Trading in the Zone

by Mark Douglas

  Not only can we not depend on the market to do anything for us, but it is extremely difficult, if not impossible, to manipulate or control anything that the market does. Now, if we’ve become effective at fulfilling our needs, wants and desires by learning how to control and manipulate our environment, but suddenly find ourselves, as traders, in an environment that does not know, care, or respond to anything that is important to us, where does that leave us? You’re right if you said up the proverbial creek without a paddle.

  One of the principal reasons so many successful people have failed miserably at trading is that their success is partly attributable to their superior ability to manipulate and control the social environment, to respond to what they want. To some degree, all of us have learned or developed techniques to make the external environment conform to our mental (interior) environment. The problem is that none of these techniques work with the market. The market doesn’t respond to control and manipulation (unless you’re a very large trader).

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

  CHAPTER 3

  TAKING RESPONSIBILITY

  Although the words “taking responsibility” sound simple, the concept is neither easy to grasp nor easy to put into practice in your trading. We have all heard the words and been confronted with the need to take responsibility so many times in our lives that it is easy to take for granted that we know exactly what the phrase means.

  Taking responsibility in your trading and learning the appropriate principles of success are inextricably connected. You have to understand, with every fiber of your being, the ways in which you are and are not responsible for your success as a trader. Only then can you take on the characteristics that will allow you to join the select group of traders who are consistently successful in the markets.

  At the end of Chapter 1, I introduced the idea of stepping into a future projection of yourself. In other words, the consistently successful trader that you want to become doesn’t exist yet. You must create a new version of yourself, just as a sculptor creates a likeness of a model.

  SHAPING YOUR MENTAL ENVIRONMENT

  The tools you will use to create this new version of yourself are your willingness and desire to learn, fueled by your passion to be successful. If the willingness and desire to learn are your primary tools, then what is your medium? An artist creating a sculpture can choose to work in a number of mediums—clay marble, or metal, for example—but 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. The medium for your artistic endeavor will be your mental environment, where with your desire to learn, you can restructure and install the beliefs and attitudes that are necessary to achieve your ultimate goal.

  I am assuming your ultimate goal is consistency. If you’re like most traders, you don’t realize the fullest potential of the opportunities available to you. To realize more and more of that potential, to make it more and more of a reality in your life, your primary goal has to be to learn how to think like a consistently successful trader.

  Remember, the best traders think in a number of unique ways. 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. This mind-set has a number of components, but the bottom line is that successful traders have virtually eliminated the effects of fear and recklessness from their trading. These two fundamental characteristics allow them to achieve consistent results.

  When you acquire this mind-set, you, too, will be able to trade without fear. You will no longer be susceptible to the multitude of fear-based errors that come from rationalizing, subconsciously distorting information, hesitating, jumping the gun, or hoping. Once the fear is gone, there just won’t be a reason to make these errors and, as a result, they will virtually disappear from your trading.

  However, eliminating fear is only half the equation. The other half is the need to develop restraint. Excellent traders have learned that it is essential to have internal discipline or a mental mechanism to counteract the negative effects of euphoria or the overconfidence that comes from a string of winning trades. For a trader, winning is extremely dangerous if you haven’t learned how to monitor and control yourself.

  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. Instead of learning to think like traders, they think about how they can make more money by learning about the markets. It’s almost impossible not to fall into this trap. There are a number of psychological factors that make it very easy to assume that it’s what you don’t know about the markets that causes your losses and lack of consistent results.

  However, that’s just not the case. 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.

  For example, if you could choose one of the following two traders to manage your money, which one would you pick? The first trader uses a simple, possibly even mediocre trading technique, but possesses a mind-set that is not susceptible to subconsciously distorting market information, hesitating, rationalizing, hoping, or jumping the gun. The second trader is a phenomenal analyst, but is still operating out of the typical fears that make him susceptible to all of the psychological maladies that the other trader is free of. The right choice should be obvious. The first trader is going to achieve far better results with your money.

  Attitude produces better overall results than analysis or technique. Of course, the ideal situation is to have both, but you really don’t need both, because if you have the right attitude—the right mind-set—then everything else about trading will be relatively easy, even simple, and certainly a lot more fun. I know for some of you this may be difficult to believe, or even distressing especially if you’ve been struggling for years to learn everything you can about the market.

  Interestingly, most traders are closer to the way they need to think when they first begin trading than at any other time in their careers. Many people begin trading with a very unrealistic concept of the inherent dangers involved. This is particularly true if their first trade is a winner. Then they go into the second trade with little or no fear. If that trade is a winner, they go into the next trade with even less concern for what would otherwise be the unacceptable possibility of a loss. Each subsequent win convinces them that there is nothing to fear and that trading is the easiest possible way to make money.

  This lack of fear translates into a carefree state of mind, similar to the state of mind many great athletes describe as a “zone.” If you’ve ever had the occasion to experience the zone in some sport, then you know it is a state of mind in which there is absolutely no fear and you act and react instinctively. You don’t weigh alternatives or consider consequences or second-guess yourself. You are in the moment and “just doing it.” Whatever you do turns out to be exactly what needed to be done.

  Most athletes never reach this level of play, because they never get past the fear of making a mistake. Athletes who reach the point where there is absolutely no fear of the consequences of screwing up will usually, and quite spontaneously, enter into “the zone.” By the way, a psychological zone is not a condition you can will yourself into, the way you can will yourself into a feat of endurance. It is a state of mind you find yourself in that is inherently creative, and usually if you start thinking about your actions at a rational or
conscious level, you pop right out of it.

  Even though you cannot force or will yourself into a zone, you can set up the kind of mental conditions that are most conducive to experiencing “the zone,” by developing a positive winning attitude. I define a positive winning attitude as expecting a positive result from your efforts, with an acceptance that whatever results you get are a perfect reflection of your level of development and what you need to learn to do better.

  That’s what the great athletes have: a winning attitude that allows them to easily move beyond their mistakes and keep going. Others get bogged down in negative self-criticism, regret, and self-pity. Not many people ever develop a positive winning attitude. The curious anomaly of trading is that, if you start with a winning trade, you will automatically experience the kind of carefree mind-set that is a by-product of a winning attitude, without having developed the attitude itself. I know this may sound a bit confusing, but it has some profound implications.

  If a few winning trades can cause you to enter into the kind of carefree state of mind that is an essential component to your success, but is not founded on the appropriate attitudes, then what you have is a prescription for extreme misunderstanding about the nature of trading that inevitably results in both emotional and financial disaster.

  Putting on a few (or more) winning trades does not mean you have become a trader, but that’s the way it feels, because it taps us into a state of mind that only the most accomplished people experience on a consistent basis. The fact is, you don’t need the slightest bit of skill to put on a winning trade, and if it’s possible to put on one winning trade without the slightest bit of skill, it is certainly possible to put on another and another. I know of several people who started their trading careers with fairly substantial strings of winning trades.

  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. It’s almost as if the market screams at you when to buy and when to sell, and you need very little in the way of analytical sophistication. And, of course, because you have no fear, you can execute your trades with no internal argument or conflict.

  The point I am making is that winning in any endeavor is mostly a function of attitude. Many people are certainly aware of this, but at the same time, most people don’t understand the significant part attitude plays in their results. In most sports or other competitive activities, participants must develop physical skills as well as mental skills in the form of strategies. If opponents are not evenly matched in the skills department, the one with superior skills usually (but not always) wins. When an underdog beats a superior opponent, what’s the determining factor? When two opponents are evenly matched, what’s the factor that tips the balance one way or the other? In both cases, the answer is attitude.

  What makes trading so fascinating and, at the same time, difficult to learn is that you really don’t need lots of skills; you just need a genuine winning attitude. Experiencing a few or more winning trades can make you feel like a winner, and that feeling is what sustains the winning streak. This is why it is possible for a novice trader to put on a string of winning trades, when many of the industry’s best market analysts would give their right arms for a string of winning trades. The analysts have the skills, but they don’t have the winning attitude. They’re operating out of fear. The novice trader experiences the feeling of a winning attitude because he’s not afraid. But that doesn’t mean he has a winning attitude; it only means he hasn’t experienced any pain from his trading activities to make him afraid.

  REACTING TO LOSS

  Eventually, our novice trader will experience a loss and being wrong, regardless of how positive he’s feeling. Losing and being wrong are inevitable realities of trading. The most positive attitude imaginable coupled with the best analytical skills can’t prevent a trader from eventually experiencing a losing trade. The markets are just too erratic and there are too many variables to consider for any trader to be right every time.

  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.

  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? Furthermore, suppose that he has completely accepted the risk, meaning that he has considered and accounted for all of what would otherwise be the unacceptable possibilities in the market’s behavior, both financially and emotionally. 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. By the way, this is an example of an ideal set of trading beliefs and attitudes.

  Now suppose that he hasn’t completely accepted the risk. 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. Expectations are our mental representations of how some future moment in the environment is going to look, sound, feel, smell, or taste. Depending upon how much energy is behind the expectation, it can hurt a lot when it isn’t fulfilled.

  Of the two different perspectives I just described, which one is likely to be held by our novice trader? The latter, of course. Only the very best traders have acquired the perspective described in the first scenario. And, as I indicated in Chapter 1, unless these very best traders grew up in successful trading families or had super traders for mentors (where appropriate attitudes about risk and loss were instilled in them from the very beginning of their careers), virtually every one of them had the common experience of losing one or more fortunes before they realized how they needed to think in order to be consistently successful.

  It’s a fundamental shift in attitude that accounts for their success, not some brilliant realization about the market, as most people erroneously assume. This erroneous assumption is prevalent among traders simply because very few of them really understand, at the deepest levels, just how critical a component attitude is in determining one’s success.

  We can safely assume that after a loss, our novice trader will be in a state of emotional pain. As a result, his trading will take on a whole new quality. He’ll definitely lose that carefree state of mind, but more important, he will feel that the market did this to him: The market caused him to feel the pain he is experiencing; the market took away his winning feeling by subjecting him to a loss.

  Notice how our trader is blaming the markets for losing or what he didn’t get. Notice, too, how natural it is to feel the way he does. Think about how many times in our lives, especially as children, we were doing something we really enjoyed, like playing with a toy or with our friends, and someone with more power and authority forced us to stop what we were doing and do something we didn’t want to do. All of us have lost things, had things taken away from us, been denied things we wanted or believed we deserved, been prevented from continuing an activity we were in the middle of, or been blocked from pursuing an idea we were passionate about.

  The point is that in many of these situations, we did not need to take personal responsibility for what happened to us or for the pain we experienced, because we were powerless to do anything about it. We didn’t choose to be forced out of a state of joy and happiness, into a state of emotional pain. The decision was out of our hands, against our will, and usually quite abrupt. Even though we may have been told we were responsible for what was happening to us, we may not have believed it or understood what it meant.

  What’s tangible, and what we can most easily relate to, is that we were having fun, and someone or
something took us out of that fun and into pain. It wasn’t our choice. The cause of our pain came to us from the outside; therefore, whatever force acted upon us in that moment was to blame. We learned not only that feeling good can instantly be replaced with feeling bad through no fault of our own; we also learned about betrayal. We felt betrayed because many of these situations were completely unexpected or unanticipated, meaning, we were unprepared for how some people in our lives had the potential to behave. If their behavior caused us to flip into a state of emotional pain, then we quite naturally would have felt betrayed.

  As a side note, I feel it is important to say that many of our past, emotionally painful experiences were the result of well-meaning parents, teachers and friends, many of whom were only doing what they believed, at the time, was best for us. The best example is a child playing with a toy that is inherently dangerous. Take the toy away, and the child will cry to express the emotional pain he is experiencing, and, if we are dealing with a very young or immature child, in all likelihood he will not listen to anything reasonable that we say about why he cannot play with that toy.

  But, at the same time, many people are born to immature and unreasonable parents, or encounter emotionally disturbed teachers, coaches, and employees who subconsciously or intentionally inflict their personal problems on anyone they perceive as having less power. What’s even worse is many of the people who have a tendency toward victimizing others are also clever enough to do it in a way that makes their victims believe they caused their own pain. In any case, whether our painful experiences are the result of an act of love or intentionally inflicted is something each of us will have to determine for ourselves.

  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. The implications are that if we haven’t learned to accept the inherent risks of trading and don’t know how to guard against making these natural connections between our past and the present, we will end up blaming the market for our results instead of taking responsibility for them.