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idaxtrader

Mark Douglas Notes from IDaxtrader

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I have decided to re-read Mark Douglas' Trading in the Zone book. I will post some of my notes in this thread. I believe it could help all candlestick traders.

 

 

When you learn the trading skill of risk acceptance, the market will not be able to generate information that you define or interpret as painful. 10

 

An objective perspective—one that is not skewed or distorted by what you are afraid is going to happen or not happen. 11

 

Faulty attitudes that foster fear instead of trust and confidence. 11

 

The best traders aren't afraid. They aren't afraid because they have developed attitudes that give them the greatest degree of mental flexibility to flow

in and out of trades based on what the market is telling them about the possibilities from its perspective. At the same time, the best traders have developed attitudes that prevent them from getting reckless. 11

 

Ninety-five percent of the trading errors you are likely to make stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears. 12

 

Understanding and controlling your perception of market information is important only to the extent that you want to achieve consistent results. 13

 

Furthermore, there are no limits to the market's behavior. It can do anything at any moment. 13

 

It will not solve the trading problems created by lack of confidence, lack of discipline, or improper focus. 14

 

Learn how to redefine your trading activities in such a way that you truly accept the risk, and you're no longer afraid. 15

 

When you've achieved a state of mind where you truly accept the risk, you won't have the potential to define and interpret market information in painful ways. 15

 

If you can't trust yourself to be objective and to always act in your own best interests, achieving consistent results will be next to impossible. 15

 

When you have the appropriate attitude, when you have acquired a "trader s mind-set" and can remain confident in the face of constant uncertainty, trading will be as easy and simple as you probably thought it was when you first started out. 15

 

You will need to learn how to adjust your attitudes and beliefs about trading in such a way that you can trade without the slightest bit of fear, but at the same time keep a framework in place that does not allow you to become reckless. 15

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If we are denied the opportunity to pursue the object of this need or desire, it literally feels as if we are not whole, or that something is missing, which puts us into a state of imbalance or emotional pain. (Do our minds also abhor a vacuum, once one has been created?) 23

 

 

What happens to all of these impulses that have been denied and left unfulfilled? Do they just go away? They can, if they are reconciled in some way: if we do something, or someone else does something, to put our mental environment back into balance. 24

 

The problem is that, most of the time, events are not allowed to take their natural course and the denied impulses are never reconciled 24

 

What's important for us to understand about these unreconciled, denied impulses (that exist in all of us) is how they affect our ability to stay focused and take a disciplined, consistent approach to our trading. 24

 

No matter how good a trade looks, it could lose. Without the presence of an external structure forcing the typical trader to think otherwise, he is susceptible to any number of justifications, rationalizations, and the kind of distorted logic that will allow him to get into a trade believing that it can't lose, which makes determining the risk in advance irrelevant. 26

 

The unlimited characteristics of the trading environment require that we act with some degree of restraint and self-control, at least if we want to create some measure of consistent success. 27

 

 

It usually takes a great deal of pain and suffering to break down the source of our resistance to establishing and abiding by a trading regime that is organized, consistent, and reflects prudent money-management guidelines. 28

 

How much effort and focus you may have to put into building the kind of mental structure that compensates for the negative effect denied impulses can have on your ability to establish the skills that will assure your success as a trader. 28

 

The way to avoid responsibility is to adopt a trading style that is, to all intents and purposes, random. I define random trading as poorly-planned trades or trades that are not planned at all. It is an unorganized approach that takes into consideration an unlimited set of market variables, which do not allow you to find out what works on a consistent basis and what does not. 29

 

Randomness is unstructured freedom without responsibility. When we trade without well-defined plans and with an unlimited set of variables, it's very easy to take credit for the trades that turn out to our liking (because there was "some" method present). At the same time, it's very easy to avoid taking responsibility for the trades that didn't turn out the way we wanted (because there's always some variable we didn't know about and therefore couldn't take into consideration beforehand). 29

 

Even though the outcome of each individual pattern is random, the outcome o f a series of patterns is consistent (statistically reliable). This is a paradox, but one that is easily resolved with a disciplined, organized, and consistent approach. 29

 

This is a classic example of how we become susceptible to unstructured, random trading—because we want to avoid responsibility. 30

 

It takes effort to create the kind of disciplined approach that is necessary to become a consistent winner. But, as you can see, it's very easy to avoid this kind of mental work in favor of trading with an undisciplined, random approach. 30

 

However, we can control our perception and interpretation of market information, as well as our own behavior. 32

 

Instead of controlling our surroundings so they conform to our idea of the way things should be, we can learn to control ourselves. Then we can perceive information from the most objective perspective possible, and structure our mental environment so that we always behave in a manner that is in our own best interest. 32

 

If you want to create a new version of your personality that expresses itself as a consistently successful trader, you have only your beliefs and attitudes. 34

 

Your ultimate goal is consistency. 34

 

They have acquired a mental structure that allows them to trade without fear and, at the same time, keeps them from becoming reckless and committing fear-based errors. 34

 

The bottom line is that successful traders have virtually eliminated the effects of fear and recklessness from their trading. 34

 

If we start from the premise that to create consistency traders must focus their efforts on developing a trader's mind-set, then it is easy to see why so many traders don't succeed. 35

 

It's attitudes and beliefs about being wrong, losing money, and the tendency to become reckless, when you're feeling good, that cause most losses—not technique or market knowledge. 35

 

Use a simple, possibly even mediocre trading technique, but possess a mind-set that is not susceptible to subconsciously distorting market information, hesitating, rationalizing, hoping, or jumping the gun. 35

 

This lack of fear translates into a carefree state of mind, similar to the state of mind many great athletes describe as a "zone." 36

 

There is absolutely no fear and you act and react instinctively. 36

 

Most athletes never reach this level of play, because they never get past the fear of making a mistake. 36

 

Set up the kind of mental conditions that are most conducive to experiencing "the zone," by developing a positive winning attitude. 36

 

Others get bogged down in negative self-criticism, regret, and selfpity. Not many people ever develop a positive winning attitude. 37

 

When you're feeling confident and unencumbered by fears and worries, it isn't difficult to put on a string of winning trades because it's easy to get into a flow, a kind of natural rhythm, where what you need to do seems obvious or self-evident. 37

 

You just need a genuine winning attitude. 38

 

What happens when the novice trader finally does lose? What effect will it have on his carefree state of mind? The answers will depend on his expectations going into the trade and how he interprets the experience. And how he interprets the experience is a function of his beliefs and attitudes. 38

 

What if he is operating out of a belief that there's no possible way to avoid a loss, because losing is a natural consequence of trading — no different from, let's say, a restaurant owner incurring the expense of having to buy food? 38

 

With these beliefs and expectations, it is unlikely that he would experience a deterioration of his attitude, and would simply go on to the next trade. 39

 

What if his expectations didn't take into account any market behavior other than what he wanted? From this mental perspective, if the market doesn't do what he wants, he is going to feel pain—emotional pain. 39

 

The bottom line is that, as adults when we get into a trading mode, we don't realize how natural it is to associate the instantaneous shift from joy to pain that we experienced so often as children with the same instantaneous shift from joy to pain that occurs when we trade. 41

 

Only the very best traders have reached a point where they can and do accept complete responsibility for the outcome of any particular trade. Everyone else to one degree or another assumes they are taking responsibility; but the reality is that they want the market to do it for them. The typical trader wants the market to fulfill his expectations, his hopes, and dreams. 41

 

The market's sole purpose is to extract money or opportunity from you. 42

 

Taking responsibility means acknowledging and accepting, at the deepest part of your identity, that you—not the market—are completely responsible for your success or failure as a trader. 42

 

Taking anything less than complete responsibility sets up two major psychological obstacles that will block your success. First, you will establish an adversarial relationship with the market that takes you out of the constant flow of opportunities. Second, you will mislead yourself into believing that your trading problems and lack of success can be rectified through market analysis. 43

 

From the market's perspective, each moment is neutral; to you, the observer, every moment and price change can have meaning. 44

 

If you want to start sensing the flow of the market, your mind has to be relatively free of fear, anger, regret, betrayal, despair, and disappointment. You won't have a reason to experience these negative emotions when you assume absolute responsibility. 45

 

The sudden shift from joy to pain usually creates quite a psychological shock. Very few people ever learn how to reconcile these kinds of experiences in a healthy way. 46

 

He was having fun; he was in a carefree state of mind; he had no personal agendas and nothing to prove. 48

 

In other words, he made a dramatic shift in his perspective from carefree to preventing pain by avoiding losses. 49

 

So again, there is no possible way to avoid losing or being wrong. 49

 

What he doesn't realize is that, in spite of his enthusiasm, when he went from a carefree state of mind to a preventand- avoid mode of thinking, he shifted from a positive to a negative attitude. 49

 

It's when you're winning that you are most susceptible to making a mistake, overtrading, putting on too large a position, violating your rules, or generally operating as if no prudent boundaries on your behavior are necessary. 51

 

The drawdowns they do experience are the type of normal losses that any trading methodology or system incurs. 51

 

They have learned how to make money, but they haven't learned there s a whole body of trading skills that have to be mastered in order to keep the money they make. 52

 

If these conflicts exist, it means that your mental environment is not completely aligned with your goals. In other words, not all parts of you would argue for the same outcome.53

 

Developing a winning attitude is the key to your success. 56

 

However, you can greatly increase the possibility of your being happy by developing fun-type attitudes and, more specifically, by working on neutralizing the beliefs and attitudes that prevent you from having fun or enjoying yourself. Creating consistent success as a trader works the same way. 59

 

They don't have to try to be consistent; they are consistent. This may seem like an abstract distinction, but it is vitally important that you understand the difference. 59

 

You didn't have to try to make them easy; they were easy. There was no struggle. You saw exactly what you needed to see, and you acted on what you saw. You were in the moment, a part of the opportunity flow. When you're in the flow, you don't have to try, because everything you know about the market is available to you. Nothing is being blocked or hidden from your awareness, and your actions seem effortless because there's no struggle or resistance. 59

 

On the other hand, having to try indicates that there is some degree of resistance or struggle. Otherwise, you would just be doing it and not have to try to be doing it. It also indicates that you're trying to get what you want from the market. While it seems natural to think this way, it's a perspective fraught with difficulties. The best traders stay in the flow because they don't try to get anything from the market; they simply make themselves available so they can take advantage of whatever the market is offering at any given moment. There's a huge difference between the two perspectives. 59

 

Certainly, you can't be consistent or experience the flow if you're consistently making errors, and you will make errors, as long as you're afraid that what you want or what you expect won't happen. 60

 

Now, you may be asking yourself, how can I think about trading in such a way that I'm no longer afraid and, therefore, no longer susceptible to the mental processes that cause me to block, obscure, or pick and choose information? The answer is: Learn to accept the risk. 61

 

There isn't anything about trading that is more central to your success and also more misunderstood than the concept of accepting the risk. 61

 

Accepting the risk means accepting the consequences of your trades without emotional discomfort or fear. This means that you must learn how to think about trading and your relationship with the markets in such a way that the possibility of being wrong, losing, missing out, or leaving money on the table doesn't cause your mental defense mechanisms to kick in and take you out of the opportunity flow. 61

 

You act on those opportunities to the best of your ability, but your state of mind is not dependent upon or affected by the market's behavior. 62

 

If you can learn to create a state of mind that is not affected by the market's behavior, the struggle will cease to exist. When the internal struggle ends, everything becomes easy. 62

 

Any degree of struggle, trying, or fear associated with trading will take you out of the moment and flow and, therefore, diminish your results. 63

 

The traders who break through the cycle and ultimately make it are the ones who eventually learn to stop avoiding and start embracing the responsibility and the risk. 64

 

I'm going to teach you a thinking strategy that has, at its core, a firm belief in probabilities and edges. With this new thinking strategy, you'll learn how to create a new relationship with the market, one that disassociates your trading from what it typically means to be wrong or to lose, and that precludes you from perceiving anything about the market as threatening. When the threat of pain is gone, the fear will correspondingly disappear, as will the fear-based errors you are susceptible to. You will be left with a mind that is free to see what is available and to act on what you see. 65

 

You can't assume that learning about something new and agreeing with it is the same as believing it at a level where you can act on it. 66

 

Many of us have what we know to be irrational fears and simply choose to live with the contradiction because we don't want to go through the emotional work that is necessary to overcome the fear. 67

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Professionals don't perceive anything about the markets as painful; therefore, no threat exists for them. 69

 

You must be able to see the market from an objective perspective, without distortion. You must be able to act without resistance or hesitation, but with the appropriate amount of positive restraint to counteract the negative effects of overconfidence or euphoria. In essence, your objective is to be able to create a unique state of mind, a traders mentality. When you've accomplished this, everything else about your success as a trader will fall into place. 70

 

Doing this effectively will require an understanding of the nature of mental energy and how you can use that energy to change a perspective that is generating an unwanted, negative, emotional response to market information. 70

 

Energy from the outside, in the form of whatever is expressing itself, gets transformed by our nervous system into electrical impulses and then gets stored in our inner, mental environment. 71

 

They act as a force on our senses from the inside, expressing their form and content, and, in the process of doing so, they have a profoundly limiting effect on the information we perceive in any given moment, making much of the information that is available from the environment's perspective, and the possibilities inherent within that information, literally invisible. 74

 

The energy that's inside of us will categorically limit and block our awareness of much of this information by working through the same sensory mechanisms the external environment works through. 75

 

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. 76

 

 

Each trade is simply an edge with a probable outcome, and statistically independent of every other trade. 79

 

So, instead of perceiving this next encounter with a dog as an opportunity to experience something new about the nature of dogs, he perceives a threatening and dangerous dog. 83

 

If you can accept the fact that the market doesn't generate positively or negatively charged information as an inherent characteristic of the way it expresses itself, then the only other way information can take on a positive or negative charge is in your mind, and that is a function of the way the information is processed. 85

 

Developing and maintaining a state of mind that perceives the opportunity flow of the market, without the threat of pain or the problems caused by overconfidence, will require that you take conscious control of the association process. 86

 

If there is such a thing as a secret to the nature of trading, this is it: At the very core of one's ability 1) to trade without fear or overconfidence, 2) perceive what the market is offering from its perspective, 3) stay completely focused in the "now moment opportunity flow," and 4) spontaneously enter the "zone," it is a strong virtually unshakeable belief in an uncertain outcome with an edge in your favor. 88

 

The best traders have evolved to the point where they believe, without a shred of doubt or internal conflict, that "anything can happen." They don't just suspect that anything can happen or give lip service to the idea. Their belief in uncertainty is so powerful that it actually prevents their minds from associating the "now moment" situation and circumstance with the outcomes of their most recent trades. 88

 

They are able to keep their minds free of unrealistic and rigid expectations about how the market will express itself. Instead of generating the kind of unrealistic expectations that more often than not result in both emotional and financial pain, they have learned to "make themselves available" to take advantage

of whatever opportunities the market may offer in any given moment. 88

 

A perspective from which you understand that the framework from which you are perceiving information is limited relative to what's being offered. 88

 

You've built a mental framework that allows you to recognize a set of variables in the markets behavior that indicates when an opportunity to

buy or sell is present. This is your edge and something you know. However, what you don't know is exactly how the pattern your variables identify will unfold. 89

 

With the perspective of making yourself available, you know that your edge places the odds of success in your favor, but, at the same time, you completely accept the fact that you don't know the outcome of any particular trade. By making yourself available, you consciously open yourself up to find out what will happen next; instead of giving way to an automatic mental process that causes you to think you already know. Adopting this perspective leaves your mind free of internal resistance that can prevent you from perceiving whatever opportunity the market is making available from its perspective (its truth). Your mind is open for an exchange of energy. 89

 

There are two mental hurdles to overcome. The first is the focus of this chapter: learning how to keep your mind focused in the "now moment opportunity flow." In order to experience synchronicity, your mind has to be open to the market's truth, from its perspective. 90

 

Acting appropriately on anything requires belief and clarity of intent, which keeps our minds and senses focused on the purpose at hand. 91

 

Success as a trader cannot be realized until you develop a resolute, unshakeable belief in uncertainty. 91

 

But having an awareness or an understanding of some principle, insight, or concept doesn't necessarily equate to acceptance and belief. When something has been truly accepted, it isn't in conflict with any other component of our mental environment. 92

 

They simply don't do the mental work necessary to reconcile the many conflicts that exist between what they've already learned and believe, and how that learning contradicts and acts as a source of resistance to implementing the various principles of successful trading. 93

 

Not predefining your risk, not cutting your losses, or not systematically taking profits are three of the most common—and usually the most costly—trading errors you can make. 97

 

And if every trade truly has an uncertain outcome, then how could he ever justify or talk himself into not predefining his risk, cutting his losses, or having some systematic way to take profits? 98

 

The only reason why he would believe it isn't necessary is that he believes he already knows what's going to happen next.99

 

Believing, assuming, or thinking that "he knows" will be the cause of virtually eveiy trading error he has the potential to make (with the exception of those errors that are the result of not believing that he deserves the money). 99

 

The most effective and functional trading belief that he can acquire is "anything can happen."99

 

Without that belief, his mind will automatically, and usually without his conscious awareness, cause him to avoid, block, or rationalize away any information that indicates the market may do something he hasn't accepted as possible. 100

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The nature of probabilities is that each individual hand played is statistically independent of every other hand. This means that each individual hand is a unique event. 102

 

If you focus on each hand individually, there will be a random, unpredictable distribution between winning and losing hands. But on a collective basis, just the opposite is true. If a large enough number of hands is played, patterns will emerge that produce a consistent, predictable, and statistically reliable outcome. 103

 

Here's what makes thinking in probabilities so difficult. It requires two layers of beliefs that on the surface seem to contradict each other. We'll call the first layer the micro level. At this level, you have to believe in the uncertainty and unpredictability of the outcome on each individual hand. 103

 

The second layer is the macro level. At this level, you have to believe that the outcome over a series of hands played is relatively certain and predictable. 103

 

It's the ability to believe in the unpredictability of the game at the micro level and simultaneously believe in the predictability of the game at the macro level that makes the casino and the professional gambler effective and successful at what they do. 103

 

They have learned and completely accepted the fact that they don't know what's going to happen next. More important, they don't need to know in order to make money consistently. 104

 

Because they don't have to know what's going to happen next, they don't place any special significance, emotional or otherwise, on each individual hand, spin of the wheel, or roll of the dice. In other words, they're not encumbered by unrealistic expectations about what is going to happen, nor are their egos involved in a way that

makes them have to be right. As a result, it's easier to stay focused on keeping the odds in their favor and executing flawlessly, which in turn makes them less susceptible to making costly mistakes. They stay relaxed because they are committed and willing to let the probabilities (their edges) play themselves out, all the while knowing that if their edges are good enough and the sample sizes are big enough, they will come out net winners. 104

 

Don't try to predict or know in advance the outcome of each individual event. Aside from the fact that it would be extremely difficult, given all the unknown variables operating in each game, it isn't necessary to create consistent results. All they have to do is keep the odds in their favor and have a large enough sample size of events so that their edges have ample opportunity to work. 106

 

It may look exactly the same on a chart as it did at some previous moment; and the geometric measurements and mathematical calculations used to determine each edge can be exactly the same from one edge to the next; but the actual consistency of the market itself from one moment to the next is never the same. It is extremely important that you understand this phenomenon because the psychological implications for your trading couldn't bemore important. 107

 

The most fundamental characteristic of the market's behavior is that each "now moment" market situation, each "now moment" behavior pattern, and each "now moment" edge is always a unique occurrence with its own outcome, independent of all others. 107

 

Being aware of uncertainty and understanding the nature of probabilities does not equate with an ability to actually function effectively from a probabilistic perspective. Thinking in probabilities can be difficult to master, because our minds don't naturally process information in this manner. 108

 

I responded that just because he put in a stop it didn't mean that he had truly accepted the risk of the trade. There are many things that can be at risk: losing money, being wrong, not being perfect, etc., depending on one's underlying motivation for trading. I pointed out that a person's beliefs are always revealed by their actions. We can assume that he was operating out of a belief that to be a disciplined trader one has to define the risk and put a stop in. And so he did. But a person can put in a stop and at the same time not believe that he is going to be stopped out or that the trade will ever work against him, for that matter. 109

 

He said that he had been waiting for this particular trade for weeks and when the market finally got to this point, he thought it would immediately reverse. I responded by

reminding him to look at the experience as simply pointing the way to something that he needs to learn. A prerequisite for thinking in probabilities is that you accept the risk, because if you don't, you will not want to face the possibilities that you haven't accepted, if and when they do present themselves. 109

 

The mental work necessary to "let go" of the need to know what is going to happen next or the need to be right on each trade. In fact, the degree by which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader. 110

 

They commit themselves to taking every trade that conforms to their definition of an edge. They don't attempt to pick and choose the edges they think, assume, or

believe are going to work and act on those; nor do they avoid the edges that for whatever reason they think, assume, or believe aren't going to work. If they did either of those things, they would be contradicting their belief that the "now" moment situation is always unique, creating a random distribution between wins and losses on any given string of edges. 110

 

For the typical trader, determining what the market would have to look, sound, or feel like to tell him that a trade isn't working would create an irreconcilable dilemma. 111

 

The degree of clarity or relative lack of inner conflict. 112

 

Looking at the process of convincing yourself that you're right from this perspective, it seems a bit absurd, doesn't it? 112

 

For the traders who have learned to think in probabilities, there is no dilemma. Predefining the risk doesn't pose a problem for these traders because they don't trade from a right or wrong perspective. They have learned that trading doesn't have anything to do with being right or wrong on any individual trade. As a result, they don't

perceive the risks of trading in the same way the typical trader does. 112

 

Any of the best traders (the probability thinkers) could have just as much negative energy surrounding what it means to be wrong as the typical trader. But as long as they legitimately define trading as a probability game, their emotional responses to the outcome of any particular trade are equivalent to how the typical trader would feel

about flipping a coin, calling heads, and seeing the coin come up tails. 112

 

A wrong call, but for most people being wrong about predicting the flip of a coin would not tap them into the accumulated pain of every other time in their lives they had been wrong. 112

 

So when we believe in a random outcome, there is an implied acceptance that we don't know what that outcome will be. When we accept in advance of an event that we don't know how it will turn out, that acceptance has the effect of keeping our expectations neutral and open-ended. 113

 

Now we're getting down to the very core of what ails the typical trader. Any expectation about the markets behavior that is specific, well-defined, or rigid—instead of being neutral and open-ended—is unrealistic and potentially damaging. 113

 

If each moment in the market is unique, and anything is possible, then any expectation that does not reflect these boundary-less characteristics is unrealistic. 113

 

The potential damage caused by holding unrealistic expectations comes from how it affects the way we perceive information. 113

 

We have to be careful about what we project out into the future, because nothing else has the potential to create more unhappiness and emotional misery than an unfulfilled expectation. 113

 

Here's where we run into problems. Because our expectations come from what we know, when we decide or believe that we know something, we naturally expect to be right. At that point, we're no longer in a neutral or open state of mind, and it's not difficult to understand why. 114

 

If we're going to feel great if the market does what we expect it to do, or feel horrible if it doesn't, then we're not exactly neutral or open-minded. Quite the contrary, the force of the belief behind the expectation will cause us to perceive market information in a way that confirms what we expect (we naturally like feeling good); and our

pain-avoidance mechanisms will shield us from information that doesn't confirm what we expect (to keep us from feeling bad). 114

 

Defining and interpreting information is a function of what we assume we know or what we believe to be true. 119

 

When we expect to be right, any information that doesn't confirm our version of the truth automatically becomes threatening. Any information that has the potential to be threatening also has the potential to be blocked, distorted, or diminished in significance by our pain-avoidance mechanisms. It's this particular characteristic of the way our minds function that can really do us a disservice. 119

 

As traders, we can't afford to let our pain-avoidance mechanisms cut us off from what the market is communicating to us about what is available in the way of the next opportunity to get in, get out, add to, or subtract from a position, just because it's doing something that we don't want or expect. 119

 

There is nothing at stake because there's no expectation. You haven't projected what you believe, assume, or think you know about that market into some future moment. As a result, there's nothing to be either right about or wrong about, so the information has no potential to take on a threatening or negatively charged quality. 120

 

We have to be rigid in our rules and flexible in our expectations. We need to be rigid in our rules so that we gain a sense of self-trust that can, and will always, protect us in an environment that has few, if any, boundaries. We need to be flexible in our expectations so we can perceive, with the greatest degree of clarity and objectivity, what the market is communicating to us from its perspective. 120

 

To eliminate the emotional risk of trading, you have to neutralize your expectations about what the market will or will not do at any given moment or in any given situation. You can do this by being willing to think from the markets perspective. Remember, the market is always communicating in probabilities. 120

 

To think in probabilities, you have to create a mental framework or mind-set that is consistent with the underlying principles of a probabilistic environment. A probabilistic mind-set pertaining to trading consists of 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. Eveiy moment in the market is unique. 121

 

When you adopt these five truths, your expectations will always be in line with the psychological realities of the market environment.

With the appropriate expectations, you will eliminate your potential to define and interpret market information as either painful or threatening, and you thereby effectively neutralize the emotional risk of trading. 121

 

The idea is to create a carefree state of mind that completely accepts the fact that there are always unknown forces operating in the market. When you make these truths a fully functional part of your belief system, the rational part of your mind will defend these truths in the same way it defends any other belief you hold about the

nature of trading. This means that, at least at the rational level, your mind will automatically defend against the idea or assumption that you can know for sure what will happen next. 121

 

When I put on a trade, all I expect is that something will happen. Regardless of how good I think my edge is, I expect nothing more than for the market to move or to express itself in some way. 124

 

The best traders are in the "now moment" because there's no stress. There's no stress because there's nothing at risk other than the amount of money they are willing to spend on a trade. They are not trying to be right or trying to avoid being wrong; neither are they trying to prove anything. If and when the market tells them that their edges aren't working or that it's time to take profits, their minds do nothing to block this information. They completely accept what the market is offering them, and they wait for the next edge. 124

 

And all that's required to put us into a negatively charged, "I know what to expect from the market" 128

 

Consistency is the result of a carefree, objective state of mind, where we are making ourselves available to perceive and act upon whatever the market is offering us (from its perspective) in any given "now moment." 129

 

When you are in a carefree state of mind, you won'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. To be at peace with any outcome, you must reconcile anything in your mental environment that conflicts with the five fundamental truths about the market. What's more, you also have to integrate these truths into your mental system as core beliefs. 129

 

Making yourself available means trading from the perspective thatyou have nothing to prove. You aren't trying to win or to avoid losing. 129

 

Market information is only threatening if you are expecting the market to do something for you. If you don't expect the market to make you a winner, you have

no reason to be afraid of losing. 131

 

On the other hand, if you believe that all you need to know is: 1. the odds are in your favor before you put on a trade;2. how much it's going to cost to find out if the trade is going to work; 3. you don't need to know what's going to happen next to make money on that trade; and 4. anything can happen 131

 

If you're never certain about the viability of your edge, you won't feel too confident about it. To whatever degree you lack confidence, you will experience

fear. The irony is, you will be afraid of random, inconsistent results, without realizing that your random, inconsistent approach is creating exactly what you are afraid of. 133

 

The task is to learn how to properly integrate these truths into your mental system as core beliefs that are not in conflict with any other beliefs you may hold. 137

 

There are three basic characteristics you need to understand in order to effectively install the five fundamental truths about trading at a functional level in your mental environment: 1. Beliefs seem to take on a life of their own and, therefore, resist

any force that would alter their present form. 2. All active beliefs demand expression. 3. Beliefs keep on working regardless of whether or not we are consciously aware of their existence in our mental environment. 153

 

The easiest and most effective way to work with our beliefs is to gently render them inactive or nonfunctional by drawing the energy out of them. 154

 

The belief was transformed into a nonfunctional, inactive concept about how the world works. 155

 

The difference between them is in the amount of energy they contain. The first has virtually no energy; the second has energy. So from a functional perspective, there is no contradiction or conflict. 155

 

This is an example of what I call an active contradiction, when two active beliefs are in direct conflict with each other, both demanding expression. In this example, the first belief exists at a core level in the boy's mental environment, with a great deal of negatively charged energy. The second belief is at a more superficial level, and has very little positively charged energy. 162

 

But if there are conflicting beliefs and we aren't willing to de-activate the conflicting forces (expending some effort), especially if they're negatively charged, then acting on what we've discovered will be a struggle at the very least, and perhaps down right impossible. 163

 

When you believe at a functional level that every edge has a unique outcome (meaning that it's a dominant belief without any other beliefs arguing for something different), you will experience a state of mind that is free of fear, stress, and anxiety when you trade. 164

 

To do so he had to create a new belief and de-activate the conflicting ones. This is the secret to achieving consistent success as a trader. 166

 

The first stage is the mechanical stage. In this stage, you: 1. Build the self-trust necessary to operate in an unlimited environment. 2. Learn to flawlessly execute a trading system. 3. Train your mind to think in probabilities (the five fundamental truths). 4. Create a strong, unshakeable belief in your consistency as a trader. 172

 

If producing consistent results is your primary objective as a trader, then creating a belief (a conscious, energized concept that resists change and demands expression) that "I am a consistently successful trader" will act as a primaiy source of energy that will manage your perceptions, interpretations, expectations, and actions in ways that satisfy the belief and, consequently, the objective. 173

 

He desired to express himself in a way that he found, at least initially, virtually impossible. To satisfy his desire, he had to

step into an active process of transformation. His technique was simple: He tried as hard as he could to stay focused on what he was trying to accomplish and, little by little, he de-activated the conflicting belief and strengthened the belief that was consistent with his desire. 174

 

When it comes to personal transformation, the most important ingredients are your willingness to change, the clarity of your intent, and the strength of your desire. Ultimately, for this process to work, you must choose consistency over eveiy other reason or justification you have for trading. 174

 

The first step in the process of creating consistency is to start noticing what you're thinking, saying, and doing. 174

 

If producing consistent results is a function of eliminating errors,then it is an understatement to say that you will encounter great difficulty in achieving your objective if you can't acknowledge a mistake. Obviously, this is something very few people can do, and it accounts for why there are so few consistent winners. 176

 

When our intent is clear and undiminished by any opposing energy, then our capacity to stay focused is greater, and the more likely it is that we will accomplish our objective. 177

 

What separates the "consistently great" athletes and performers from everyone else is their distinct lack of fear of making a mistake. The reason they aren't afraid is that they don't have a reason to think less of themselves when they do make a mistake. 177

 

Belief that mistakes simply point the way to where they need to focus their efforts to grow and improve themselves 178

 

Remember that every thought, word, and deed reinforces some belief we have about ourselves. 178

 

All you have to do is decide why you want to monitor yourself, which means you first need to have a clear purpose in mind. When you're clear about your purpose, simply start directing your attention to what you think, say, or do. 179

 

If and when you notice that you're not focused on your objective or on the incremental steps to accomplish your objective, choose to redirect your thoughts, words, or actions in a way that is consistent with what you are trying to accomplish. 179

 

The more willfully you engage in this process, especially if you can do it with some degree of conviction, the faster you will create a mental framework free to function in a way that is consistent with your objectives, without any resistance from conflicting beliefs. 179

 

Initially, my desire to be a runner had no foundation of support in my mental system. In other words, there was no other source of energy (an energized concept demanding expression) consistent with my desire. 182

 

I actually had to do something to create that support. To create a belief that "I am a runner" required that I create a series of experiences consistent with the new belief. Remember that everything we think, say, or do contributes energy to some belief in our mental system. Each time I experienced a conflicting thought and was able to successfully refocus on my objective, with enough conviction to get me into my running shoes and out the door, I added energy to the belief that "I am a runner." And, just as important, I inadvertently drew energy away from all of the beliefs that would argue otherwise. 182

 

Now I can effortlessly (from a mental perspective) express myself as a runner, because "I am a runner." That energized concept is now a functioning part of my identity. When I first started out, I happened to have a number of conflicting beliefs about running 183

 

If there's anything in your mental environment that's in conflict with the principles of creating the belief that "I am a consistently successful trader," then you will need to employ the technique of self-discipline to integrate these principles as a dominant, functioning part of your identity. 183

 

I AM A CONSISTENT WINNER BECAUSE:

1. I objectively identify my edges.

2. I predefine the risk of every trade.

3. I completely accept 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. 185

 

Keep your expectations neutral, focus your mind in the "now moment opportunity flow" (by disassociating the present moment from your past), and, therefore, eliminate your potential to commit these errors. 187

 

When you genuinely accept the risks, you will be at peace with any outcome. When you're at peace with any outcome, you will experience a carefree, objective state of mind, where you make yourself available to perceive and act upon whatever the market is offering you (from its perspective) at any given "now moment." 187

 

A clear desire aimed squarely at a specific objective is a very powerful tool. You can use the force of your desire to create an entirely new version or dimension to your identity; shift energy between two or more conflicting concepts; or change the context or polarity of your memories from negative to positive. 187

 

The implication of "making up our minds" is that we decide exactly what we desire with so much clarity (absolutely no lingering doubts) and with so much conviction that literally nothing stands in our way, either internally or externally. 187

 

To get there, you must "make up your mind," with as much convictionn and clarity as possible, that more than anything else you desire consistency (the state of mind of trust, confidence, and objectivity) from your trading. This is necessary because if you're like most traders, you're going to be up against some very formidable conflicting forces. 188

 

From a probabilities perspective, this means that instead of being the person playing the slot machine, as a trader, you can be the casino, if:

1. you have an edge that genuinely puts the odds of success in your favor;

2. you can think about trading in the appropriate manner (the five fundamental truths); and

3. you can do everything you need to do over a series of trades.

Then, like the casinos, you will own the game and be a consistent winner. 189

 

This means that we have to expand our definition of success or failure from the limited trade-by-trade perspective of the typical trader to a sample size of 20 trades or more. 196

 

By setting up the exercise with rigid variables that define your edge, relatively fixed odds, and a commitment to take every trade in your sample size, you have created a trading regime that duplicates how a casino operates. 199

 

If you believe in the five fundamental truths and you believe that trading is just a probability game, not much different from

pulling the handle of a slot machine, then you'll find that this exercise will be effortless—effortless because your desire to follow through with your commitment to take every trade in your sample size and your belief in the probabilistic nature of trading will be in complete harmony. 199

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