Trading in the Zone

by Mark Douglas

  4. An edge is nothing more than an indication of a higher probability of one thing happening over another. Creating consistency requires that you completely accept that trading isn’t about hoping, wondering, or gathering evidence one way or the other to determine if the next trade is going to work. The only evidence you need to gather is whether the variables you use to define an edge are present at any given moment. When you use “other” information, outside the parameters of your edge to decide whether you will take the trade, you are adding random variables to your trading regime. Adding random variables makes it extremely difficult, if not impossible, to determine what works and what doesn’t. 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.

  On the other hand, if you believe that an edge is simply a higher probability of one thing happening over another, and there’s a random distribution between wins and losses for any given set of variables that define an edge, why would you gather “other” evidence for or against a trade? To a trader operating out of these two beliefs, gathering “other” evidence wouldn’t make any sense. Or let me put it this way: Gathering “other” evidence makes about as much sense as trying to determine whether the next flip of a coin will be heads, after the last ten flips came up tails. Regardless of what evidence you find to support heads coming up, there is still a 50-percent chance that the next flip will come up tails. By the same token, regardless of how much evidence you gather to support acting or not acting on a trade, it still only takes one trader somewhere in the world to negate the validity of any, if not all, of your evidence. The point is why bother! If the market is offering you a legitimate edge, determine the risk and take the trade.

  5. Every moment in the market is unique. Take a moment and think about the concept of uniqueness. “Unique” means not like anything else that exists or has ever existed. As much as we may understand the concept of uniqueness, our minds don’t deal with it very well on a practical level. As we have already discussed, our minds are hardwired to automatically associate (without conscious awareness) anything in the exterior environment that is similar to anything that is already inside of us in the form of a memory, belief, or attitude. This creates an inherent contradiction between the way we naturally think about the world and the way the world exists. No two moments in the external environment will ever exactly duplicate themselves. To do so, every atom or every molecule would have to be in the exact same position they were in some previous moment. Not a very likely possibility. Yet, based on the way our minds are designed to process information, we will experience the “now moment” in the environment as being exactly the same as some previous moment as it exists inside our minds.

  If each moment is like no other, then there’s nothing at the level of your rational experience that can tell you for sure that you “know” what will happen next. So I will say again, why bother trying to know?! When you try to know, you are, in essence, trying to be right. I am not implying here that you can’t predict what the market will do next and be right, because you most certainly can. It’s in the trying that you run into all of the problems. If you believe that you correctly predicted the market once, you will naturally try to do it again. As a result, your mind will automatically start scanning the market for the same pattern, circumstance, or situation that existed the last time you correctly predicted its movement. When you find it, your state of mind will make it seem as if everything is exactly as it was the last time. The problem is that, from the market’s perspective, it is not the same. As a result, you are setting yourself up for disappointment.

  What separates the best traders from all the rest is that they have trained their minds to believe in the uniqueness of each moment (although this training usually takes the form of losing several fortunes before they “really” believe in the concept of uniqueness). This belief acts as a counteracting force, neutralizing the automatic association mechanism. When you truly believe that each moment is unique, then by definition there isn’t anything in your mind for the association mechanism to link that moment to. This belief acts as an internal force causing you to disassociate the “now” moment in the market from any previous moment filed away in your mental environment. The stronger your belief in the uniqueness of each moment, the lower your potential to associate. The lower your potential to associate, the more open your mind will be to perceive what the market is offering you from its perspective.

  MOVING TOWARD “THE ZONE”

  When you completely accept the psychological realities of the market, you will correspondingly accept the risks of trading. When you accept the risks of trading, you eliminate the potential to define market information in painful ways. When you stop defining and interpreting market information in painful ways, there is nothing for your mind to avoid, nothing to protect against. When there’s nothing to protect against, you will have access to all that you know about the nature of market movement. Nothing will get blocked, which means you will perceive all the possibilities you have learned about (objectively), and since your mind is open to a true exchange of energy, you will quite naturally start discovering other possibilities (edges) that you formerly couldn’t perceive.

  For your mind to be open to a true exchange of energy, you can’t be in a state of knowing or believing that you already know what’s going to happen next. When you are at peace with not knowing what’s going to happen next, you can interact with the market from a perspective where you will be making yourself available to let the market tell you, from its perspective, what is likely to happen next. At that point, you will be in the best state of mind to spontaneously enter “the zone,” where you are tapped into the “now moment opportunity flow.”

  CHAPTER 9

  THE NATURE OF BELIEFS

  At this point, if you can sense the benefits of adopting the five fundamental truths about trading, then 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.

  At first glance, this may seem like a daunting task and under other circumstances I would agree with you, but it won’t be, because in Chapter 11 I’ll give you a simple trading exercise specifically designed to properly install these truths as beliefs at a functional level. A functional level is, one where you find yourself just naturally operating out of a carefree state of mind, perceiving exactly what you need to do and doing it without hesitation or internal conflict.

  However, I do have a word of caution for those of you who have already looked at the exercise. On the surface, the trading exercise looks so simple that you may be tempted to do it now, before you thoroughly understand the implications of what you are doing. I strongly suggest that you reconsider. There are some subtle yet profound dynamics involved in the process of learning how to install new beliefs and change any existing beliefs that are in conflict with the new ones. Understanding the trading exercise itself is easy. Understanding how to use the exercise to change your beliefs is another matter entirely. If you do the exercise without understanding the concepts presented in this chapter and the next, you will not achieve the desired results.

  It is also important that you not take for granted the amount of mental effort you may have to expend to train your mind to fully accept these principles of success, regardless of how well you understand them. Remember Bob, the CTA who believed he thoroughly understood the concept of probabilities, but didn’t have the ability to function from a probabilistic perspective.

  Many people make the mistake of assuming that once they understand something, the insight inherent in their new understanding automatically becomes a functional part of their identity. Most of the time, understanding a concept is only a first step in the process of integrating that concept at a
functional level. This is especially true of concepts that deal with thinking in probabilities. Our minds are not naturally wired to be “objective” or to stay in the “now moment.” This means we have to actively train our minds to think from these perspectives.

  In addition to the training involved, there may be any number of conflicting beliefs to work through. Conflicting beliefs will have the effect of sabotaging your best intentions to operate from an objective state of mind or to experience the “now moment opportunity flow.” For example, let’s say you’ve spent years learning how to read the markets, or spent large sums of money developing or buying technical systems, just so you could find out what was going to happen next. Now you have come to understand that you don’t have to know what’s going to happen next, and that even trying to know will detract from your ability to be objective or to stay in the moment. What we have is a direct conflict between your old belief that you need to know what will happen next to be successful and your new understanding that you don’t need to know.

  Now, will your new understanding suddenly neutralize all the time, money, and energy expended on reinforcing the belief that you “need to know”? I wish it were that easy. And for some lucky few, it may be. If you will recall in Chapter 4 when I talked about psychological distance in relationship to software code, I said that some traders may already be so close to these new perspectives that all they need is to put together a few of the missing pieces to create a mind-altering, “ah, ha” experience.

  However, based on my experience of working with well over a thousand traders, I can say that most are not close to these perspectives at all. For those of you who are not, it may take a considerable amount of mental work (over a considerable amount of time) to properly integrate your new understandings about trading into your mental environment. The good news is that, ultimately, the exercise I present in Chapter 11 will install the five fundamental truths and resolve many of the potential conflicts, but only if you know exactly what you are doing and why you are doing it. That is the subject of this and the next chapter.

  THE ORIGINS OF A BELIEF

  What can we learn about the nature of beliefs, and how can we use that knowledge to create a mind-set that fosters our desire to be a consistently successful trader? These are the two questions I am going to focus on answering in this chapter.

  First, let’s look at the origin of our beliefs. As you may recall, memories, distinctions, and beliefs exist in the form of energy—specifically, structured energy. Earlier, I lumped these three mental components together to illustrate:1. that memories, distinctions, and beliefs do not exist as physical matter;

  2. that the cause-and-effect relationship that exists between ourselves and the external environment brings these components into existence; and

  3. how the cause-and-effect relationship reverses so that we can perceive in the external environment what we have learned about.

  To get at the origins of our beliefs, we’re going to have to unbundle these components to illustrate the difference between a memory and a belief. The best way to do this is to imagine ourselves in the mind of an infant. I would think that at the very beginning of a child’s life, the memories of his experiences would exist in their purest form. By that I mean that the memories of what he has seen, heard, smelled, touched, or tasted exist in his mind as pure sensory information that is not organized or attached to any specific words or concepts. Therefore, I am going to define a pure memory as sensory information stored in its original form.

  A belief, on the other hand, is a concept about the nature of the way the external environment expresses itself. A concept combines pure sensory information with a symbol system we call language. For example, most infants have a pure memory of how it feels to be lovingly nurtured by a parent, but it isn’t until the infant is taught to link or associate certain words with the pure sensory information stored in his memory that he will form a concept about how it feels to be lovingly nurtured.

  The phrase “Life is wonderful” is a concept. By themselves, the words make up a meaningless collection of abstract symbols. But if a child is either taught or decides to connect these words to his positively charged feelings of being nurtured, then the letters are no longer a collection of abstract symbols and the words are no longer an abstract phrase. “Life is wonderful” becomes a definitive distinction about the nature of existence or the way the world works. By the same token, if the child didn’t get enough nurturing, relative to his needs, he could just as easily link his feelings of emotional pain to a concept like “Life isn’t fair” or “The world is an awful place.”

  In any case, when the positive or negative energy from our memories or experiences become linked to a set of words we call a concept, the concept becomes energized and, as a result, is transformed into a belief about the nature of reality. If you consider that concepts are structured by the framework of a language and energized by our experiences, it becomes clear why I refer to beliefs as “structured energy.”

  When a belief comes into existence, what does it do? What is its function? In some ways it seems ludicrous to ask those questions. After all, we all have beliefs. We are constantly expressing our beliefs both verbally and through our actions. Furthermore, we are constantly interacting with other people’s beliefs as they express them. Yet, if I ask, “What exactly does a belief do?” chances are your mind will go blank.

  On the other hand, if I were to ask about the functions of your eyes, ears, nose, or teeth, you would have no problem answering. Since beliefs are such important component parts of our make-up (in terms of their impact on the quality of our lives), it certainly has to be one of life’s great ironies that they are also the least thought about and understood.

  What I mean by “least thought about” is, if we have a problem with one of our body parts, we naturally focus our attention on that part and think about what we need to do to fix the problem. However, it doesn’t necessarily occur to us that the problems we may be having with the quality of our lives (for example, lack of happiness, a sense of dissatisfaction, or lack of success in some area) are rooted in our beliefs.

  This lack of consideration is a universal phenomenon. One of the prominent characteristics of beliefs is that they make what we experience seem self evident and beyond question. In fact, if it weren’t for your intense desire to experience consistent success as a trader, it’s unlikely you would be delving into this topic at all. Usually, it takes years of extreme frustration before people begin examining their beliefs as the source of their difficulties.

  However, even though beliefs are an intricate part of our identity, you don’t have to take this process of self analysis so personally. Consider the fact that none of us was born with any of our beliefs. They were all acquired in a combination of ways. Many of the beliefs that have the most profound impact on our lives were not even acquired by us as an act of free will. They were instilled by other people. And it probably won’t come as a surprise to anyone that usually the beliefs that cause us the most difficulty are those that were acquired from others without our conscious consent. By that I mean beliefs that we acquired when we were too young and uninformed to realize the negative implications of what we were being taught.

  Regardless of the source of our beliefs, once they are born into existence they all basically function in the same way. Beliefs have certain characteristic ways in which they do their jobs, not unlike the various parts of our bodies. For example, if you compare my eyes and your eyes, or my hands and your hands, or my red blood cells and your red blood cells, we can see that they are not exactly the same, but they have characteristics in common that cause them to function in similar ways. By the same token, a belief that “Life is wonderful” will perform its function in the same way as a belief that “Life is awful.” The beliefs themselves are different and the effect that each has on the quality of the holder’s life will be vastly different, but both beliefs will function in exactly the same manner.

  BELI
EFS AND THEIR IMPACT ON OUR LIVES

  In the broadest sense, our beliefs shape the way we experience our lives. As I have already said, we’re not born with any of our beliefs. They’re acquired, and as they accumulate, we live our lives in a way that reflects what we have learned to believe. Consider how different your life would be if you had been born into a culture, religion, or political system that has very little, if anything, in common with the one you were born into. It might be hard to imagine, but what you would have learned to believe about the nature of life and how the world works may not be remotely similar to what you currently believe. Yet you would hold these other beliefs with the same degree of certainty as your current beliefs.

  How Beliefs Shape Our Lives

  1. They manage our perception and interpretation of environmental information in a way that is consistent with what we believe.

  2. They create our expectations. Keep in mind that an expectation is a belief projected into some future moment. Since we can’t expect something we don’t know about, we could also say that an expectation is what we know projected into some future moment.

  3. Anything we decide to do or any outward expression of behavior will be consistent with what we believe.