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Trading in the Zone – Book Notes

I recently finished reading Mark Douglas’s book, Trading in the Zone. This book found me at an opportune time, as I’ve been going through a rough patch with my trading and especially my mindset while trade.

If there is one book I highly recommend you read as a trader to get your state of mind right, it’s Trading in the Zone. Here are my book summary notes below. Note that my summary notes are not short. It’s over 2,500 words of the best wisdom I pulled out of the book.

Book Summary Notes

Have confidence in trades.

Focus on opportunities.

Fundamental analysis is the study of finding supply and demand of an investment based off fundamental information.

Technical analysis is based off patterns in an investments’ historical data.

Technical analysis is more “in the moment” than fundamental analysis. You react in the moment to changes in prices.

Good traders have rules for entry and exits.

Accept risk before putting on a position and never assume you are correct. Be quick to admit you’re wrong.

Accept the possibility that you will lose money so that you can objectively manage a position.

Good traders aren’t afraid because they have effective management strategies to enter and exit trades.

The four primary trading fears are:

  1. Being wrong
  2. Losing money
  3. Missing out
  4. Leaving money on the table

We blame the market for our losing money.

How you view the market affects the consistency of your results.

You can never know the myriad of ways the market can make you lose money.

Accept that the outcome of a trade is unknown, and that one trade is not a reflection on you as a trader. Failure to accept this leads to costly decisions.

Doing more market analysis will not make you a better trader. Acceptance of what the market is will.

Accept the risk you take on with every trade, and you will no longer be afraid.

Trade without fear, and have rules to prevent reckless behavior.

The market presents you with unlimited possibilities, and this can challenge those not equipped to deal with this fact.

Desires are generated internally, but must be fulfilled externally.

Once we identify a desire we are drawn to fill that desire externally. Denial of this opportunity to fulfill a desire leads to pain.

Accept that trades are a probabilistic outcome, and define how much risk you are willing to take on this probability.

Prices always move. Your entries and exits last as long as you want.

The market will not make you exit a trade. You must do that. Don’t be a passive loser. Actively lose by defining your risk.

Trading gives you ultimate freedom. This can be a curse because you have no structure to follow.

Most of those who get into trading initially struggle to create a set of rules to follow.

That which draws us to trading is the same thing that makes us resist creating trading rules.

Your impulses hinder your ability to trade well for psychological reasons.

You must keep yourself responsible for the way you take profits and take losses.

If you play probabilistic edges, you must be consistent in how you trade them and not get thrown off by a few losing trades.

Don’t get hung up on any single trade.

Adapt to your environment and create rules so that you can adapt appropriately.

Winning early as a trader can hurt your long-term performance.

Trying to “understand why” the markets do something can hurt you in the long run.

Your mental attitude will produce better results than analysis alone.

Trading can be a simple pursuit in which you don’t need a ton of skills, but rather a winning attitude.

Operate from the belief that trading losses are a natural part of trading and should be considered as your business expenses.

We feel pain when reality fails to meet our expectations, especially when they are unrealistic.

Losing traders blame markets for their losses.

You blame markets for your results if you don’t accept the randomness of markets, have rules to protect you against this randomness, and take responsibility of your results.

Your goal is to extract money from the market, and the markets’ goal is to extract money from you.

Markets owe you nothing. Don’t blame them for your losses.

Take complete responsibility of your trading. Otherwise you will view the market as your adversary and you believe that your problems can be fixed by better analysis.

Every entry and exit on a trade is an opportunity for you to act in your own best interest.

You are never fighting the market, because it owes you nothing.

Learning about markets isn’t bad, but it can give you a false confidence that you know what will happen next and ignore the randomness inherent to markets.

Learning more about markets isn’t going to eliminate losing trades. Don’t take losing trades personally.

Accept your losses and you will no longer view market information as painful. You will view it as it is, information.

Our bias to avoid pain makes us ignore or alter information that the market provide us.

In sports there is a more discernible connection between one’s focus and results. It’s harder to see this connection in trading.

Leaving money on the table can be more painful than taking a loss because you know you missed out on a large profit.

Make winning and consistency are states of mind.

Make yourself available to what the market is offering you.

Our biases make us interpret information that is favorable to our own egos, even though it can hurt more in the long run.

Fear causes 95% of the errors you are likely to make.

Think about trading in a way that keeps fear at bay so that you can continue to focus on opportunities.

Let the market unfold and make yourself available to opportunities with a clear mind.

Accept risk and you won’t have anything to fear.

You see what you’ve learned to see, and miss that which you haven’t learned to see.

Every trade is an edge with a probable outcome. Know this to define your risk, and eliminate your fears.

Perceive the market objectively. Don’t project your own feelings on the market.

Your emotional mind links your current state to your most recent trading experiences, which can be painful and create a fearful state of mind.

The “secret” to trading well is four items:

  1. Trade without fear OR overconfidence
  2. Perceive what the market is offering clearly
  3. Stay focused on the “now moment opportunity flow”
  4. Enter the “zone” and believe in an uncertain outcome with an edge in your favor

Great traders don’t let emotions of recent trades influence their process.

To be a consistently successful trader one must learn adapt.

It can take years for most traders to figure out that consistency trumps picking the occasional winner.

The best traders cut their losses without hesitation if the market tells them it’s not working.

The three most costly trading errors you can make

  1. Not predefining your risk
  2. Not cutting your losses
  3. Not systematically taking profits

Thinking that you “know” what will happen next is the cause of most trading errors you will make.

The most effective trading belief you can acquire is “anything can happen.”

Every trader acts on their own belief about what is high and what is low, and collective behavior pattern is displayed in the price at that moment.

Every trade you make is unique from every other trade you’ve made.

Train your mind to think in probabilities, and have actions that you take to deal with these unknown outcomes.

Don’t ever convince yourself you’re right when you enter into a trade. Instead, define the risk.

When you think you know what will happen, you are effectively thinking you know the future actions of every single individual and how they will move prices.

Markets are unique, anything is possible. To ignore this fact is foolish.

Your beliefs are shaped by your expectations. These beliefs cause you perceive market information that confirms your bias, and ignore market information that conflicts with your bias.

Market information that goes against our position is ignored when we find it too painful to acknowledge.

We focus on information that helps minimize our pain, which is destructive to our trading.

We lose out on opportunities when we choose to ignore what the market is telling us.

Our pain-avoidance mechanism shields us from seeing information that is not aligned with our beliefs.

Traders must learn to be rigid in our rules, and flexible in our expectations.

There are five fundamental truths you must accept to think probabilistically:

  1. Anything can happen
  2. You don’t need to know what will happen next to make money
  3. Wins and losses are randomly distributed for any given edge
  4. An edge is an indication of higher probability of one thing over another
  5. Every moment in the market is unique

When you put on a trade, your only expectation is that something will happen. That’s it.

Define a stop loss for every trade. This should be some point where the odds of success are greatly diminished in relation to the potential profit.

Losses are the cost of doing business in the course of finding winning trades.

Each moment in the market is an opportunity to do something on your behalf. You always have an opportunity to:

  1. Scratch a trade
  2. Trade profits
  3. Cut losses
  4. Add or detract from a position

Expectations are beliefs projected into some future moment.

We can’t know what to expect from the market because other traders are always there to enter and exit trades based off their own beliefs about the future.

The only thing you should “know” in trading is what an edge looks like, how much you need to risk, and a plan for taking profits or losses on a trade. You can never know if any one trade will work out.

Don’t have an agenda when you trade. Make yourself available to the opportunities the market makes available to you with a clear mind.

Emotional pain is a response we have when the world expresses itself in a manner opposite of our beliefs.

Don’t expect the market to make you “right” or “wrong”.

Don’t expect to market to go in your favor forever. Establish rules for taking profits.

Gathering more information to predict if a coin will flip heads or tails is silly. Why would you expect it to work in the markets? Remember that every trade is probabilistic.

Every moment is unique, and therefore you will never “know” what will happen next.

Don’t try to change your beliefs. Remove the energy behind that belief, and channel it towards better beliefs.

It’s hard to make new discoveries when your internal beliefs conflict with those discoveries.

The underlying cause of fear in trading is interpreting market information as threatening.

You must believe that every edge has a unique outcome in order to trade without fear.

You must believe you don’t know what is going to happen next.

Train your mind to expect a unique outcome in order to see market information objectively.

Believe that each moment is unique in order to achieve mental freedom while trading.

Trading is a pattern recognition numbers game. Identify patterns for some edge, define your risk, and take profits consistently. Some trades work and some don’t. Don’t take it personally.

Trading is one of the hardest things to do because the more you think you know, the less successful you’ll be.

Manage your expectations as a trader and align your mental environment with the five fundamental truths.

  1. Trust yourself to operate in an unlimited environment
  2. Focus on flawlessly executing a trading system
  3. Think in probabilities – the five fundamental truths
  4. Create a strong belief in your consistency as a trader

Your primary objective as a trade should be to produce consistent results. The way you do that is by following your trading rules with unshakeable confidence.

Consistency should be your primary reason for trading.

Making mistakes will happen until your beliefs are in harmony with your desires and your beliefs are consistent with what works from an environment’s perspective.

Don’t think less of yourself when you make mistakes.

Mistakes should not hold negatively charged energy for you.

Beliefs must be in alignment with goals and desires to eliminate any conflicting energy.

You must create the belief that you are a consistently successful trader.

Don’t make it a goal to guess correctly. Make it a goal to be consistent with your techniques.

Tell yourself, I am a consistent winner because:

  1. I objectively identify my edges
  2. I predefine the risk of every trade
  3. I accept risk and am willing to let go of trades
  4. I act on my edge without hesitation
  5. I pay myself as the markets make profits available to me
  6. I monitor myself for my susceptibility to make errors
  7. I never violate these principles above

To be an objective observer, think from the market’s perspective. There are always unknown forces waiting to act on price movement so that every moment is truly unique.

The typical trading errors are:

  1. Hesitating
  2. Jumping the gun
  3. Not predefining risk
  4. Defining risk but not taking a loss
  5. Exiting a winning trade too soon
  6. Not taking profits on a winning trade
  7. Letting a winning trade turn into a loser
  8. Moving stop too close to your entry point
  9. Trading too large a position in relation to your equity

You can change your identity by changing your desires.

Losses call for larger % returns in order to be profitable. A 50% loss requires a 100% return to become profitable again.

Divide your position into thirds or quarters, and scale out of the position when taking profits.

Take off a portion of a winning position whenever the market presents you with the opportunity to do so.

In a three contract trade, establish a stop loss, and take profits by scaling out of the position one contract at a time.

Scale out of positions to create “risk-free opportunities”. These are positions where you have taken profits to the extent of max loss allowable on the remainder of the position, therefore guaranteeing a break-even trade at a minimum.

Try to achieve a risk to reward ratio of 3:1, which means you risk one dollar for every three dollars of profit potential.

Success or failure of a strategy should be based off a sample size of 20 trades or more.

An edge is merely a snapshot which captures a limited portion of all probabilities.

Be willing to make 20 trades on a strategy before making a judgement of its effectiveness.

Follow your trading rules and focus on the five fundamental truths in trading.

If you can go through 20 trades without allowing your emotions to influence you adherence to rules and probabilities, then you discover that thinking in probabilities is a functioning part of your identity.

Conclusion

Again, if there is one book I highly recommend you read as a trader to get your state of mind right, it’s Trading in the Zone.

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Author: Trader Court

CPA first, pivoted to python programmer focused on data science which I apply to my own stock and options trading.

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