Trading in the zone - Bible for speculation!

 

Trading in the Zone

 Trading in the zone by Mark Douglas is one of the most prominent book which covers trading psychology, systematic trading, trading rules, trade setup etc which helps in wholistic development of any trader or someone who aspires to be speculator. As the preface quotes-Mastering the market with confidence, discipline and a winning attitude, the book highlights what it takes to be consistently profitable, thinking in probabilities, defining your edge and ultimately getting in that ZONE.

Chapter 1 

It introduces you to basic stock market terms like fundamental analysis, technical analysis and mental analysis and each of its importance in the market.

On technical analysis-"Individuals develop behavior patterns and a group of individuals, interacting with one another on consistent basis, form collective behavior patterns. These behavior patterns are observable and quantifiable, and they repeat themselves with statistical reliability."

Further the chapter discusses two groups of traders ,one which has broken "threshold of consistency" who can take money at their will out of the markets while the other and dominant one in which they remain in state of fear, anger, frustration, anxiety etc. Thus, showing the importance of psychology in trading. He denotes TRADING FEARS as-being wrong, losing money, missing out, and leaving money on the table.

"The best traders can put on a trade without the slightest bit of hesitation or conflict, and just as freely and without hesitation admit it isn't working." 

Trading psychology quotes-"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."

Chapter 2

How people get into trading and think of it as endless money making machine. The chapter highlights the lures and dangers in speculating and elaborates how attraction, freedom of choice, social structure pulls them towards trading. How impulses guides our behavior most of the times and the only way to protect health, wealth and time is through imparting objectivity in the process. The problems with most of the traders are examined and explained in detail like failure to take responsibility, addiction to random rewards and lack of internal control

"Our needs and desires are generated I our mental environment, and they are fulfilled in the exterior environment. If these two are in balance we are in a state of peace."

"No matter how good a trade looks, it could lose."

Chapter 3

The chapter discusses responsible trading, forming mental structure, getting that consistent winning attitude. "The fact is, you don't need the slightest bit of skill to put a winning trade, and if it is possible to put one winning trade without the slightest bit of skill, it is certainly possible to put on another and another"

Market's sole purpose is to extract money or opportunity from you, but it also provides you with the opportunity to take as much as you can. This can be achieved by making your own rules, abiding to them and having winning attitude

"Analysis paralysis" is also explained well in the chapter as "Learning more and more about the markets only to avoid pain will compound your problems because the more you learn the more he will naturally expect and more will be the pain". What matters more is praxis ie theory + practice.

"Winning attitude" : a positive expectation to your efforts with an  acceptance that whatever results you get are a perfect reflection of your level of development and what you need to do better"

Chapter 4 

Consistency-What differentiates a skilled to novice trader is consistency. Consistency comes from understanding the risk, managing the risk, and not letting fear overpower your rational mind. Human mind and body is designed such way so as to maximize pleasure and minimize pain but in reality perfections does not exist which imparts pain. "Relationship with the market should be in such way that possibility of being wrong, losing, missing out, doesn't cause your mental defense mechanisms kick in and take you out of the opportunity flow." Douglas explains the situation by taking the example of dog and child, how biases and behavior of child affects the perception about snake and how the snake behaves in reality. Getting your mind right clubbed with edge and probabilities gets you in the ZONE" 

"Stop avoiding and start embracing the responsibility and the risk."  

  

Chapter 5

Douglas compares speculative behavior of masses and how cause and effect relationship that exists between ourselves and everything else exists in external environment. How our biases can lead to formation of perception. "Anything that is energy has potential to act as a force expressing its form." 

This chapter particularly gives some complex jargons and how internal environment is build using metaphysical forces. Again the anecdote of child and dog is used to throw the light on formation of perception. In trading how one trade can dwell an individual into either overconfidence or pessimism ultimately distorting ones objectivity. At last Douglas provides a solution "Developing and maintaining a state of mind that perceives the opportunity flow of the market, without threat of pain or problems caused by overconfidence, will require you to TAKE CONSCIOUS CONTROL OF THE ASSOCIATION PROCESS"

f(last 3 trades) = Approach of trader for next trades

Chapter 6

This explains the "now moment" is what matters in the market ie it defines the perception of market. Getting in the ZONE is to get your head in sync with the market or to recall Edwin Tape never lies, it is always how you perceive it. The ease with which you execute each trade comes from objective approach towards the market, free from biases of previous trades creating "now moment opportunity flow" and getting yourself in the ZONE.

Top trading errors according to Douglas are-not predefining the risk, not cutting losses, not systematically taking profits.

"A good market analyst need not be good trader."

"There can be an extreme diversity of beliefs present in any market in any given moment, making virtually anything possible."

Chapter 7

What is edge and how can one discover that edge in trading, how to think in probabilities and how psychology of masses work. This chapter answers all of the above questions and is one of the best chapters from the bible of trading. Uncertainty at micro level and certainty at macro level helps us to get consistent and free from emotional pain in the markets.

"Losses are simply the cost of doing business or the amount of money I spend to make myself available for winning trade."

"Edge is nothing more than an indication of a higher probability of one thing happening over the other."

"We have to be rigid in our rules and flexible in expectations."

This chapter holds crux of thinking in probabilities and getting an edge which makes it one of the most engaging one and requires re reading  quite a few times.

Chapter  8,  9, 10 Beliefs

Three chapters collectively suffice the topic belief and defines basic terms used earlier in the book. Often things gets repetitive but once soaked in can do wonders for aspiring trader/struggling trader. Reiteration of terms like edge, thinking in probabilities, market uncertainty, now moment, unfulfilled expectations, uniqueness of market at every moment, random distribution of wins and loses, origins of belief, shaping of beliefs are explained in detail. 

Free money experiment shows difference between belief and truth and how humans perceive money.

These chapters were a bit more complex to digest and hence require very thorough and slow reading so as to assimilate the thoughts piece by piece.

"For your mind to be open to a true exchange of energy, you can't be in a state of knowing or believing that you already know what's going to happen next."

Chapter 11 

Thinking like a Trader-Whole book is concentrated and revised in this chapter-Five fundamental truths, to lowering expectations, perception etc. The three stages in a traders life namely mechanical, subjective and intuitive stage. Tips and checklist to be consistent and disciplined trader along with psychology, strong belief system, self discipline is explained in detail making it a must read. Overall the chapter summarizes the whole book and at the end provides us with an exercise with given set of rules to be practiced.

All in all the book is must read for a beginner who aspires to trade. It does not contain any strategy as such but psychology part and what does it take to be a successful consistent trader is augmented well by Douglas.