Mark Douglas book Trading in the zone is considered to be a masterclass on trading psychology.
Very few people understand that in trading, trading psychology is more important than the trading systems or methods.
If you are new to trading or a professional trader, these two books on trading psychology are must-have in your bookshelf.
Professional Traders think differently
This is, as per Mark most essential criteria which differentiate from a consistently successful trader from a failed trader.
People who are very successful in other areas, when they come to trading, they failed miserably.
The reason for it is that our mindset s programmed for not accepting any failure. We want to be successful in everything which we do.
Whereas trading is a game of probability, and we will have to accept the loss gracefully.
To be in the Zone
Most people failed to understand that the failure in their trading is because of the way they think rather than tradings systems of methods.
The trading method is responsible for just around 20% of the total, whereas what you are thinking before-during and after trader will determine whether you will become a successful trader or not.
When people make a loss, they think that it is because of a lack of analysis they suffer damage, and so they start studying more on analysis part but ignores the most vital component which is psychology.
In most of the cases, this is not true and is not a differentiating factor among traders. It is the zone in which the trader is before-during and after trader which determines his success as a trader.
This book goes on to explain in great detail that it is a mindset over market analysis which helps a trader to be successful. Market analysis is essential, but too much study will lead to paralysis of analysis.
A trader with the right mindset and standard trading method will beat a trader just equipped with an excellent trading system.
There are many paradoxes and contradictions goes in a traders mind from time to time, which needs proper attention, as it causes them to think they are right whereas they are not.
Fear of Losing
Every novice trader faces this challenge in his trading tenure sooner than later. When you suffer consecutive losses on your trades, this will bring fear in your mind of losing in the next trade, which is giving you an excellent opportunity.
So because of this fear either you will miss the trade, or you might enter into the “Revenge Trade ” mode to cover all your previous losses in this trade. Both of the mental states are a recipe for disaster.
This is opposite to fear of losing, but it is having the same, if not worse effect on your trading outcome.
This generally happens when you have a series of winning traders and this makes you think you are “GOD of Markets“. And you start talking more significant risk in your trading. No need to tell that outcome eventually this will have.
Anyone who takes a trade knows that he is exposed to a particular risk. Whether the trade which has been taken turn out to be positive or negative is not known upfront. What is known at the time of taking the trade is that it is exposed to risk, which can have any outcome.
A Novice trader can have an internal conflict when it comes to risk. He would not want to lose and so will try or falsely “assume” that there is no risk involved in the trade which he has taken.
Whereas for a professional trader, no matter how much reliable a trade setup is, accepts and embraces the risk entirely. And he is mentally ready to lose that amount without any psychological issues.
This is one of the significant differentiating factors between novice and professional traders.
The fact is that risk is inherent in trading, and you should be able to accept it without the slightest bit of hesitation in taking a loss.
If you do not learn to accept the risk, then eventually it will give you mental pain.
Mark Douglas goes on to explain that if you have a system or your trading method in place, you have an Edge, but that does not mean you will be successful by just having this edge.
You have two choices before you enter the trade:
- You understand all the market variables ( to be able to know the risk completely) , which is practically impossible.
- You embrace the risk and will have no mental stress accepting that risk, and hence you are not afraid at all while taking the position.
If you manage to get this traders mindset and remain calm and emotionless during a tough time, then trading will become as easy as drinking a cup of coffee.
Whats the Learning
- You should be able to enter the trade without the slightest bit of fear.
- You should not get overconfident you results are continuously in your favor.
- Think of the market as what it is offering NOW, without being worried about past trades.
Best traders vs Average Traders
In Mark Douglas words ” what seperates best traders from others is not what they do or how they do it, but rather how they think what they do and how they are thinking when they do it. ”
Becoming a successful trader is in your own mind than in the market. successful traders do not fight with the market or give excuses of their wrong trades.
Some more common traits of successful trades are
Emotion free trading will help you to see all the opportunities present in the market and to take action on those opportunities without the slightest bit of discomfort within.
To be emotionally free, you should know these facts:
- anything can happen in the market
- its a game of probability
- an edge is nothing more than the more probability in your favour.
- Every moment in the market is unique.
- You can not expect that market will always behave in the direction of your wish. Accept it gracefully when it is not in your favour. Accept what market is offering you.
Thinking in Probabilitis
Successful traders always think in probability. No matter how excellent your analytical skills are, you will have to take loos in the market at some point in time.
But if you have a large enough sample size combined with the Edge in your favour, then you will be a successful trader.
Thinking in probability also means that you accept all possible outcome of the trade. In reality, it is tough to achieve this state of mind.
Do not try to predict the results. Just have your Edge and make a large sample size and your success will be inevitable. Don’t try to be right all the time.
Know your risk before you enter the trade
This is the most common error many novice traders do; they do not know their risk in a particular trade.
They mostly are overconfident that the event ( independent event as per probability) will turn out in their favour. Or they are just gambling. In any case, the loss is inevitable.
A professional trader know irrespective of how good his Edge is, the event has a probability and an inherent risk associated with it. And he is ready for any outcome.
Sometimes when we are emotionally attached to trade, we fail to see opportunities in it, as we see what we want to see and not what market is telling us.
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