by Mark Douglas
Even though most people who trade consider themselves responsible adults, 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.
Society may work this way but the markets certainly don’t. In society, we can expect other people to behave in reasonable and responsible ways. When they don’t, and if we suffer as a result, society makes remedies available to rectify the imbalance and make us whole again. The market, on the other hand, has no responsibility to give us anything or do anything that would benefit us. This may not be the way markets are advertised and certainly not the impression they want to project, but the reality is, every trader who participates in the markets does so for his own benefit. The only way one trader can benefit is if some other trader loses, whether the loss is in actual dollars as in a futures trade, or lost opportunity as in a stock trade.
When you put on a trade, it is in anticipation of making money. Every other trader in the world who puts on a trade does so for the same reason. When you look at your relationship with the market from this perspective, you could say that your purpose is to extract money from the markets, but, by the same token, the market’s sole purpose is to extract money or opportunity from you.
If the market is a group of people interacting to extract money from one another, then what is the market’s responsibility to the individual trader? It has no responsibility other than to follow the rules it has established to facilitate this activity. The point is, if you have ever found yourself blaming the market or feeling betrayed, then you have not given enough consideration to the implications of what it means to play a zero-sum game. Any degree of blaming means you have not accepted the reality that the market owes you nothing, regardless of what you want or think or how much effort you put into your trading.
In the market, typical social values of exchange do not come into play. If you don’t understand this and find a way to reconcile the differences between the social norms you grew up with and the way the market works, you will continue to project your hopes, dreams, and desires onto the market believing it’s going to do something for you. When it doesn’t, you’ll feel angry, frustrated, emotionally distraught, and betrayed.
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. Granted, the market’s purpose is to separate you from your money; but in the process of doing so, it also provides you with an endless stream of opportunities for you to take money from it. When prices move, that movement represents the collective actions of everyone participating at that moment. The market also generates information about itself, and makes it extremely easy to enter and exit trades (depending, of course, on the number of people participating).
From the individual’s perspective, price movement, information, and the ability to enter and exit trades represent opportunities to see something and to act on what you perceive. During each moment the markets are open, you have an opportunity to enter a position, lighten up a position, add to a position, or exit a position. These are all opportunities to enrich yourself by taking profits or, at least, cutting your losses.
Let me pose a question. Do you feel responsible for fulfilling some other trader’s expectations, hopes, dreams, and desires? Of course you don’t. It sounds absurd to even ask. However, if you ever find yourself blaming the market and feeling betrayed, that is essentially what you are doing. You are expecting the collective actions of everyone participating in the market to make the market act in a way that gives you what you want. You have to learn for yourself how to get what you want out of the markets. The first major step in this learning process is taking complete and absolute responsibility.
Taking responsibility means believing that all of your outcomes are self-generated; that your results are based on your interpretations of market information, the decisions you make and the actions you take as a result. 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.
Let’s consider the first obstacle. When you project any degree of responsibility onto the market for giving you money or cutting your losses, the market can all too easily take on the quality of an adversary or enemy. Losing (when you expected the market to do something different from what it did) will tap you into the same childlike feelings of pain, anger, resentment, and powerlessness that all of us felt when someone took something away from us, didn’t give us what we wanted, or wouldn’t let us do what we wanted.
No one likes to feel denied, especially if we believe that getting what we want will make us happy. In each of these situations, something or someone outside of us prevented us from expressing ourselves in some particular way. In other words, some outside force was acting against the inner force of our desires and expectations.
As a result, it feels natural to assign the market the power of an outside force that either gives or takes away. But consider the fact that the market presents its information from a neutral perspective. That means the market doesn’t know what you want or expect, nor does it care, unless, of course, you trade the kind of position that can have a major impact on prices. Otherwise, each moment, each bid, and each offer gives you the opportunity to do something. You can put on a trade, take profits, or take off a loser. This is also true for those of you who are floor traders and are personally known to other floor traders, who may also know your position and, to your detriment, purposely take advantage of that knowledge. It just means that you have to be faster and more focused, or take whatever limitations you have in these areas into consideration and trade accordingly.
From the market’s perspective, each moment is neutral; to you, the observer, every moment and price change can have meaning. But where do these meaning exist? The meanings are based on what you’ve learned, and exist inside your mind, not in the market. The market doesn’t attach meanings or interpret the information it generates about itself (although there are always individuals who will offer an interpretation if you’re willing to listen). Furthermore, the market doesn’t know how you define an opportunity or a loss. The market doesn’t know whether you perceive it as an endless stream of opportunities to enter and exit trades for both profits and losses at each and every moment, or whether you perceive it as a greedy monster ready and willing in any given moment to devour your money.
If you perceive the endless stream of opportunities to enter and exit trades without self-criticism and regret, then you will be in the best frame of mind to act in your own best interest and learn from your experiences. On the other hand, if what you perceive in market information is painful in some way, then you will naturally try to avoid that pain by either consciously or subconsciously blocking that information from your awareness. In the process of blocking that information, you’ll systematically cut yourself off from any number of opportunities to enrich yourself. In other words, you cut yourself off from the opportunity flow
Furthermore, it will feel like the market is against you but only if you expect it to do something for you, or if you believe that it owes you something. If someone or something is against you and causes you pain, how are you likely to respond? You’ll feel compelled to fight, but what exactly are you fighting? The market is certainly not fighting you. Yes, the market wants your money, but it also provides you with the opportunity to take as much as you can. Although it may feel as if you are fighting the market, or it is fighting you, the reality is you are s
imply fighting the negative consequences of not fully accepting that the market owes you nothing; and that you need to take advantage of the opportunities it presents by yourself, 100 percent and not one degree less.
The way to take maximum advantage of a situation where you are being offered unlimited opportunities to do something for yourself is to get into the flow. The market does have a flow. It is often erratic, especially in the shorter time frames, but it does display symmetrical patterns that repeat themselves over and over again. Obviously, it’s a contradiction to flow with something you are against. 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.
Earlier, I said that when you don’t take responsibility, 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. To illustrate this point, let’s go back to our novice trader who started out with a carefree state of mind until he experienced his first loss.
After winning with such ease and effortlessness, the abrupt shift to emotional pain can be quite shocking—not shocking enough, however, to quit trading. Besides, in his mind the situation wasn’t his fault anyway; the market did it to him. Instead of quitting, the great feeling that he experienced when he was winning will be fresh in his mind, and will inspire him with a sense of determination to continue trading.
Only now he’s going to be smarter about it. He’s going to put some effort into it and learn everything he can about the markets. It’s perfectly logical to think that if he can win not knowing anything, he’ll be able to clean up when he does know something. But there’s a big problem here that very few, if any, traders will have any awareness of until long after the damage is done. Learning about the markets is fine and doesn’t cause a problem in itself. It’s the underlying reason for learning about the market that will ultimately prove to be his undoing.
As I said a moment ago, 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. Techniques are available, but they aren’t widely known. The typical response in most people, especially in the type of person attracted to trading, is revenge. For traders, the only way to extract that revenge is to conquer the market, and the only way to conquer the market is through market knowledge, or so they think. In other words, the underlying reason for why the novice trader is learning about the market is to overcome the market, to prove something to it and himself, and most important, to prevent the market from hurting him again. He is not learning the market simply as a means to give himself a systematic way of winning, but rather as a way to either avoid pain or prove something that has absolutely nothing to do with looking at the market from an objective perspective. He doesn’t realize it, but as soon as he made the assumption that knowing something about the market can prevent him from experiencing pain or can help satisfy his desire for revenge or to prove something, he sealed his fate to become a loser.
In effect what he has done is set up an irreconcilable dilemma. He is learning how to recognize and understand the market’s collective behavior patterns, and that’s good. It even feels good. He’s inspired because he assumes he’s learning about the market in order to become a winner. As a result, he will typically go on a knowledge quest, learning about trend lines, chart patterns, support and resistance, candlesticks, market profiles, point and line charts, Elliott waves, Fibonacci retracements, oscillators, relative strength, stochastics, and many more technical tools too numerous to mention. Curiously, even though his knowledge has increased, he now finds that he’s developed problems executing his trades. He hesitates, second-guesses himself, or doesn’t put on a trade at all, in spite of any number of clear signals to do so. It’s all frustrating, even maddening, because what’s happened doesn’t make sense. He did what he was supposed to do—he learned—only to find that the more he learned, the less he took advantage of. He would never believe that he did anything wrong by devoting himself to learning; he simply did it for the wrong reasons.
He won’t be able to trade effectively if he is trying to prove something or anything for that matter. If you have to win, if you have to be right, if you can’t lose or can’t be wrong, you will cause yourself to define and perceive categories of market information as painful. In other words, you will view as painful any information the market generates that is in opposition to what will make you happy.
The dilemma is that our minds are wired to avoid both physical and emotional pain, and learning about the markets will not compensate for the negative effects our pain-avoidance mechanisms have on our trading. Everybody understands the nature of avoiding physical pain. Accidentally set your hand on a hot burner, and your hand moves away from the heat automatically; it’s an instinctive reaction. However, when it comes to avoiding emotional pain and the negative consequences it creates, especially for traders, very few people understand the dynamics. It’s absolutely essential to your development that you understand these negative effects and learn how to take conscious control in a way that helps you fulfill your goals.
Our minds have a number of ways to shield us from information that we have learned to perceive as painful. For example, at a conscious level, we can rationalize, justify, or make a case for staying in a losing trade. Some of the more typical ways we do this are to call our trading buddies, talk to our broker, or look at indicators we never use, all for the express purpose of gathering nonpainful information in order to deny the validity of the painful information. At a subconscious level, our minds will automatically alter, distort, or specifically exclude information from our conscious awareness. In other words, we don’t know at a conscious level that our pain-avoidance mechanisms are either excluding or altering the information being offered by the market.
Consider the experience of being in a losing trade when the market is making consistently higher highs and higher lows or lower highs and lower lows against your position, while you refuse to acknowledge you are in a losing trade because you have focused all your attention on the tics that go in your favor. On the average, you are only getting one out of four or five tics in your direction; but it doesn’t matter because every time you get one, you are convinced the market has reversed and is coming back. Instead the market keeps going against you. At some point, the dollar value of the loss becomes so great that it cannot be denied and you finally exit the trade.
The first reaction that traders universally have when looking back at such a trade is, “Why didn’t I just take my loss and reverse?” The opportunity to put on a trade in the opposite direction was easily recognized once there was nothing at stake. But we were blinded to this opportunity while we were in the trade, because at that time the information indicating it was an opportunity was defined as painful, so we blocked it from our awareness.
When our hypothetical trader first started trading, he was having fun; he was in a carefree state of mind; he had no personal agendas and nothing to prove. As long as he was winning, he put his trades on from a “let’s see what will happen” perspective. The more he won, the less he considered the possibility of ever losing. When he finally did lose, he was probably in a state of mind where he least expected it. Instead of assuming that the cause of his pain was his erroneous expectation about what the market was supposed to do or not do, he blamed the market, and resolved that by gaining market knowledge, he could prevent such experiences from recurring. In other words, he made a dramatic shift in his perspective from carefree to preventing pain by avoiding losses.
The problem is that preventing pain by avoiding losses can’t be done. The market generates behavior patterns and the patterns repeat themselves, but not every time. So again, there is no possible way to avoid losing or being wron
g. Our trader won’t sense these trading realities, because he is being driven forward by two compelling forces: (1) he desperately wants that winning feeling back, and (2) he is extremely enthusiastic about all of the market knowledge he is acquiring. What he doesn’t realize is that, in spite of his enthusiasm, when he went from a carefree state of mind to a prevent-and-avoid mode of thinking, he shifted from a positive to a negative attitude.
He’s no longer focused on just winning, but rather on how he can avoid pain by preventing the market from hurting him again. This kind of negative perspective isn’t any different from the tennis player or golfer who is focused on trying not to make a mistake, the more he tries not to make a mistake, the more mistakes he makes. However, this mode of thinking is much easier to recognize in sports because there’s a more discernable connection between one’s focus and one’s results. With trading, the connection can be obscured and more difficult to recognize as a result of the positive feelings being generated from discovering new relationships in market data and behavior.
Since he is feeling good, there’s no reason to suspect that anything is wrong, except that the degree to which his focus is weighted toward pain-avoidance is the same degree by which he will create the very experiences he is trying to avoid. In other words, the more he has to win and not lose, the less tolerance he will have for any information that might indicate he is not getting what he wants. The more information that he has the potential to block, the less he will be able to perceive an opportunity to act in his own best interests.