Trading in the Zone

I picked up Trading in the Zone many years after I first heard about it. It wasn’t one of the first trading books on my list, as the mystical title made me think it was only for the hardcore traders. My assumption was right – in one of the first paragraphs the author claims: “I assume that most of the people reading this book are already well schooled in technical analysis”.

Novice traders turn to technical analysis in their quest for a holy grail. Especially after having experienced severe failures. That was also my case. I’ve devoured serious amount of technical analysis books. I started seeing setups, I’ve made some correct predictions. But my EC (Equity Curve) was still flat – or rather volatile. There is no other as detrimental feeling for a trader as when a meticulously prepared trade turns into disaster. Douglas had an explanation for it right in the first chapter:

…one of the major psychological obstacles that can block your success is that you will mislead yourself into believing that your trading problems and lack of consistency can be rectified through market analysis. ⁴

There’s a big difference between predicting that something will happen in the market (and thinking about all the money you could have made) and the reality of actually getting into and out of trades. I call this difference (…) a “psychological gap” that can make trading one of the most difficult endeavours you could choose to undertake and certainly one of the most mysterious to master. ²

Mike Douglas – the author of the book and a famous trading coach – has been working with top traders and trading companies on the Street for decades. He compares trading to experiencing the moon. Seeing the moon from Earth is possible almost every night, yet only few people have achieved to get there. The same is with trading – the flow of the money is the basic concept of a stock exchange – yet making consistent profits is achieved only by a few successful traders.

The defining characteristic that separates the consistent winners from everyone else is this: The winners have attained a mind-set – a unique set of attitudes – that allows them to remain disciplined, focused, and, above all, confident in spite of the adverse conditions. ¹

To be honest, I would have not understood the book and Douglas’s theory without an intense experience of the Market. Below are some of Douglas’s concepts which stuck with me the most.

The Neutrality of the Market

One of the core concepts behind Douglas’s theory which changed my perception on trading is the neutrality of the Market.

The market is neutral, in the sense that it moves and generates information about itself. Movement and information provide each of us with the opportunity to do something, but that’s all! The markets don’t have any power over the unique way in which each of us perceives and interprets this information, or control of the decisions and actions we take as a result. ³

The Market does not force us to take any action at any time. But we often judge the Market as good, bad or difficult depending on the success or failure of our trades.

It’s in human nature to find the culprit outside of ourselves. In case of a loss trader usually blames it on the outside world – either the Market behaving irrationally, or a bad hint received from another trader. By doing so the traders do not see the real reasons of a loss – their own faulty actions. By not reflecting on their actions, they will surely commit the same mistake again.

Taking Full Responsibility

Douglas stresses that the most important factor in the process of maturing as a trader is taking full responsibility for one’s actions.

Taking full responsibility means being internally ready to face a failure. In order to be ready for a failure we have to assess and accept the risk of each trade.

Accepting the risk

Accepting the risk means preparing for it.

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. When you eliminate the potential to define market information in painful ways, you also eliminate the tendency to rationalise, hesitate, jump the gun, hope that the market will give you money, or hope that the market will save you from your inability to cut your losses. ⁶

Both – taking responsibility and accepting the risk boil down to one inevitable conclusion – each trade has to be planned thoroughly before being put into action:

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. Only the best traders have eliminated these errors from their trading. At some point in their careers they learned to believe without a shred of doubt that anything can happen, and to always account for what they don’t know, for the unexpected. ⁷

The last quote brings us to the fundamental edge a trader should develop according to Douglas:

Thinking in Probabilitites

(…) by establishing a belief that anything can happen, he will be training his mind to think in probabilities. This is by far the most essential as well as the most difficult principle for people to grasp and to effectively integrate into their mental system. ⁸

Here’s what makes thinking in probabilities so difficult. It requires two layers of beliefs that on the surface 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 of each individual hand. (…) 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. ⁹

In order to make sure the outcome of a series of trades is positive, the trader has to develop a sound trading process that gives him an edge on the Market. But equally important is that he needs to rigorously follow it.

Consistency

Consistency is the most fundamental trait of a trader. As Douglas writes:

The consistency you seek is in your mind, not in the markets. 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. ⁵

Conclusion

In his extraordinary book Douglas gives a detailed guidance on how to make the mindset evolve into an optimal tool for trading. He also makes it clear that it will take years to get there.

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. That’s exactly what this book is designed to teach you. ¹⁰

Review by: Tomek Gola / TradeYourPlan.PRO