I recently finished reading the book: Trading in the Zone by Mark Douglas
My overall impression is that the book is worthwhile. Yes, there is some fluff, some pop psych, some things I might not agree with. I've been trading a long time, so even a few small insights, a nugget or two of information, is worthwhile to me. If I can improve on a couple of trades a year, that made it well worth my time to read the book, and type up these notes. Yes, hope for more, but as a person learns more, each increment of improvement tends to be more marginal.
Notes for Chapters 1 & 2:
Like markets, others may find other high points, other things that stick in their mind. I'm not going to go into great detail, just hit a few high points. I suggest reading the book for yourself and taking your own notes. I'm sure another person's notes will be far different from mine.
There is a long questionaire in the preface, with questions about how a person perceives the markets. Here are two sample questions (agree or disagree):
"I often find myself feeling that markets are against me personally."
"As much as I might try to let go, I find it very difficult to put past emotional wounds behind me."
Why do people want to be traders? The action, the freedom are two big reasons. Douglas asks why so many would-be traders fail. An interesting follow up question is why so many traders avoid taking responbility for their trades. Another follow up is why so many ask for or take advice. There is a bit about how often a child is told "no," or "you can't."
Douglas is big on rules, a person might imagine given the title of his other book The Disciplined Trader. I have a few rules, though I do bend mine on occasion. My Rule #1 is "live to trade another day," meaning never YOLO your account, no matter how sure you are. Someone with better gut instincts might find this to be silly, but my forays into directional trading are no better then coin flips, perhaps worse.
There is a bit on random rewards. A simple real life example is a slot machine in a casino. The occassional winning spin is enough to addict some people to the things. People that are prone to be addicts can become addicted to more than a few things.
Some people that come to the market with huge success in other fields are often frustrated. Many of them owe their success to charm, personality, the ability to bend others to their own will. Markets can't be charmed by individual traders.
Chapters 3 and 4
Taking responsibility, by shaping your mental environment. The ultimate goal is consistency, to be able to trade without fear, without recklessness. Ironically, many beginner traders lack fear. It is when the beginner experiences losses does he/she feel the fear. The average reaction is to study more, try and find more indicators, do more back testing. The aim is to conquer the market with knowledge.
Brief discussion of athletes in the zone (hence the book title). Musicians, artists can also feel like they are in the zone. Douglas describes it as acting instinctively, just doing. The zone is a state of mind that is inherently creative. Another phrase is a winning attitude. In many sports and competitive activities, the competitors are all highly skill. What often separates winner from loser is a winning attitude. If there is a significant skill difference, the competitor with much more skill will usually win.
My thought: Oprah Winfrey popularized The Secret, that attitude, intent are the keys to the kingdom. Douglas is saying something similar.
Back to Douglas, the market owes you nothing. The market is not your adversary. Any meaning is in your mind. The market does have a flow, though it can be erratic. To start sensing the flow of the market, a mind has to be relatively free of fear, anger, regret, betrayal, despair and disappointment. Knowing about markets while carrying the burder of these emotions will usually result in losses. The emotion will override the knowledge.
A trader that has to win, has to be right, will tend to have a distorted image of the market. That trader is unlikely to be able to flow with the market, because the ego, the need to be right is often primary. Losses can not be avoided.
Douglas observes three groups: consistent winners, which are about 10% of traders. Consistent losers are about 30 to 40% of traders. The losers often have horrible habits such as trading emotionally (fear of loss, fear of missing out, revenge trading, freezing when all their indicators line up). The other 50% to 60% or so, win some and lose some. Those in this large group that lack risk management skills tend to blow up their accounts.
Hypothetical question: if you undid every trade that was flat out stupid (eg: revenge trade) or reckless, how much would your profit/loss improve for the past year? Next question: did you ever think to try to identify how your might change your perspective, your attitude, and eventually your behavior? The market has nothing to do with a trader being reckless.
A difficult concept is that the market acts as a mirror, reflecting back what's inside you. Like an ink blot, different people see different things in the same market. Premise: the solution is in your mind, not in the market, not in studying the market. Your state of mind is a by product of your beliefs and attitudes. Douglas drifts into Yoda's famous line from Star Wars, there is no try. A trader is consistent by nature, he/she doesn't have to try to be consistent. It becomes second nature.
There is a book for musicians called Effortless Mastery by Kenny Werner with similar thoughts. To become a good musician requires a lot of time, effort, practice. The master musician can make it seem effortless. When the musician is in the zone, like the athlete in the zone, it feels effortless.
Back to Douglas: learn to create a state of mind that is not affected by the market's behavior, and the struggle will cease to exist. When the internal struggle ends, everything becomes easy. The challenge is that losses are part of trading. Can the mind accept the losses, without feeling pain or regret or despair? Can a person experience those losses and enter the next trade without fear?
Knowledge is not enough. One trader that Douglas worked with was terrified of snakes. That trader understood that some snakes were relatively harmless, but the physical and emotional reaction was one of terror. For that person a lot of training, cognitive behavioral therapy is one form of training needed to overcome a deep rooted fear.
My comment: Many of us have deep thoughts, emotions that we don't fully understand. Suzy Orman asks you about your first memory about money. Her's was picking up a coin in a sand box and her mom telling her that it was dirty and to put it back. A person with that kind of first memory of money is likely to have a lot of emotional baggage attached to money.
Douglas uses the analogy of a computer program with one typo in the thousands of lines of code. That one typo might cause terrible problems in that program. Douglas compares that faulty program to a person's state of mind. It might be one click away, or a thousand clicks away. Of course, Douglas tended to work with traders that had some degree of success. If a person never had any success, why would they see
Douglas and pay his hefty fee? So the analogy might be to top athletes, all with a high degree of skill, not top athletes vs. the players at the local gym.
Douglas mentions the movie Cool Hand Luke. For those not familiar with the movie, Luke is a prisoner on a chain gang. He escapes, then is recaptured and beaten severely. Luke escapes a second time. The warden and guards tell him not to try a third time, because they will kill him. Spoiler alert. Luke escapes a third time. To Douglas this is analogy for some traders, that the market punish, and eventually kill. Maybe I have to see the movie again, because the analogy doesn't click with me.
Chapters 5 and 6
People see what they want to see, or as Douglas puts it: 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.
Example about a kid seeing a dog for the first time. The first encounter will generate history. If the first dog is friendly, it is likely the kid will see the second dog as friendly. If the first dog is dangerous or angry, the kid will likely think the next dog will be similar. Now take this to trading, a trader is considering a certain trade. Does the recent history color his/her perception? What if the last three similar setups resulted in winners? What if losers? What if the last ten were winners? Or losers?
I go back to Douglas' earlier categorization of traders, with about 30% to 40% that tend to generate consistent losses. Ten losers in a row, may mean doing the opposite trade is a better path. I am huge fan of keeping a trade journal. There is a time to go back and look at what's working, what's not. However that time is not in the middle of a trade. Markets do change. Winning strategies in one kind of market often become losers after the change.
Every trader that Douglas has worked with had to train their brain to focus on the now. Like a baseball relief pitcher, a short memory, letting go of any pain, is vital to success.
Douglas gives his secrets to trading:
1 ) trade without fear, without over confidence
2 ) perceive what the market is offering from its perspective
3 ) stay completely focused on the "now moment of opportunity flow."
4 ) spontaneously enter the "zone"
Traders who have experienced being tapped into the collective consciousness of the market can anticipate a change of direction just as a bird in the middle of a flock or a fish in a middle of a school will turn at the price moment that all others turn. To get there, a person needs to focus entirely on the now moment, to tap the creative side of the brain (vs. the logical side). True inspiration, intuition can not be readily explained.
The best traders believe that anything can happen. To me the obvious corollary is that while anything can happen, the profits tend to be with the odds in your favor (vs. long odds against you). The bit about intuition, I categorize as gut. A few people have what I call "golden guts." They have remarkable market instincts and their gut feelings can lead to huge profits. I don't have this. I think I am average, and that my "gut" is more often emotion (greed or fear), and tends to lead to bad decisions. Not bad enough to be a contrary indicator, but bad enough that trading on my gut would likely lead to the poor house.
Back to Douglas: most people believe that a successful trader is a good market analyst. In his experience, this isn't close to true. In his travels, analysis and trading are separate, though analysis can contribute to trading success. To Douglas, way too much attention is paid to analysis, not enough inner work on your own psyche and biases.
Chapter 7 and 8
Thinking in probabilities is the trader's edge. My comment: This will come naturally to experienced options traders. If markets are efficient, every trade has the same expected value (zero), but have different odds, different payouts.
Douglas uses the example of Las Vegas casinos. He goes on to say that an individual can't anticipate how other players will play their Blackjack hands. The casino has the edge, so won't attach any emotion on the outcome of any individual hand.
Douglas tells the story of a client who consistently made 12 to 18% per year for 30 years. However, the client had analysis that indicated he was leaving a lot of money on the table. Douglas goes through one futures trade, where the trade goes against his client. It doesn't reach the stop loss level, however, when the trade comes back, he exits for break even. The trade would have gone on to be a big winner. My comment is that if there is some rule in place to exit at break even in that instance, there is no problem. The problem is the client "felt bad" about the trade, and just wanted to get out at even. There was no plan or rule to exit at that point. Perhaps prior experience of a trade that moves against the client, then gets back to even, then blows through the stop level, influenced the exit.
I think back to the analogy of the kid that meets an angry aggressive dog as his first dog. That experience imprints and fear becomes built in. Recent trading losses can influence us, but the deep dark history is often where the bigger demons are.
Everyone experiences some degree of anger, resentment, despair, regret, disappointment, or betrayal. A trader that feels great when the market moves in his/her favor, or feels terrible when it moves against them, is human. However, that person often loses objectivity, and acts like the client in the story, allowing emotion to influence the decision making.
An experienced trader watching a market he has no position in, no possibility of putting on a position, tends to be objective. My comment: this is one reason many traders take a break after a bad stretch, to clear their mind, to become objective again.
Douglas: when I put on a trade, all I expect is that something will happen. Ideally, losses don't do any emotional damage, because there is no expectation. If and when the market tells them their edges aren't working, they accept what the market is offering them. My comment, the fine line is objectivity, vs. emotion. It is the rare person that can trade consistently on emotion. More rare might be a person that never gives into to emotion.
Back to Douglas: putting on a winning trade or even a series of winning trades requires no skill. Creating consistent results and being able to keep what we've created does require skill. Making money consistently is a by-product of acquiring and mastering certain mental skills. The degree to which you understand this is the same degree to which you will stop focusing on the money and focus instead on how your can use your trading as a tool to master these skills.
Consistency is the results of a carefree, objective state of mind, where we are making ourselves available to perceive and act upon whatever hte market is offering us (from its perspective) in any given "now moment."
Carefree means confident, but not euphoric. You don't feel any fear, hesitation or compulsion to do anything because you've effectively eliminated the potential to define and interpret market information as threatening. To remove the sense of threat, you have to accept the risk completely. When you have accepted the risk, you will be at peace with any outcome.
Edge is an indication of a higher probability of one thing happening over another. Trading isn't about hoping, wondering or gathering evidence. Adding random variables makes it difficult, if not impossible to determine what works and what doesn't. To the degree that you lack confidence, you will experience fear.
Every moment in the market is unique.
Chapter 9 and 10
Story about a TV show doing a stunt. They dress up a man in a suit, hang a big sign that says "free money," on him and have him try to give out cash in a high end business district. Virtually no one wants his money. Note, this stunt was back in 1987. My comment is that I am city kid, so the scam radar goes way up when I see something like this. In this case it was a stunt, but a lot of offers of "free money" are scams. The other thought is about expectations and beliefs. If a person believes that money has to come hard, that tends to be self-fulfilling.
Beliefs take on a life of their own. My thought is about confirmation bias. How many people will only seek out information and sources that confirm their existing beliefs. These days it is easier and easier to slide into these kind of protective bubbles. Harders and harder to find objective groups of people. Even facts can no longer be agreed upon. Almost everyone believes they are objective. In the markets, results speak volumes.
Douglas believed in both the tooth fairy and Santa Claus as a child. (I believed in neither.) Beliefs can be active or inactive. Active beliefs are energized. Douglas believes that creativity is boundless, limitless. Beliefs keep on working in the background, even if they are not on a conscious level.
Everyone has a sense of self-valuation. It is a core belief. There can be huge gaps between how much money we desire, how much we perceive is available, how much we think we deserve. The dynamics can be complex and go beyond the scope of any book. My stray thought is Warren Buffett visualized money as being like a snowball rolling down a mountain. Find a high mountain with a lot of snow, start the ball rolling early and you will accumulate a large pile, and that's what he did. Buffett bought real estate before graduating high school and was earning more than most of his teachers by the time he graduated, all from businesses he started when he was a kid (paper routes, golf balls from the lake, pinball machine repair and leasing).
For young people that want to be the next Buffett, perhaps think about starting a simple business, instead of trying to get that first little pile by trading. Buffett eventually hired other kids to deliver papers, eventually outsourced the retrieval of golf balls from the lake and found an unfilled niche with the pinball machines. I'm sure others have seen the many posts from people with next to no money asking for advice. Best advice might be to be like Buffett and make that first pile of money with a job or a business, before thinking about equity or option investing.
Douglas worked with many traders that would acheive a certain level of success, but their core beliefs limited them. They had an invisible ceiling in their mind, and when they reached a certain dollar level or certain annual percentage gain, they would start losing. A trader that demonstrates this kind of consistent pattern may have to do a lot of psychological work to alter their belief system to lift or remove the ceiling.
Chapter 11 (last chapter)
Douglas writes about becoming intuitive. This might seem opposite of discipline (his other book is The Disciplined Trader). He also talks about mechanical sets of rules. Most people have to learn how to execute a mechanical system before they can use an intelligent intuitive system. The irony is that many beginners trade mostly on their intuition, their gut.
However, with little or no training, the beginners tend to bumble and stumble around. There is that fine line where skill, training, and intuition all can line up--that's the zone that is mentioned in the title. Musicians can be in the zone, athletes too, and traders. The mind trick is to go through all that training, and still be able to go back to the "beginners mind" that Zen philosophers talk about.
The dog analogy used in many chapters is a good one (kid meets their first dog, it is angry and aggressive, so it imprints on the young person that all dogs are dangerous). In this chapter Douglas introduces a second analogy, about walking across a bridge without any rails on the sides. If the bridge is wide, say 20 feet (6 meters) wide, a person may feel a bit of discomfort. If the bridge is say 3 feet wide, most people are going to be nervous if the bridge is of any length. Narrow it down to one foot or less and most will not want to cross. A few adrenaline junky types may want the thrill, but average folks are going to turn away. In trading, the risk can be like the width of the bridge. Those doing YOLO (you only live once, bet the farm) trades have very little margin for error. Those that continuous do them are almost sure to fall off before they reach their goal.
It can be difficult to observe yourself. Douglas thinks this is a critical step in trader development.
Douglas writes about his road to becoming a runner. Being relatively young and fit, he thought it would be easy, even though he had never run before. First time out, he ran maybe 50 yards, before running out of steam. This was so discouraging that he didn't try again for weeks. Eventually, the weather turned nicer and he gave it another go. It wasn't much better. Douglas decided that setting a goal of running five miles by the end of summer would be helpful to him. He started keeping a running diary of distance, time, and how he felt. There were a lot of excuses, distractions.
After several weeks of running, he was able to run one mile, and felt elated. Douglas found his happiness to be troubling, so he decided to add what he calls his "five-mile rule." Each time he went out running, he would go at least one yard further than the last time. He could do more than that if he felt like it, but even if he felt terrible, or the weather wasn't so good, he decide that each time out he would go a bit further. With this rule in place, he reached his goal of a five mile run, on schedule.
My thought is that running five miles is a fair enough goal for a relatively young, relatively fit person with no major physical limitations. Douglas writes about doing 20 trades as a decent sample size, though for some people a lot more than 20 trades are going to be needed to feel confident.
Back to Douglas, beliefs can be changed. The goal is to create the belief that "I am a consistent winner." Like the first dog story, if a person has imprinted early with stories of discouragement or loss, the road can be long and hard. My other thought that this book is 17 years old. Thousands of traders have read and processed the material. Think about golfers in a tournament. If only a few golfers have worked on sport psychology to try and improve their results, that small group might have an advantage (assuming the program is worthwhile). After all these years, a new trader just going through the cycle, will only get to even with the other more experienced traders that have already been through training. That said, if a person is new, any training is likely to have a positive effect.
Five fundamental truths:
1. Anything can happen
2. You don't need to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
5. Every moment in the market is unique
There are some comments on Reddit: