The Disciplines Trader: Developing Winning Attitudes by Mark Douglas is a book, as the title suggests, about being disciplined when it comes to trading whatever it is that you are trading.
There are only a few traders who have come to the realization that they alone are completely responsible for the outcome of their actions.p. xiii
In the trading environment, you will have to make up your own rules and then have the discipline to abide by them.p. xiii
There is no beginning, middle, or end – only what you create in your own mind.p. xiii
This grim scenario certainly explains why so few people ever make money as traders.p. xiii
Painful emotional conditions are basically the result of unfulfilled expectations. Unfulfilled expectations create a conflict between a person’s beliefs about the way things should be and the actual environmental conditions that don’t match those beliefs. This conflict is expressed through our emotions in the form of pain that we generally label as stress, anxiety, confusion, and so on.p. xiv
forced awerenessp. xv
You may not be able to control the markets, but you can control your perception of them in order to achieve a higher degree of objectivity, resulting in a higher degree of shared reality with the markets.p. xv
Now, there are several major problems that result when fear becomes a motivation to do or not to do something. First, it will limit your range of perceived opportunities by narrowing your focus of attention, keeping it on the object of your fear. This means that out of all available market information, you will only perceive information that will, in effect, validate what you fear the most. Your fear will systematically exclude from your awareness market information that would indicate the existence of other alternatives and opportunities.p. xv
Many traders suffer considerably when they know exactly what they want to do but, when the moment to execute arrives, find themselves completely immobilized.p. xv
self-confidence and self-trustp. xv
You can’t really determine what the market is likely to do next when you don’t even know what you will do next, regardless of what you may perceive or want.p. xvi
The difference is that the traders who can make money consistently on a weekly, monthly and yearly basis approach trading from the perspective of a mental discipline.p. 4
don’t expect to become a successful trader if you have limited trading capital or if you are trading with money you can’t afford to lose.p. 8
I would refuse to take profits of $500 or $750 in many trades even when I knew that’s all there was to be made.p. 9
my mental framework was structured to avoid losses at all costs and in my desperate attempts to do so, I actually created them.p. 11 I can’t remember exactly as to why I highlighted this part but I would disagree with the author here, as I believe that the first rule of trading is to not lose money and protect your capital at all costs. However I do understand where he is coming from. Personally I like to remind myself of Warren Buffett’s statement where we mentions that most of his mistakes where made by omission rather than commission
one of the most important lessons to becoming a successful trader: how to “accept” a loss without any negative consequences.p. 12
the principles of time, effort, and reward associated with most job situations simply do not apply with the markets.p. 17
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5. Revenge-trading as if you were trying get back at the market for what it took away from you
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8. Planning for a move or feeling one building, but then finding yourself immobilized to hit the bid or offer, and therefore denying yourself the opportunity to profit.
9. Not acting on your instincts or intuition.
10. Establishing a consistent pattern of trading success over a period of time, and then giving your winnings back to the market in one or two trades and starting the cycle over again.p. 19 from a list of culturally learned behavior that results in an unsuccessful trading experience
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1. Learning the dynamics of goal achievement so you can stay positively on what you want – not what you fear.p. 19 from skills to be acquired
Believing that trading is easy is the reason for the unrealistic expectations.p. 22
they understood the psychological implications of an event that is never ending, that begins only when one decides to participate, that ends only when one has had enough, and behaves without the slightest regard for individual survival.p. 25
“The market behaves as it does because of the interactions of hundreds of thousands of people. And since all these individuals are members of the human race, regardless of national origin, religious conviction, or what have you, they will all have one thing in common – the psychological structure of the human mind.”p. 27
You create the game in your mind based on your beliefs, intents, perceptions, and rules.p. 27
People generally don’t know how to repair psychological damage and as a result don’t know how to release themselves from their fear.p. 28
Lack of Self-Discipline
If the type of environmental conditions exist that are beyond your skill level to respond to appropriately (without doing harm to yourself), then you will need to institute some rules and limitations to guide your behavior until you learn how to act in your best interests. When you were a child your parents didn’t let you cross the street by yourself because the consequences of your ability to cross safely might have precluded your getting a second chance. When you were able to make the appropriate distinctions about the nature of traffic, your parents trusted you enough to cross the street on your own.
Until they trusted you, they always feared the possibility of your getting hit by a car. As a result of their fear, they restricted your freedom of movement, regardless of the opportunities that may have existed for you across the street. Your interaction with the trading environment works the same way. The difference is that no one is stopping you from standing in the middle of the street (metaphorically) to get hit by the truck. You are the only one who can stop yourself. After you have been hit once or twice, it might not be so easy to cross the street, regardless of how good the opportunities look on the other side.
What makes it even more difficult (continuing with the traffic metaphor) to step out into the street is when you further realize that the cars and trucks can come at you in a seemingly random fashion. All of a sudden you’re lying on the street not even knowing what hit you because you thought you were being careful.p. 29-30
If all trading stopped at any particular price, what would this last posted price represent? At the most fundamental level, this last price (or any current price) would represent the consensus belief about value, relative to the future, of all the traders who are in the market in that moment. The current price is a direct reflection of the beliefs of all the traders who choose to act as a force on prices by putting on a trade. So, when there are two traders, one wanting to buy and one wanting to sell at a price and do so, they have made a trade, and they have also made a market.p. 35
All that is needed to make the market right are two traders willing to trade at a price.p. 35
Movement creates opportunity to make money, and making money is what trading is all about.p. 37
As a trader, you have to decide what is more important – being right or making money – because the two are not always compatible or consistent with one another.p. 37
There are several psychological factors that go into being able to assess accurately the market’s potential for movement in any given direction.p. 40
“Only trade with money you can afford to lose”, meaning money that has little or no value in your life.p. 42
the game only begins when you decide to enter and ends only when you decide to exitp. 42
Entering a trade will involve all your beliefs about opportunity in relationship to risk, missing out, needing a sure thing, and not being wrong. Exiting a trade will involve all your beliefs about loss, greed, failure, and control.p. 42-43
The event begins and ends according to the rules of the game, and the risk of loss is limited to the size of the wager.p. 43
greed (fear founded in a belief there will never be enough)p. 46
it might not be easy to take responsibility for losing more than what you intended to risk. This is where the revenge factor comes into play.
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If the markets took from you more than you originally intended to risk, then you will likely feel compelled to get it back.p. 46
For example, is a 10-tick profit enough in the trade you are currently in if you lost 20 in the last trade? The market may be giving the objective observer a very clear indication that where the price is now is all that is left in the move and the highest probability for success is to take profits now. If you lost 20 ticks in the last trade and you only intended to risk 5 and the market is now offering you 10, are you going to take it. If you believe in “getting back,” 10 won’t be enough regardless of what the market is doing or telling you. You will need at least 15 and preferably 20 to make you whole.p. 46-47
Your last trade obviously has nothing to do with the potential that exists in the market at any given moment. When you feel compelled to get back, it puts you in an adversary relationship with the market. The market becomes your opponent, it is you against it, instead of being in harmony with it. The market can’t take anything away from you that you don’t allow; if you lost money or lost more than you intended to risk, you gave your money to other traders.p. 47
In reality you can’t get back at the market, and a belief in revenge only allows you to get back at yourself.p. 47
it is essential that you establish rules to guide your behavior. You will need to create definition and give yourself direction. Otherwise, you feel overwhelmed with too many possibilities.p. 49
assuming everyone else must know something they don’t, otherwise why would they be doing anything.p. 51 talking about the herd mentality and the game of follow the follower which everyone else is doing. This relates a lot to what Charlie Munger is saying about biases and errors in judgement
In an unlimited environment, the less structure you create for yourself, the less accountable you are, the more easily you will be swept along by the force of events, and the less control you seem to have over your life.p. 53
When you win it is so pleasurable, it creates a need to repeat it and compels you to try again.p. 54
We don’t live in a society that has a highly evolved concept of the growth process, and as a result, we learn to become very intolerant of “mistakes.” I say this because we are basically taught as children and, therefore, in turn teach our children through our ridicule of them that mistakes are something that diminish one as a person.p. 55
The more negatively you think of yourself, the greater your tendency to avoid taking responsibility, so you can avoid the pain of your harsh thoughts, thus generating a fear of making mistakes.p. 55
To be successful, the market forces you, as a trader, to be responsible in completely new ways.p. 55
The market’s behavior will seem mysterious because your own behavior is mysterious. You will be in a constant state of confusion, anxiety, and fear because you don’t know what to do next – the kind of state of mind that breeds superstition.p. 56
Understanding yourself is synonymous with understanding the markets because as a trader you are part of the collective force that moves prices. How could you begin to understand the dynamics of group behavior well enough to extract money from the group, as a result of their behavior, if you don’t understand the inner forces that affect your own? When you do understand the inner forces that affect your behavior and take responsibility for what you do and don’t do, and what you can or can’t do, you will begin to perceive how and why other traders comprising the group behave the way they do.p. 56
Fundamentally people trade to make money. And to make money, traders have to take positions, hold their positions for some length of time, and then exit their positions.p. 59
Greed is founded in a belief in scarcity and insecurity.p. 62
Risk is the possibility of a net loss of personal resources (energy, money etc.) in the exchange or pursuit of fulfilling a need.p. 62
I define trading as two parties exchanging something of value to fulfill some need or goal. In the context of stock or futures markets, participants trade for the sole purpose of accumulating wealth or protecting physical assets from deteriorating in value. In essence, all traders in these markets, whether they are labeled speculators or hedgers, trade to accumulate wealth; it is only a matter of perspective. For the hedger the motivation to protect the value of an asset from economic risk is still to accumulate wealth.p. 63
In the market environment you have to make the rules of the game and then have the discipline to abide by these rules, even though the market moves in ways that will constantly tempt you into believing you don’t need to follow your rules this time. This movement allows you to indulge in any illusion or distortion that suits you in any given moment. Certainly you wouldn’t choose to feel pain (confronting your illusions about the market) if there is any reasonable information that would support the possibility of your expectation being fulfilled.p. 65
The way the market seemed to you was actually the way you created it in your own mind.p. 67
You can’t change what the market is doing. You can only change yourself in a way that allows you to perceive what it may do next with increased clarity and objectivity.p. 68
So even though you can’t actually control the market’s movement, you can learn how to control your perception of the market’s movement in a way that allows you the maximum objectivity. Learning to perceive objectively will increase your ability to let the market tell you when to get in and when to get out.p. 69
If you did not start your trading career with the proper mental perspective or with a disciplined approach, then it is likely you have suffered some degree of psychological damage.p. 71
By learning to release yourself from pain, you will be reducing the fear and automatically opening yourself up to new awareness about the nature of the markets.
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Instead of being focused on pain avoidance, you can be focused on what the markets are telling you.p. 71
Your ability to execute your trades is a function of the amount of fear you generate or the lack of it.p. 71
The effects of fear on one’s behavior are obvious, limiting one to the point of complete immobility. If you can’t execute your trades properly, even when you perceive the most perfect opportunity, it is because you have not released yourself from the pain contained in the memories of the past trading experiences and because you still don’t trust yourself to act appropriately in any given set of conditions. If you did, there would be no fear or immobility.p. 72
The market will quite naturally make you face what is inside of you on a moment-to-moment basis. What is inside of you could be confidence or fear, a perception of opportunity or loss, restraint or uncontrollable greed, objectivity or illusion. The market just reflects these mental conditions, it does not create them.
Therefore, to grow into a new expression of yourself (fulfill your goal of being a more successful trader), you will need to learn how to accept the existence of any of these negative mental conditions and the psychological components that create them. Cultivating a belief in accepting whatever you find inside of yourself will give you the base you need to work from to change these conditions.p. 73
As you cultivate a stronger belief in self-acceptance, you will then realize how the market reflects back to you your level of skill development along with the information that will indicate what you need to work on to become ever more successful. Each moment will then become a perfect indication of your skills and your degree of self-valuation, giving you a solid base from which to improve and learn.p. 77
(1) identify exactly what changes you need to make to function successfully in the trading environment and (2) how to effect any mental changes that are necessary.p. 81
The types of changes you will need to make will fall into two broad categories. First, you will need to learn some sophisticated mental skills to adapt yourself more readily to the constant changes with which the market confronts you – which will require neutralizing some commonly held cultural beliefs about success. (These are the beliefs that have the potential to distort market information.) Second, you will likely need to undo any psychological injury you may have sustained from your previous trading activity. Any psychological injury diminishes your capacity to execute your trades properly.p. 81
It is essential that you learn how to monitor your relationship between the interior and exterior environment because our goals, intents, expectations, needs, and wants are all component parts of our mental environment that we project out into the physical environment for fulfillment in some future moment. In other words, they are all components of the mental environment that either happen or don’t happen in the outside physical world. You need to be able to recognize immediately (especially as a trader) when you have the potential to distort the outside information to be consistent with the inner components. These distortions will inevitably result in pain and psychological injury.p. 82
The predominant underlying force behind most traders’ actions causing prices to move is fear – the fear of missing out (competing for the supply) and the fear of loss.p. 83
If you can’t change or control what the market is doing, then the only option you have left is to control yourself in a way that allows you to perceive what the market may do next with increased clarity and objectivity, requiring a thorough working knowledge of the nature of your inner environment in relationship to the outer physical environment.p. 83
Positively Charged Emotions: Love, happiness, joy, confidence, peace, acceptance
Negatively Charged Emotions: Fear, anger, hatred, jealousy, disappointment, confusion, impatience, stress, anxiety, betrayal
Illusions: Denials, rationalizations, intellectualizations, distortions
Intents: Goals, aspirations
Expectations: Wants, desire, demands
Dreams: Sleeping dreams, daydreams
For example, mental energy in the form of a belief or memory of an experience can motivate a person to walk across a room to change the channel on his television set because he believes a program on another channel is more worthwhile or pleasurable, bid the price of a stock higher than the last price because he believes it serves his best interests, or motivate masses of people to go to war to defend or promote whatever they believe needs to be defended or promoted. These actions and their effects on the environment are the result of this mental energy expressed outwardly.p. 89
The past doesn’t exist anymore, and the future doesn’t exist yet.p. 95
We think in an environment that is more like a stream where our consciousness can roam freely between the past, present, and future without regard to time and space. Furthermore, the actual sequences of moments that exist in the physical environment have no effect on the energy our memories are stored in. Sequences of time only have an effect on the mental environment relative to the impact the environment is having on our senses in energy terms. You can easily demonstrate this to yourself by trying to reconstruct from your memory the last 24 hours, moment for moment. Difficult, isn’t it. Now try to do it for a week ago today. The only things we remember are the significant events, the experiences that had the most impact on our senses, the ones with the most energy connected with them. That’s because experiences are not recorded in our memories as moments in time; they are stored as charges of energy. And as such they have no relationship to the passing of physical clock time.p. 96
Each of our memories makes up a part of our identity, and because they exist as an energy form, they have the potential to act as a force on our behavior.p. 98
The more we experience the more we learn about the nature of the environment. The more we learn about the nature of the environment, the better able we are to interact with it more effectively to fulfill our needs and achieve our goals. Positively charged memories give us that sense of confidence that allows to step out to try something new resulting in mental growth.p. 101
the things we fear in the environment are those things we have learned to recognize as threatening.p. 102
Fear drastically limits our choices.p. 102
As traders, it is essential that you be able to observe the market’s behavior from an objective perspective.
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how perception creates an energy loop between the inside mental environment and the outside physical environment.p. 103
Associations are an automatic function of the way in which information gets organized in our mental system.p. 104
Traders who are motivated to act out of fear generally aren’t aware that their feat drastically reduces the choices they perceive as available, making their behavior very predictable to an objective observer (someone not caught in the same cycles of fear).p. 106
By learning to make more distinctions, we increase the depth of our level of understanding of the cause-and-effect relationship between everything that exists.p. 107
The environment isn’t creating the meaning as in a first-time encounter; the meaning is already inside of us, and in essence we create the experience by the way in which we perceive it, through our memories, distinctions, and associations.
This is why a group of people can all be in the same location, be exposed to the same environmental information, and then afterward describe the event in a different way.p. 108
What we experience as individuals will be a function of what we perceive, unless we are in a learning mode. In other words, what we are experiencing in any given moment is being shaped by what is already inside of us (memories, distinctions, associations, and beliefs), and what is already inside of us may not be remotely close to what the environment is offering in the way of experience. When we are in a learning mode we open ourselves up to learn new distinctions and alternative meanings to expand what we know about the nature of the environment.p. 111
Our experiences shape our meanings and then the meanings shape our experiences of the future. Let me illustrate this concept for you. I was watching a local television program in spring 1987 called “Gotcha Chicago.” It was about some local celebrities who played practical jokes on other Chicago notables. In one segment of the program the TV station hired a man to stand on the sidewalk along Michigan Avenue holding a sign that read “FREE MONEY – TODAY ONLY.” (For those of you who are not familiar with Chicago, Michigan Avenue is home to many of the most expensive and fashionable department stores and boutiques in the city.) The man’s pockets were stuffed with cash, and he had been instructed to give money to anyone who asked for it. Considering that Michigan Avenue is one of the busiest areas of the city, how many people do you think took him up on his offer and asked for some money?
Out of all the people who walked by and read the sign, only one person stopped and said, “Great! May I have a quarter to buy a bus transfer?” Otherwise, no one would even go near him. Eventually he grew frustrated and started crying out, “Do you want any money? Please take my money. I can’t give it away fast enough.” Everybody just walked around him as though he didn’t exist. He approached one businessman asking, “”Would you like some money?” And the man responded, “No today.” The “plant” said, “How many days does this happen?” as he tried to give him a handful of cash, while continuing to say “Would you please take this?” The businessman responded with a terse “no” and walked on.
Now here is a situation where the environment was expressing itself in a way that only one person had the mental structure to perceive. For the rest of the people, there was no meaning inside of them that they could directly correlate with the actual environmental conditions. Other than the one person who asked for a quarter, nobody looked at the sign and said to themselves “Great!” Somebody is giving away free money, I wonder how much he will give me.”
People’s responses to the conditions shouldn’t be too surprising because we generally don’t believe that money is ever free. And we can know what people believed about the situation by just observing their behavior. If they thought that it was possible to get free money, we can assume that they would not have walked by, ignoring the opportunity to get some. So the meaning they attached and what they experienced corresponded to their belief that “free money” isn’t possible or nobody gives away money on the street – no strings attached. In fact, most people probably thought he was crazy, which would explain why people went out of their way to walk around him to avoid contact.
However, the environment was expressing itself in exactly the way in which it was representing itself. The sign reading “free money” was the truth, but the information “free money” did not connect with anything in anyone’s mental environment so that it could be perceived as the truth. There was a direct one-to-one relationship between what any given individual believed, what he perceived, and what he experienced. Except for one man, everyone else obviously did not believe in the possibility of free money; they probably perceived a crazy man and thus had an erroneous experience relative to the conditions. Now, the environment did not choose the meaning any of these people placed on the information it was offering. And if the environment did not choose, then each individual created his own experience out of the situation that was presented to him. There were a number of alternate experiences available and each alternate experience would correspond to the type of belief someone would have about the possibilities.p. 111-113
People think of their beliefs and subsequent experiences as a fact of reality instead of a belief about reality.p. 113
Unless we are open or even know how to be open to new information that could lead to new experiences, we will experience the closed-loop nature of our beliefs every moment, assuming the whole time that what we experienced in each situation was the only possibility available.p. 113
Learning to drive is an excellent example that illustrates how fear narrows our focus of attention. The dangers of driving are obvious even to someone who has never driven before. It isn’t too difficult to imagine the harmful effects of a head-on collision. Without having developed the necessary skills to control the car, the new driver would lack the confidence to know that he can respond appropriately to any given situation. That is, he doesn’t trust himself. As a result, he will feel some degree of uncomfortableness or fear when he drives. The fear will, in turn, cause him to focus his attention on the oncoming traffic or concentrate on the eye/hand coordination necessary to keep the car in the appropriate lane. Because he is so focused on what he can’t do and what may happen as a result, he has little if any of his attention available to do anything else, like carry on a conversation with a passenger, notice the scenery in his peripheral vision, or even read road signs. All this other environmental information is available and perceivable, but in his case it is either blocked or unnoticed because he has to devote so much of his attention to the object of his fear (the lack of control he has over the car). At the point where he becomes comfortable with his ability to drive safely, his field of awareness will open up allowing him to perceive all this other information.p. 115-116
The purpose of fear is to help us avoid those things in the environment we have learned to perceive as threatening.p. 116
What we focus our attention on in the environment is what we will usually get. The dog-biting example is a graphic illustration of this.p. 117
What you have just been given is an example of why the vast majority of traders cut their profits short and let their losses run. In a winning trade, the fear of losing will cause us to focus our attention on information that the market is going to take our profits away, compelling us to get out early. In a losing trade we will focus our attention on just the opposite information – anything other than that which would indicate the trade is a loser. Fear causes us to act without a perception of choice. When we are afraid to confront certain categories of market information, it drastically limits the choices that we perceive as available. Cutting a loss isn’t a choice if we systematically block from our awareness any information that would indicate that we are in a losing trade. Staying in a winner isn’t a choice if we are consumed with the fear that the market is going to take away our money.
To prevent these blind spots in our perception, we have to learn to trade without fear. And to trade without fear we need to completely trust ourselves to confront and accept whatever information the market is offering about itself, and we need to be able to trust ourselves to know that we will always act in our best interest without hesitation, regardless of the conditions. Any endeavor will require some degree of trust. We would find it difficult to cross the street if we didn’t trust ourselves to be able to get out of the way of the oncoming traffic. From a psychological perspective, the market environment can wreak just as much havoc in our lives as getting hit by a car. To be successful as traders, we need to believe that we can win with an absence of fear so we can make better assessments of the conditions and perceive more choices. What this means is that we have to do the necessary mental work to release ourselves from anything within us that would cause us to narrow our focus of attention or specifically block certain categories of information from our awareness.p. 118-119
Fulfilling our needs and achieving our goals create within us a feeling of well-being, confidence, and satisfaction about our lives that would otherwise be characterized by feeling of dissatisfaction, disappointment, and deterioration when we can’t fulfill ourselves.p. 121-122
To fulfill our needs and achieve our goals, there has to be some level of correspondence or balance between the inner mental environment and the outer physical environment. What I mean by “correspondence” is some level of understanding of how the outer environment works. Our needs, intents, goals, and desires – all – exist first in the mental environment. Then one of three things can happen in some future moment in the physical environment; they are either 100 percent fulfilled, partially fulfilled, or not fulfilled at all, resulting in feelings of satisfaction or dissatisfaction equivalent to the degree of fulfillment.
To fulfill ourselves, we need to interact with the outside environmental forces. The extent to which we fulfill ourselves is a function of knowing the most appropriate set of steps to take in relationship to the outer conditions and to what extent we can act on what we know. Knowing the most appropriate set of steps to take in relationship to the prevailing conditions is a function of how much or little we have learned in relationship to what is available to be learned.p. 122
there will always be more information available in the environment than what our personal limitation will allow us to perceive or experience.p. 124
The physical environment was here before we were born – and we certainly weren’t born with the insight that we need to interact with it in such a way that we can assure ourselves of experiencing high levels of satisfaction.p. 125
the more we understand and know about the interacting forces behind our own behavior and the interacting environmental forces outside of us, the easier it is to fulfill our needs and achieve our goals, resulting in greater levels of satisfaction that we will experience in our lives.p. 125
As I have mentioned, we aren’t born with the knowledge that we need to operate effectively in the physical environment to fulfill ourselves. However, we are born with the need to know. This need to know operates as a driving force in our lives coming from the innermost depths of who we are. Our natural sense of curiosity compels us to explore and learn. For example, once we have learned the nature of something or accomplished some task, we quickly become bored and go on to something different. Boredom acts as an inner force compelling us to look for something new to discover and learn about.p. 126
Crying is a form of grieving to compensate for the lack of balance between the inner and outer environment.p. 126
Learning is a function of our existence.p. 127
The more we allow ourselves to learn, the better able we are at making assessments about the possibilities that exist in some future moment.p. 128
If we weren’t willing to acknowledge that in any given situation more information and choices exist than what our beliefs allow us to perceive, then we will never learn to recognize or anticipate the existence of these other more satisfying possibilities. By acknowledging the possibility that a more appropriate set of steps exists, we open ourselves up to perceive and then learn the steps that can lead to greater levels of satisfaction. Refusing to acknowledge the existence of these possibilities would be the same as claiming that electricity didn’t exist before it was discovered. When we continually argue for the status quo by defending what we already believe we know, the environment will seem to be constantly assaulting us, resulting in feelings of stress and anxiety. The outer environment becomes assaulting because it is offering us more to learn about the nature of the ways in which things exist and we are simply refusing to learn.p. 129
In any case, out feelings will always tell us about the state of our relationship with the environment and point the way to what we need to learn to experience greater degrees of satisfaction.p. 129
One of the biggest ironies in life is that everyone want to be right.p. 131
The more we believe we know, the more we make the environment prove to us that what we know isn’t particularly useful or effective.
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All this should be somewhat apparent because it is not a typical human characteristic to actively gather and consider information that conflicts with what we already know and believe to be true.p. 133
When we do allow ourselves to adapt, we learn that there are always more choices available than our beliefs will allow us to perceive. What I mean by adapt is to identify and actively change something that is already inside of us so there is a higher degree of correspondence between the inside and outside.p. 133
The problem is that if learning something new means that we have to change what we have already learned, we instinctively seem to refuse to do it, regardless of how inappropriate what we have learned may be relative to what we would need to know to experience satisfaction.p. 136
All learning is synonymous with change, whether we are changing something we already know or learning something completely new. If we refuse to change (adapt) the inside – adding to what we know to create more distinction and change our perspective – then we are not learning what we need to know to experience something different in the outer environment. If there is no change on the inside, there will be no perceived change in the outside, thereby locking us into recurring cycles of pain and dissatisfaction. What’s more, we will continue to suffer until the pain becomes so great that we are left with no choice other than to reassess how we go about managing our lives, that is, reassessing the usefulness of our beliefs.p. 136
The extent to which we fulfill our needs and achieve our goals with any degree of satisfaction is, first, a function of our being able to recognize our needs and formulate our goals.p. 139
Any differences between what we wanted, expected, desired, or needed and what we got is simply an indication of the degree to which we haven’t learned what we needed to know or evidence that we don’t have the appropriate skills to do what needed to be done. […] we haven’t learned what we needed to knowp. 140
we don’t have the appropriate skills to do what needed to be donep. 141
Did you ever wonder why it is so difficult to break an unwanted habit or why it can be so difficult to execute some well-thought-out plan you were really committed to? It is difficult because of what is already inside of us that acts as resistance to our intent. An intent to do something is not necessarily a belief. In other words, out of everything we intend to do, some of those intentions will be supported by our beliefs, memories, and associations, and some will not. When there is support, our efforts will seem effortless, because there is no conflict between any beliefs, memories, and associations and what we intend to do. However, if our intents are not in harmony with our beliefs, memories, or associations, doing becomes a struggle, where we can’t stay focused, become easily distracted, or make what most people would characterize as “stupid mistakes.”p. 143
Trading is a perfect example to illustrate this. Many people devote a great deal of their time, energy, and financial resources to expressing themselves as traders. They learn a lot about trading – they are even highly regarded by their peers for what they know about the market – but still can’t execute their trades properly or the way they planned. There are traders who can consistently make money day after day until they get to certain threshold levels and then promptly give all their profits back to the market in one or two trades. They way they give their money back is completely inconsistent with their trading style while they were making money. After they have lost a sufficient amount of money, they go back to the way they normally trade and start the process all over again. This kind of behavior is no accident. It happens for a reason.
In each of these situations these traders certainly had developed effective, workable strategies to be successful – they definitely had some highly structured beliefs to support their expression as a trader. However, what they haven’t done is identify and decharge a whole host of other beliefs (both conscious and subconscious) that are in direct conflict with the endeavor of trading or making money as a trader. For example, there are many beliefs related to one’s religious upbringing that are in direct conflict with the whole concept of speculating. And what is trading but taking money away from other traders with no services rendered? This kind of activity isn’t consistent with most religious teachings. Another typical example is most people grow up with very powerful beliefs related to the work ethic. They have very rigid definitions about what constitutes work and how one earns one’s money. Trading doesn’t exactly fit into most of these definitions either.
So regardless of how highly developed one’s trading strategies become, the act of trading will still violate the integrity of any belief that is in conflict with the act of trading or making money from trading. Eventually the unexpressed energy accumulating in these conflicting beliefs will build to the point where the trader will find himself behaving in a manner completely inconsistent with his trading rules or intent to make money. Often, he will even be aware that he is about to make a trading error, watch himself do it, and at the same time either feel powerless to stop himself or won’t stop himself until he has lost enough money to compensate for the imbalance in his mental environment.p. 144-145
Many of our beliefs, memories, and associations are resources for failure, pain, and dissatisfaction because they lock us into only perceiving what we already know as well as cutting us off from our natural sense of curiosity. In other words, they specifically act as forces to prevent any further mental growth.p. 147
Now since we have to interact with the physical environment to fulfill our needs and achieve our goals, they key to doing it to assure ourselves of experiencing greater levels of satisfaction is to acquire deeper levels of insight and understanding into the nature of these forces. That is, we need to stay in a constant state of learning. The only thing that really stops us from continuing to learn about the nature of these outside forces is the mental forces in the form of beliefs, memories, and associations that build up and as a result block our natural sense of curiosity sometime to the point of shutting down the leaning process altogether.p. 147
To stay in a constant state of learning we need to learn how to adapt.p. 148
The first assumption is that we haven’t learned everything there is to know.
. . .
The second assumption is that what we have learned to believe either by force – unwillingly thrust upon us, as an expression of the outside environment – or by choice – as an expression of the inner forces that operate within us like our curiosity and attractions – may not be very useful with respect to fulfilling ourselves in some satisfying manner.
The third assumption is that what we have learned that is useful and works to our satisfaction is still subject to change because of the changing environmental conditions. In other words, what we may need to know to experience more satisfaction and happiness in our lives will often have to replace partially or invalidate completely what we have already learned.p. 149
Anything less than a feeling of satisfaction from our interaction with the environment is an indication that we need to learn something.p. 150
What better form of goal achievement could there be than to confront conditions as they exist, identify what we need to learn to operate most effectively, and then go about the task of learning it, making our adjustments along the way?p. 153
Trading is an exercise in accumulating money.p. 153
In fact, if traders were to chart their equity, it would reflect their internal conflicts and what they think of themselves on a day-to-day, month-to-month, or year-to-year basis.p. 153
Charts like these also can have the same predictive value as in the markets, if one learns what to look for. Some of the more sophisticated brokerage firms that manage large funds keep these kinds of charts on the CTAs that they employ to trade their money under management. They will switch the amount of equity available for each CTA to manage based on each individual’s chart formation. In other words, once you build up some history it isn’t too difficult to determine when someone is about to take a big hit because of the psychological forces building inside of him, just as the collective forces of the market build before a big move.p. 154
As individual traders if we want to give ourselves more and more money out of the markets, we have to learn how to value ourselves more and more so that we believe we deserve what we want or deserve what we get. Trading can result in the fast accumulation of windfall profits. To keep profits, we have to have inner support. Most of the time, that support doesn’t exist, and that accounts for all the rags to riches to rags stories that can be told in the trading world. Of course the first step in the process of valuing ourselves more is to accept our true starting point; that is, we have to take complete responsibility for what we end up with being a reflection of what we need learn about the markets, about ourselves, or both. Ultimately, everything that we do contributes to or detracts from our sense of self-valuation. That is why it can fluctuate from day to day or moment to moment. The best way that I know of to add to our sense of valuation is to commit ourselves to the process of growth.p. 154
Thoughts are a very powerful tool to effect changes in the mental environment.p. 156
Painful life cycles begin with and are perpetuated by painful memories.p. 157
Creativity is synonymous with growth and change.p. 159 As I had another note from somewhere else “Create or perish”
Mistakes just point the way to something that we haven’t learned yet and obviously need to know.
. . .
The criteria that we sue for how we define a mistake is something that we had to learn from someone. In other words, our parents and teachers passed their definitions on to us. These definitions would represent the mental framework for their unresolved painful experiences and what they themselves haven’t learned about as being available from the environment beyond their pain. In other words, we pass on our ignorance, as well as our wisdom, without knowing at the time the difference between the two. And what was passed on that was dysfunctional will be regarded as the truth just the same as wisdom.p. 160
In any case, it is much easier to identify what we need to learn to accomplish our objective.p. 161
As long as we are alive, we will have needs, and as long as we have needs, we are not whole the way we are. Our needs compel us to interact with the environment to achieve this state of wholeness. Growing into this state of wholeness requires that we keep on learning. To keep on learning we need to adapt. Learning is a primary function of our existence. When we fulfill this function, we are rewarded with feelings of happiness, well-being and satisfaction, all of which are by-products of the quality of our experiences with the outer environment and a function of how much we have learned.p. 162
Intuition will always guide you in the most appropriate way to fulfill your needs.p. 164
If we find ourselves wishing and hoping, it is an excellent indication that we don’t know what is going on and as a result need to get our of the markets until we do.p. 164
When we don’t actively work at turning our negatives into positives, we just stay angry and afraid. It’s out choice. We were all given the gift of creativity and the free will to think any way in which we choose, and we can use our thoughts to change the quality of our lives, if we want to.p. 165
Any new knowledge comes from those who question the status quo and have a willingness to go beyond and a willingness to accept the next answer.p. 167
In essence we can use our thoughts to create a new identity because we want to.p. 168
Each belief you identify will form a comfort zone.
. . .
Each belief is our truth about reality.p. 168
Self-discipline is a word used to describe a process of learning how to take conscious control of your actions.
. . .
So I would define self-discipline as willfully behaving outside of the boundaries of some belief (dealing with the emotional discomfort your actions will produce) to accomplish a certain goal or task that is inconsistent with that belief.p. 173
One way you can change these definitions is to build a mental resource for the sole purpose of changing beliefs that are not useful. I am going to call this mental resource “self-discipline.”p. 174
The less you expect of yourself, the faster you will progress. An expectation can easily become a demand that it be fulfilled. Demands usually generate a certain amount of fear that the demands will not be met.p. 176
Self-discipline is simply a mental technique to stay focused on what you need to learn, or to do, to accomplish your goals. There will be times when you won’t have the resources to function effectively relative to the external conditions. Other times the resources you do have will be in conflict with both the conditions and your goals. So to accomplish your goals, you will need to adapt. In other words, you will need to change the way you interact with the environment. To change your behavior and how you experience the environment (feeling and emotions), you will have to change the mental components that effect your perception of environmental information. Keep in mind that you can’t physically control what the markets do; you can only learn to control your perception of the markets to share the highest degree of reality (the least amount of distortion) with everyone else who is participating or has the potential to participate.p. 201
Each individual trader creates his own experience of the markets based on this picking and choosing process and the decisions that result. If you accept this concept as valid, then the implications are that you will never have a valid reason to blame the markets for your unsatisfying results. The markets don’t owe you anything (regardless of how hard you work to be successful) because every other trader participating is doing so to take your money away. You and you alone are completely responsible for whatever you end up with. The sooner you accept that responsibility (of you haven’t already), the easier it will be to identify what skills you need to learn to interact with the markets more successfully. Even if you can’t identify the mental components responsible for what you ended up with, at least assuming that you are responsible, you will be opening yourself up to find out.p. 202
Your individual history will repeat itself until you change your history, which will then allow you to learn and experience something new.p. 202
The more you learn, the easier it will be to anticipate what the market will do next. If you can accurately anticipate what will happen next, the easier it will be to give yourself more and more moneyp. 203
Getting rich quick can only lead to a great deal of anxiety and frustration if you don’t have the skills to keep it.
. . .
Once you have made a fortune and lost it, the psychological work that you will need to do to get it back is enormous compared to the work that is necessary to keep yourself from losing it in the first place. As a trader it is more important to know that you will always follow your rules than it is to make money, because whatever money you make, you will inevitably lose back to the market if you can’t follow your rules.p. 203
You also need to understand that your rules will change as your understanding and insights evolve.p. 203
“What do I need to learn or how will I have to adapt myself to interact more successfully?”p. 204
keep in mind that each moment is a perfect reflection of your level of developmentp. 204
As part of this framework you may also need to change your definition of a missed opportunity. Except for the inability to accept a loss, there isn’t anything that has the potential to cause more psychological damage than a belief in missed opportunities. Missed opportunities are trades that would have always turned our perfectly because they only occurred in our minds, where we can make anything be as we want it to be. Of course, we would have responded exactly as the conditions warranted without flaw. The problem is we didn’t do it, and the resulting sense of loss we fell id difficult to reconcile. Therefore, these missed opportunity trades have the potential to cause more anxiety and stress than the trades we actually do take that turn our to be losers.p. 205
As long as the price keeps changing, there will always be another opportunity.p. 205
When you release the energy out of the belief that it is possible to miss anything, you will not longer feel compelled to do something, like getting into trades too early or too late. In other words, you will be giving yourself additional choices (not doing something is often the most appropriate choice) where only one choice existed.p. 205
Trading Rule 1
. . .
So confronting and accepting the inevitability of a loss is a trading skill, certainly a skill learned the hard way for most, but nevertheless an essential component at the foundation of virtually everything you need to learn to become a successful trader.
. . .
The second is your willingness to change your definitions of what it means to lose
. . .
Trading Rule 2
. . .
Execute your losing trades immediately upon perception that they exist.
. . .
The next error after letting a loss get out of hand is usually not taking the next opportunity, which invariably is always a winning trade. After which, we get so angry at ourselves for passing up that opportunity that we make ourselves susceptible to any number of other trading errors, like taking a trade that was a tip from another trader, which invariably is always a loser.
. . .
Keep in mind, that fear is really the only thing that keeps us from learning anything new. You can’t learn anything new about the nature of the market’s behavior if you are afraid of what you may do or can’t do that is not in your best interests. By predefining and cutting your losses short, you are making yourself available to learn the best possible way to let your profits grow.p. 206-208
Any compelling behavior is usually the result of some fear. That fear, in turn, will cause you to behave in many inappropriate ways.p. 209
Nothing is more frustrating than to know what is going to happen next and not be able to do anything about it.p. 210
You need to understand that the ability to perceive an opportunity (based on the quality of distinctions that you can make) and your ability to execute a trade, are not automatic functions of one another. Perception and execution are separate skills.
. . .
If there are mental obstacles preventing the proper execution of a trade, then learning how to perceive better opportunities is not going to solve the problem.p. 210
The proper execution of your trades is one of the most fundamental components of becoming a successful trader and probably the most difficult to learn.p. 210
Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make them feel as if the outcome had been in doubt. The momentary suspense adds the thrill factor necessary to keep our lives from getting too boring. When it comes right down to it, no one trades to lose, no one puts on a trade believing it is going to be a loser, and all systems will definitely have some percentage of losing trades. So it’s difficult not to be tempted into trying to guess which ones are going to be the losers and not participate.p. 211 As I heard Tony Robbins say in a TED speech that people need both predictability and unpredictability in their lives or how we says it we need variety
trying to outguess your trading system is an exercise in extreme frustration.p. 211
People aren’t taught to think in terms of probabilities – and we certainly don’t grow up constructing a conceptual framework that correlates a prediction of mass human behavior in statistical odds by means of a mathematical formula.p. 212
To be able to execute your trading systems properly, you will need to incorporate two concepts into your mental framework – thinking in terms of probabilities and correlating the numbers or the mechanics of your system to the behavior. Unfortunately, the only way you can really learn these things is actually to experience them by executing your system. The problem is that rarely will the typical trader stay with his system beyond two or three losses in a row, and taking two or three losses in a row is a very common occurrence for most trading systems. This creates something of a paradox or Catch 22. How do you do it long enough for it to become a part of your mental framework? This is where you employ mental discipline to make flawless execution a habit.p. 213 Some of my profitable trading systems have more than a couple of losses in a row, some have even reached
do the best you can and look for ways to improve your performance.p. 214
1. What is the market telling me at this moment?
2. Who is paying up to get in or get out?
3. How much strength is there?
4. Is momentum building?
5. Can it be measured relative to something?
6. What would have to happen to indicate the momentum is changing?
7. Is the trend weakening or is this a normal retracement?
8. What would show that? If the market has displayed a fairly symmetrical type of pattern and that pattern has been disturbed, then it is a good indication the balance of forces has shifted.
9. Are there any places where one side will definitely gain dominance over the other? If that point is reached, it still may take sometime for the other side to be convinced they are losers. How long are you willing to give them to stampede out their position?
10. If they don’t stampede out their positions, what will that tell you?
11. What did traders have to believe to form the current pattern relative to the past? Remember that people’s beliefs don’t change easily unless they are extremely disappointed. People are disappointed when their expectations aren’t fulfilled.
12. What will disappoint the predominate force?
13. What is the likelihood of that happening?
14. What is the risk of finding our in a trade?
15. Is there enough potential for movement to make the trade worth the risk?p. 216
Keep in mind that the amount of price movement that you determine is necessary for the market to define itself has to correspond with your emotional tolerance to accept the dollar value of a loss that size. Otherwise, don’t take the trade regardless of how much potential you think it might have, unless you can realistically change the foregoing parameters to fit your capacity for a potential loss.p. 217
Keep in mind that since the market is in perpetual motion, it puts you in a position of having to make never-ending assessments of the current risk in relationship to the current possibilities for reward.p. 217
The market doesn’t make you right, you make yourself right.p. 218
When you are about to enter into a position, ask yourself, by imagining, what the next five minutes or tomorrow (depending on your time frame) would have to look like to validate your trade, to confirm that the trend is still intact. What would the next five minutes or tomorrow have to look like to indicate the opposite. Then, again, place your orders at the appropriate price in advance of the market’s getting there.p. 218
To achieve a state of objectivity you need to operate out of beliefs that allow for anything to happen, as opposed to beliefs that allow only for the markets to express itself in a limited fashion. If you operate our of a belief that anything can happen, then whatever does happen won’t be threatening to you in any way, thereby causing you to avoid or distort certain categories of market information. Any limits you place on the market’s behavior will be a compensating factor for your lack of trust and confidence to act appropriately in any given situation. This will be evidenced by the fear, stress, and anxiety that you will feel when the market expresses itself beyond your mental limits and you can’t do anything to control the situation.p. 219
To be objective you have to make “uncommitted assessments of the probabilities.” Which is simply means that you have no commitment to any particular outcome. You just observe what is happening is each moment as an indication of that will probably happen next.
Here is what objectivity feels like . . .
You feel no pressure to do anything
You have no feeling of fear
You feel no sense of rejection
There is no right or wrong
You recognize that this is what the market is telling me, this is what I do
You can observe the market from the perspective as if you were not in a position, even when you are
You are not focused on money but on the structure of the market
To stay objective anticipate as many possibilities as you can and how probable each of these possibilities are. Then decide in advance what you are going to do in each situation. If none of your scenarios is working out as you anticipated, then get out. Release yourself from the need to be right. The more uncommitted your assessments are the less potential for distortion and experiencing a painful forced awareness.p. 221
If you feel that your commitment levels are rising, keep on telling yourself that it is all right for anything to happen because you are confident in your ability to respond appropriately to whatever does happen.p. 222
Even after you have learned all of the skills set forth in this book, at some point in time it will probably occur to you that your trading is simply a feedback mechanism to tell you how much you like yourself in any given moment. After you have learned to trust yourself to always act in your best interests, the only thing that will hold you back is your degree of self-evaluation. That is, you will give yourself an amount of money that directly corresponds with what you believe you deserve based on some value system you acquired at some point in your life. The more positive you feel about yourself, the more abundance that will naturally flow your way as a bu-product of these positive feelings. So, in essence, to give yourself more money as a trader you need to identify, change or decharge anything in your mental environment that doesn’t contribute to the highest degree of self-evaluation that is possible. What’s possible? Stay focused on what you need to learn, do the work that is necessary, and your belief in what is possible will naturally expand as a function of your willingness to adapt.p. 223