make him afraid.

suppose that he has completely accepted the risk, meaning that he has considered and accounted for all of what would otherwise be the unacceptable possibilities in the market’s behavior, both financially and emotionally. With these beliefs and expectations, it is unlikely that he would experience a deterioration of his attitude, and would simply go on to the next trade. By the way, this is an example of an ideal set of trading beliefs and attitudes.

fundamental shift in attitude that accounts for their success, not some brilliant realization about the market, as most people erroneously assume. This erroneous assumption is prevalent among traders simply because very few of them really understand, at the deepest levels, just how critical a component attitude is in determining one’s success.

only the very best traders have reached a point where they can and do accept complete responsibility for the outcome of any particular trade. Everyone else to one degree or another assumes they are taking responsibility; but the reality is that they want the market to do it for them. The typical trader wants the market to fulfill his expectations, his hopes, and dreams.

If you perceive the endless stream of opportunities to enter and exit trades without self-criticism and regret, then you will be in the best frame of mind to act in your own best interest and learn from your experiences. On the other hand, if what you perceive in market information is painful in some way, then you will naturally try to avoid that pain by either consciously or subconsciously blocking that information from your awareness. In the process of blocking that information, you’ll systematically cut yourself off from any number of opportunities to enrich yourself.

The market does have a flow. It is often erratic, especially in the shorter time frames, but it does display symmetrical patterns that repeat themselves over and over again. Obviously, it’s a contradiction to flow with something you are against. If you want to start sensing the flow of the market, your mind has to be relatively free of fear, anger, regret, betrayal, despair, and disappointment. You won’t have a reason to experience these negative emotions when you assume absolute responsibility.

For traders, the only way to extract that revenge is to conquer the market, and the only way to conquer the market is through market knowledge, or so they think. In other words, the underlying reason for why the novice trader is learning about the market is to overcome the market, to prove something to it and himself, and most important, to prevent the market from hurting him again. He is not learning the market simply as a means to give himself a systematic way of winning, but rather as a way to either avoid pain or prove something that has absolutely nothing to do with looking at the market from an objective perspective. 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.

Curiously, even though his knowledge has increased, he now finds that he’s developed problems executing his trades. He hesitates, second-guesses himself, or doesn’t put on a trade at all, in spite of any number of clear signals to do so. It’s all frustrating, even maddening, because what’s happened doesn’t make sense. He did what he was supposed to do—he learned—only to find that the more he learned, the less he took advantage of.

If you have to win, if you have to be right, if you can’t lose or can’t be wrong, you will cause yourself to define and perceive categories of market information as painful. In other words, you will view as painful any information the market generates that is in opposition to what will make you happy. The dilemma is that our minds are wired to avoid both physical and emotional pain, and learning about the markets will not compensate for the negative effects our pain-avoidance mechanisms have on our trading.

The problem is that preventing pain by avoiding losses can’t be done. The market generates behavior patterns and the patterns repeat themselves, but not every time. So again, there is no possible way to avoid losing or being wrong.

What he doesn’t realize is that, in spite of his enthusiasm, when he went from a carefree state of mind to a prevent-and-avoid mode of thinking, he shifted from a positive to a negative attitude. He’s no longer focused on just winning, but rather on how he can avoid pain by preventing the market from hurting him again. This kind of negative perspective isn’t any different from the tennis player or golfer who is focused on trying not to make a mistake, the more he tries not to make a mistake, the more mistakes he makes. However, this mode of thinking is much easier to recognize in sports because there’s a more discernable connection between one’s focus and one’s results. With trading, the connection can be obscured and more difficult to recognize as a result of the positive feelings being generated from discovering new relationships in market data and behavior. Since he is feeling good, there’s no reason to suspect that anything is wrong, except that the degree to which his focus is weighted toward pain-avoidance is the same degree by which he will create the very experiences he is trying to avoid. In other words, the more he has to win and not lose, the less tolerance he will have for any information that might indicate he is not getting what he wants. The more information that he has the potential to block, the less he will be able to perceive an opportunity to act in his own best interests.

He has unwittingly created a vicious cycle where the more he learns, the more debilitated he becomes; the more debilitated he becomes, the more he feel compelled to learn. 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.