Mark Douglas on Emotionless Trading

dbphoenix

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Trading is a sequence of small financial decisions. If you have not done the prep, you get to take a pass-fail emotional test every time you sit down to trade. This repeats over and over until you work through these issues. Once you have done so, trading is emotionally void, and the risk of trading emotionally is effectively zero. This heightens your awareness and perception of the market (and your "self") during trading.

To trade rationally and objectively, you must possess strongly supporting beliefs.

Supporting beliefs can totally ELIMINATE emotional trading as of the moment you completely internalize ("possess") them.

The 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.

The Seven Principles of Consistency

1. I objectively identify my edges.
2. I predefine the risk of every trade.
3. I completely accept the risk or I am willing to let go of the trade.
4. I act on my edges without reservation or hesitation.
5. I pay myself as the market makes money available to me.
6. I continually monitor my susceptibility for making errors.
7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.

It is impossible to trade emotionally once these beliefs are internalized, primarily due to Principle 3: "I completely accept the risk . . .". You take 100% responsibility for all results: all the profits, all the losses, EVERYTHING.

If you hold the 5 beliefs, you can follow the 7 Principles because the beliefs support the Principles.

If you follow the Principles, especially Item 7, then you do not need to "learn emotional control" because you are already living out the beliefs that manifest calm and effortless control of emotions.

This makes perfect sense if you buy the idea that behavior comes from values and values come from beliefs. Beliefs underlie all your values, and values underlie all your behaviors. Therefore, work on beliefs, not "emotional control" (behaviors) per se.

If you hold the 5 beliefs, you are going to be very disciplined about risk. For example if you truly believe "anything can happen at any time", you are going to put strict limits on the total risk you are willing to take. If you don't impose limits on risk, you CLEARLY don't hold the belief that "anything can happen".

The 5 beliefs and 7 rules force a complete understanding of all risks and complete management of those risks, especially Risk of Ruin. The 5 beliefs and 7 rules manifest great RESPECT for risk.

To hold the 5 beliefs and follow the 7 rules you must be ready, willing and able to take 100% responsibility for all your results.

This 100% acceptance of all responsibility means you are never a victim of anyone else – ever – and that all the credit (if any) belongs to you – and you alone.

What level of competence you actually achieve is in direct proportion to how fully and faithfully you adhere to these beliefs about trading.


Liberty means responsibility. That is why most men dread it.

--George Bernard Shaw
 
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dbphoenix

Legendary member
6,953 1,260
Certainly one could argue that some traders lose because they don't understand enough about the markets and therefore they usually pick the wrong trades. As reasonable as this may sound, it has been my experience that traders with losing attitudes pick the wrong trades regardless of how much they know about the markets. In any case, the result is the same -- they lose. On the other hand, traders with winning attitudes who know virtually nothing about the markets can pick winners; and if they know a lot about the markets, they can pick even more winners.

If you want to change your experience of the markets from fearful to confident, if you want to change your results from an erratic equity curve to a steadily rising one, the first step is to embrace the responsibility and stop expecting the market to give you anything or do anything for you. If you resolve from this point forward to do it all yourself, the market can no longer be your opponent. If you stop fighting the market, which in effect means you stop fighting yourself, you'll be amazed at how quickly you will recognize exactly what you need to learn, and how quickly you will learn it. Taking responsibility is the cornerstone of a winning attitude.

--MD
 
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0007

Senior member
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Taking responsibility is the cornerstone of a winning attitude.

--MD


Excellent advice – and it doesn't just apply to the markets only but many other walks of life also.
 

dbphoenix

Legendary member
6,953 1,260
When you participate in gambling games, you know exactly what your risk is and the event always ends. With the markets you don't ultimately know what your risk is, even if you are disciplined enough to use stops, because the market could gap through your stops. Also because the event never ends and is in constant motion, there is always the possibility of getting back what you are losing in any trade. You won't need to actively participate to get back what you are losing; you just have to stay in your trade and let the market give it to you. As a result, there is the constant temptation not to cut your losses which is very difficult to resist. Why choose pain over the possibility of being made whole, when all you need do is ignore the risk?

--MD
 

dbphoenix

Legendary member
6,953 1,260
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.

--MD
 
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Fugazsy

Veteren member
3,661 677
Good read.

I do not agree with this one:
5. I pay myself as the market makes money available to me.

When the market goes my way I like to stay with my trade as long as I can, taking partial profits quickly reduces my positive RR considerably. (maybe it would make more sense in scalping....I do not know..... but in swing where my money comes from an handful of trades it does not make sense, it is like selling something at a cheaper price when everybody wants it).

Also regarding accepting the responsibility of the trade.... yes it does make sense but only accepting it will not shift the mental structure in my experience...to shift the mental structure more pragmatism ways may be required as in mindfulness to be able to trade effortless (centered and not pushed here and there by emotions), in this state creativity can be injected to reinforce effortless with positive imagery in line with your vision and objectives, doing so will help in a tangible way to stay focus on where you need to get without being obstructed by internal conflicts.

Only me.
 
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Gring0

Well-known member
264 128
Good read.

I do not agree with this one:
5. I pay myself as the market makes money available to me.

When the market goes my way I like to stay with my trade as long as I can, taking partial profits quickly reduces my positive RR considerably. (maybe it would make more sense in scalping....I do not know..... but in swing where my money comes from an handful of trades it does not make sense, it is like selling something at a cheaper price when everybody wants it).

If one doesn't know how far price will go in advance then partial exists would make sense. I would imply this kind of thinking is presupposing that "anything can happen" to not be true. One exits based on one's understanding and testing of price behaviour. If behaviour is weak a partial position is taken off. Whether it's quick or slow is a based on behaviour of price and changing probabilities and is not randomly decided.

Also regarding accepting the responsibility of the trade.... yes it does make sense but only accepting it will not shift the mental structure in my experience...to shift the mental structure more pragmatism ways may be required as in mindfulness to be able to trade effortless (centered and not pushed here and there by emotions), in this state creativity can be injected to reinforce effortless with positive imagery in line with your vision and objectives, doing so will help in a tangible way to stay focus on where you need to get without being obstructed by internal conflicts.

It's the shifting of mental structure that leads one to accepting the responsibility of trade. Claiming one has accepted the responsibility of trade without a change in mental structure is a form of delusion.

Gringo
 
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Fugazsy

Veteren member
3,661 677
If one doesn't know how far price will go in advance then partial exists would make sense. I would imply this kind of thinking is presupposing that "anything can happen" to not be true. One exits based on one's understanding and testing of price behaviour. If behaviour is weak a partial position is taken off. Whether it's quick or slow is a based on behaviour of price and changing probabilities and is not randomly decided.



It's the shifting of mental structure that leads one to accepting the responsibility of trade. Claiming one has accepted the responsibility of trade without a change in mental structure is a form of delusion.

Gringo

My point is how you change your mental structure in a pragmatic way? How do you effective embrace fully that responsibility? By doing what? How do you shift your mental structure?

Your response is a bit like of a vendor knowing everything about trading but has not any idea how to trade.
 
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dbphoenix

Legendary member
6,953 1,260
My point is how you change your mental structure in a pragmatic way? How do you effective embrace fully that responsibility? By doing what? How do you shift your mental structure?

Your response is a bit more of a vendor knowing everything but has not any idea how to trade.

That's pretty much what Trading In The Zone is all about. But, put as succinctly as I can, the mental structure is changed by developing and following a thoroughly-tested and consistently-profitable trading plan, something which all but a few traders will avoid at all costs, largely because they don't want to assume the responsibility for their outcomes (as one of our new members recently said, "I like to jump in and hope for the best").

Db
 

dbphoenix

Legendary member
6,953 1,260
Thank you for this insightful information. Although one can argue that actually applying these principles is easier said than done...

True. Studying and testing and formulating is more time-consuming than posting on message boards, but one must eventually decide why he/she is in this in the first place.

Once one has the abovementioned trading plan, emotions are an irrelevance. If, on the other hand, one thinks he can just "feel" his way through the trading day . . .

Db
 
 
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