[TimRacette]

The biggest leap forward in my trading came when I began to think like a trader. This important realization was a result of training my brain to think in terms of probabilities. The best book hands down (for me at least) that helped me think this way was Trading in the Zone by Mark Douglas.

Thinking in probabilities did a lot more for me than just help analyze my trades. It allowed me to trade with more confidence because I knew the likely statistical outcome of a series of trades. (As a side note you can see what I do each night as part of my nightly homework here).

I’d like to pull from some of Mark Douglas’s work in this post to help you better understand how to think like a trader.



Think in Sample Sizes
Looking at the markets in terms of probabilities is extremely important, both to help you understand your edge and to calm your emotions from trade to trade. I like to think in sample sizes of 20 trades. I am not looking at my profit/loss for the day or week; rather I am monitoring my p/l for the last 20 trades.

Each trade you make is simply one of thousands of trades that you will make over the course of your trading. If you keep this in mind and limit your risk on every trade then mentally there is no need to fret over one or two losing trades, or even a string of losing trades.

Monitor your last 20 trades. What is your worst string of 20 trades? What is your best string of 20 trades? The numbers may surprise you.

Eliminate the Emotional Risk
Thinking in terms of probabilities also helps remove the emotional risk of trading. Mark Douglas talks about the 5 Fundamental Truths, they are as follows…
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

When you train your mind to think in this way, the emotional stress and fear of pulling the trigger diminish. You become less concerned with the outcome of each individual trade and more concerned with how it fits into the larger statistical set.

Become an Observer
Think about how objective we are when observing the markets with no money on the line. This is the state of mind we are looking to create throughout the entire trade. Win, lose, or scratch. One exercise I find useful is to visualize yourself standing just behind yourself, watching over your shoulder as you trade.

Does this trade meet your entry criteria? Is this a trade taken out of boredom? Are you sure you want to break your rules? These are some questions the observing self would ask your conscious self. Once you’ve identified your edge, practice executing your trades the same way, each and every time. Use this observer exercise to help keep you in check and remain disciplined.

The 7 Principles of Consistency
Mark Douglas talks about 7 principles which help beginning traders develop into consistent winners over time. The following are his list of guiding principles…
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. I never violate them.

So to think like a trader means to think in terms of probabilities, identify your edge, execute your trades the same way each and every time taking every setup that first your criteria and then analyze your trades not individually, but in sample sizes. Doing these things (over time), can help develop a level of consistency trading the markets.

[gosu]

Perhaps Douglas should get more credit (or blame) for the current prominence of the "psychology" of trading as separate from other aspects.

TITZ is OK. The analog in chess literature is not "Think Like a Grandmaster" by Kotov, but something akin to "Chess for Beginners" by Horowitz.

[MightyMouse]

Douglas' "trading in the zone" is a good beginner book. If you reread it, you understand why he writes and does not trade.

[TimRacette]

I find that I'm constantly internalizing trading ideas while off doing other things away from the screen. Often I go back and re-read books like this (along with the Market Wizards Series, Reminiscences and Pit Bull to name a few more). I always end up pulling out more great nuggets.

Sometimes it's reading something at the right time when you're in the right frame of mind. I think that was the case with Trading in the Zone. After reading it a few times, and at different stages of my trading I would absorb different pieces of information.

p.s. I enjoy reading your comments MM, lots of insight, thanks.

[JEHs]

I know this is blasphemy but I have to say, I thought "Trading in the Zone" was a ridiculous book. Every time I have read something by Mark Douglas or listened to one of his recordings I come away thinking I have just wasted a bunch of my time.
I am not denying the importance of proper mindset and control of emotions or psychology or whatever you want to call it, but that book is not the place to get insight into the matter.
It's a great example of someone making money off wannabee traders with books and speaking tours.
my

[MightyMouse]

Originally Posted by JEHs »

I know this is blasphemy but I have to say, I thought "Trading in the Zone" was a ridiculous book. Every time I have read something by Mark Douglas or listened to one of his recordings I come away thinking I have just wasted a bunch of my time.
I am not denying the importance of proper mindset and control of emotions or psychology or whatever you want to call it, but that book is not the place to get insight into the matter.
It's a great example of someone making money off wannabee traders with books and speaking tours.
my

When I first read it, I thought it was good, then as I learned more and more from practical trading experience, I realized that his main audience is fledgling traders. If you are lost and need help I suppose learning that you have to be in the right mindset is good, but if you are lost and need help, you should really go do something else because there are a lot of traders who are not lost and do not need help and they will steal your lunch right from under your nose. There has to be a point where you call it quits. In life, perseverance is important. In trading, perseverance will kill you.

[TimRacette]

Ya, JEH I can see your point. I was more focused on relaying what's resonated and worked for me, the message of thinking in terms of probabilities and that there is no one who can predict the market.

[SIUYA]

plus often going back to books for ideas, or reinforcement of crap (or good stuff ) is often worthwhile in itself. Sometimes its just the one or two things a book resonates with you that is all it needs.
Look at market wizards.....a great book, and yet full of DIFFERENT styles, ideas and personalities and yet we can all learn a little bit from each of them.