A book that has helped me the most in trading is not on fundamental or technical analysis–although I’ve a few favourites–but one about mental analysis of ourselves as traders, titled Trading in the Zone by Mark Douglas.
Mark opened the book with a bold claim: “The consistently winning traders think differently from everyone else.” It's not intelligence, or market analysis, or a super-duper indicator that separates the successful from the unsuccessful. It’s really about one's state of mind that think in probabilities, and one’s response to four primary trading fears: fear of missing out (FOMO), fear of losing money (FLM), fear of being wrong (FBW), and fear of letting a win turns to loss (FWTL).
Five Fundamental Truths of Trading
Mark shared that in order to be successful, traders need to adopt a probabilistic mind-set that believes in the five fundamental truths about the Markets and trading:
- Anything can happen in the Markets, so be comfortable with being uncertain
- We don’t need to know everything about what is going to happen next in order to make money.
- Trade winners and losers are random, they do not follow a pattern
- A trading edge is just an indication of higher probability, never a certainty.
- Every moment in the Market is unique, while similar patterns reoccur, they are not exactly the same as before.
Unsuccessful vs Successful Traders
According to Mark, the unsuccessful traders are those that could not understand and handle the five truths. As a result, they avoid taking trades or make losing trades, further aggravating emotional stress such as anger, blaming the Markets, news, company, broker, bad luck, anyone except themselves, losing confidence, falling into despair or being fearful to take the next trade…
On the other hand, successful traders:
- Consistently trade without fear or overconfidence, taking full responsibility for their decisions
- Have little stress as they have completely embraced the risk of the trade, and are at ease with possibility of losing all capital allocated to it
- Are not trying to be right or avoid being wrong; neither are they trying to prove anything
- Accepts that Markets are neutral, neither for nor against them. If and when the Markets give information that their trading edges aren’t working, they cut loss or that it’s time to take profits, their minds do nothing to block this information or action.
In the Zone
When one is able to enter trades without the slightest hesitation or conflict, and just as carefree, without hesitation or conflict, admit they aren’t working, and exit trades–accepting losses as part and parcel of the business of trading. If doing so doesn’t cause the slightest emotional discomfort or loss of discipline, focus or confidence, then one would be trading in the zone.
It takes mental discipline, time and repeated practice to develop such fortitude as a trader, and he identified three stages of development, the mechanical, subjective and intuitive stage, outlining what each entails and how to work towards it.
About the Book
Mark has a gift of using analogies and stories, ranging from childhood experience to sporting heroes, everyday life to trading scenarios, that vividly illustrate some rather abstract concepts in his book, making them relatable and drive home the learning point.
He started as a broker with Merrill Lynch (now part of $Bank of America(BAC)$), before making his mark coaching real floor traders, hedgers and option specialists for 18 years, amassing a wealth of experience in teaching them how to develop the right mindset to be successful. He put that to good use in writing the book, sharing anecdotes and insights of how professional traders really think and behave, as well as the worries and pitfalls they fall into.
Hardcopy, eBook and Audiobook version can be borrowed from Singapore's National Library Board (NLB)
Shortcomings
No review would be complete without highlighting shortcomings of the title. First, I wish he would expand on the three stages of development for traders, to provide more details and guidance, as it covered only half of the last chapter. One might find parts of the book rather repetitive, and if these are cut out, it would be less than the 11 chapters and 324-pages.
Finally, some critics questioned his authority and claimed some parts bordered on pseudo psychology. A clinical psychologist friend who trades and have read Trading in the Zone shared with me that while some parts could do with citing his sources and evidence, it’s likely due to the author’s intention to explain psychology concepts in more accessible way, and contextualise them to trading. Mark’s tenets on trading psychology written circa 2000 are largely sound and timeless, and remain relevant today not only in trading, but fields such as competitive sports and gaming.
Worth a Read?
Trading in the Zone seeks to assist traders in adjusting their attitudes towards trading, to enable them to trade consistently without fear or greed, and minimise reckless behaviour, among others, revenge trading, doubling down when a trade is evidently against us, or taking outsized risks to recover losses.
Just like in trading, we don’t have to be perfect to make money, this book while not perfect, may still afford you the awareness and knowledge to be the more consistent, successful version of a trader you aspire to!
Chinese translations of Trading in the Zone are available
Comments
My fav trading psych book too! Fav quote fr Mark Douglas when I have string of winners or losers to keep me focused
“Trading is probably the hardest thing you’ll ever attempt to be successful at. That’s not because it requires intellect; quite the contrary ! But because the more you think you know, the less successful you’ll be.” [微笑]