Mark Douglas - Trading In The Zone

121 Pages·2001·2.6 MB·English

MASTER THE MARKET WITH
CONFIDENCE, DISCIPLINE AND
A WINNING ATTITUDE
MARK DOUGLAS
Foreword by Thorn Hartle
ECNANIF FO ETUTITSNI KRONEYW
wcw VHDV • Tnnnurn . cvnucv • Tnrvn • cinr.«pnpc
s seCrgnoaC tfoa yrlarobiLging-in-PublicatioatanD
).J kraM( kraM ,salguoD
Trading in the zone : master the market with confidence, discipline, and a DEDICATION
k DroauMglas ,yb / edutitta gninniw
p. cm.
)htolc( 7-4410-2537-0 NBSI
1. Stocks. 2. Speculation. I. Title.
This book is dedicated to all of the traders I have had the pleasure of
HG6041 .D59 2001
ni uoy fo hcaE .hcaoc gnidart a sa sraey 81 tsal eht revo htiw gnikrow
152540 332.64—dc2 010
your own unique way is a part of the insight and guidance this book
llaH ecitnerP yb 0002 © will provide to those who choose to trade from a confident, disci-
plined, and consistent state of mind.
ni decudorper eb yam koob siht fo trap oN .devreser sthgir llA
any form or by any means, without permission in writing from
the publisher.
Printed in the United States of America
10 9876 5 4321
evitatirohtua dna etarucca edivorp ot dengised si noitacilbup sihT
information in regard to the subject matter covered. It is sold with the under-
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other professional service. If legal advice or other expert assistance is required,
the services of a competent professional person should be sought.
a yb detpoda yltnioj selpicnirP fo noitaralceD eht morF . . .
Committee of the American Bar Association and a Committee
.snoitaicossA dna srehsilbuP fo
ISBN D-73SE-DmM-7
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TABLE OF CONTENTS
FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. xi
E ..C...A...F..E..R..P........................ xm
Y EV.RUS E.DUTIT.TA . . . . . . . . . . . . . . . . . . . . . . . . . .. xvii
_________________CHAPTER 1___________
THE ROAD TO SUCCESS:
, TLEACTHNNIECMALA,DNUF
OR MENTAL ANALYSIS?
IN THE BEGINNING: FUNDAMENTAL ANALYSIS . . . . . . . . .. 1
E HSTHIFTO TT ECHNICAL ANALYSIS ...............3..
THE SHIFT TO MENTAL ANALYSIS . . . . . . . . . . . . . . . . . .. 4
_____________________CHAPTER 2_______________
)SREGNAD EHT DNA( ERUL EHT
OF TRADING
. . . 17. . . . . . . . . . . . . . . . . . . . . . . . . . . . . NOITCARTTA EHT
THE DANGERS .....................0.2........... .
THE SAFEGUARD. ..........S..................... 25
Problem: The Unwillingness to Create Rules. ...... 27
y ti.lib.isn.op.seR. e.ka.T o.t8 e2.r.u liaF :melborP
Problem: Addiction to Random Rewards ......... 30
Problem: External versus Internal Control........ 31
STNETNOC iiiv
CONTENTS
IX
CHAPTER 3
CHAPTER 7
TAKING RESPONSIBILITY
THE TRADER'S EDGE: THINKING IN
PROBABILITIES
. TN.EMNOR.IVNE LA.TNEM RU.OY GNIP.AHS . . . . . . . .4.3
. S..T. L1U02SER TNET MOSUOISTDNCNOOMACER , :XODARAP
REACTINGO T Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..83
. .T.N. .E.M. .O. .M. . E. H. .T. .N.I. .G6.N.0.1I.D . ART
WINNERS, LOSERS, BOOMERS, AND BUSTERS . . . . . . . . .. 50
S.N.O.IT.A.T.C.E.P.X.E .GN. I.G.A.N.A.M. . . . . . .. 113
K SIR LANOITOME EHT GNITANIMILE. . . . . . . . . . . . . . . ..021
___________CHAPTER 4_______________
DNIM FCOO NESTISATTESNC AY :
_______ CH8APTE R
THINKING ABOUT TRADING . . . . . . . . . . . . . . . . . . . . . . .. 58
SFEILEB RUOY HTIW GNIKROW
REA. L.L.Y. .U.6N1.D.E.R.S.T.A.N.D.IN. G. . R.I.SK. .
M .E.L.B.O.R.P .E.HT. .GN.I.N.IF.E.D. . . . . . . .5.21..
T . .N.E. .M. .N.4O. 6.R. .IV. . NE LATNEM RUOY GNINGILA
S .M. .R. .E.T. .E.H. .T. .G.N. .I.N. .I.F.E.D.8.2.1. . .
How THE FUNDAMENTAL TRUTHS RELATE TO
___________CHAPTER 5________________ THE SKILLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 130
THE DYNAMICS OF PERCEPTION MOVING TOWARD "THE ZONE". ..................... 135
DEBUGGING YOUR MENTAL SOFTWARE . . . . . . . . . . . . . .. 70
G . . .N. .I.N. .R. .A. . E. .L. .4 D.7. .N. .A. . NOITPECREP
___________CHAPTER J9_________________
PERCEPTION AND RISK............................ 79
THE NATURE OF BELIEFS
THE POWER OF ASSOCIATION. . . . . . . . . . . . . . . . . . . . . .. 80
. .F.E.I.L.E. .B. .A. F. .O. .S.N. I.G. .I9.R.3O1. . .EHT
BELD ITENHFASE IR R ILMUIOPVA ENCSOT . . . . . . . .24.1..
BELIEFS vs. THE TRUTH. . . . . . . . . . . . . . . . . . . . . . . . . .. 147
___________CHAPTER 6_____________
THE MARKET'S PERSPECTIVE
THE "UNCERTAINTY" PRINCIPLE . . . . . . . . . . . . . . . . . . .. 88 CHAPTER 10
THE MARKET'S MOST FUNDAMENTAL CHARACTERISTIC. .. 93 THE IMPACT OF BELIEFS ON TRADING
E PHRTIMARY CHARACTERIA SBT FEICOLSI EF .......... 153
SELF-EVALUATION AND TRADING . . . . . . . . . . . . . . . . . . .. 167
CONTENTS
FOREWORD
CHAPTER 11
REDART A EKIL GNIKNIHT
THE MECHANICAL STAGE. . . . . . . . . . . . . . . . . . . . . . . . .. 173
The great bull market in stocks has led to an equally great bull mar-
. .E.N. .IL. .P.I.C.S. .ID. .-.F.L9. .E7.1S. . FO ELOR EHT
ekam ot woh fo tcejbus eht no dehsilbup skoob fo rebmun eht ni tek
CREATING A BELIEF IN CONSISTENCY . . . . . . . . . . . . . . .. 184
money trading the markets. Many ideas abound, some good, some
A EKIL EGDE DNA EDART OT GNINRAEL :ESICREXE not, some original, some just a repackaging of earlier works.
CASINO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 189
Occasionally, though, a writer comes forward with something that
E . .T.O. .N. . .L. .A. .N. .I.F. .A. . . . . . . . . . .1.0. .2. . . really sets him or her apart from the pack, something special. One
.salguoD kraM si retirw hcus
Mark Douglas, in Trading in the Zone, has written a book that is
ATTITUDE S U R V E Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 203
the accumulation of years of thought and research—the work of a
X EDNI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..902
sah eh ,noisseforp a sa gnlidiafrte wteiiv mohwe su— fo esaohnt rodf
produced a gem.
ew taht segnellahc eht ta kool htped-ni na si enoZ eht ni gnidarT
face when we take up the challenge of trading. To the novice, the
only challenge appears to be to find a way to make money. Once the
novice learns that tips, brokers' advice, and other ways to justify buy-
rehtie eh taht srevocsid eh ,yltnetsisnoc krow ton od gnilles ro gni
needs to develop a reliable trading strategy or purchase one. After
that, trading should be easy, right? All you have to do is follow the
.pal ruoy otl nlfiaiwl l yenom eht dna ,selur
nac gnidart taht revocsid secivon ,erofeb ton fi ,tniop siht tA
turn into one of the most frustrating experiences they will ever face.
This experience leads to the oft-started statistic that 95 percent of
.gnidart fo raey tsrif eht nihtiw yenom rieht fo lla esol sredart serutuf
Stock traders generally experience the same results, which is why
-tuo ot liaf sredart kcots tsom taht tcaf eht ot tniop syawla stidnup
perform a simple buy and hold investment scenario.
So, why do people, the majority of whom are extremely
successful in other occupations, fail so miserably as traders? Are suc-
cessful traders born and not made? Mark Douglas says no. What's
necessary, he says, is that the individual acquire the trader's mindset.
xii FOREWORD • • --
PREFACE
-moc nehw ngierof yrev si tesdnim siht ,si tcaf eht tub ,ysae sdnuos tI
pared with the way our life experiences teach us to think about the
world.
That 95-percent failure rate makes sense when you consider
wef os tey ,sisab raluger a no stiforp nrut ot si redart yna fo laog ehT
nehW .worg ew sa denrael slliks gnisu ,efil ecneirepxe su fo tsom woh
people ever really make consistent money as traders. What accounts
ot nrael ew slliks eht taht tuo snrut ti ,revewoh ,gnidart ot semoc ti
for the small percentage of traders who are consistently successful?
earn high marks in school, advance our careers, and create relation-
-niws pi st ynrcoheottlcosgaiiscfan l—goncthie nimreted eht ,em oT
ships with other people, the skills we are taught that should carry us
ners think differently from everyone else.
through life, turn out to be inappropriate for trading. Traders, we
-moc a gniganam saw I ,emit eht tA .8791 ni gnidart detrats I
-nerrus ot dna seitilibaborp fo smret ni kniht ot nrael tsum ,tuo dnif
mercial casualty insurance agency in the suburbs of Detroit,
der all of the skills we have acquired to achieve in virtually every
Michigan. I had a very successful career and thought I could easily
salguoD kraM ,en nIoTZ .rs eaevhditli nnruigo fo tcepsa rehto
ton saw taht dnuof I ,yletanutrofnU .gnidart otni sseccus taht refsnart
siH .koob elbaulav yrev a rehtegot tup sah eH .woh su sehcaet
the case. By 1981, I was thoroughly disgusted with my inability to
sources are his own personal experiences as a trader, a traders coach
ogacihC ot devom I os ,boj rehtona gnidloh elihw ylevitceffe edart
.ygolohcysp gnidart fo dleif sih ni rerutcel dna ,rohtua ,ogacihC ni
and got a job as a broker with Merrill Lynch at the Chicago Board of
My recommendation? Enjoy Douglas's Trading in the Zone and,
ot gnivom fo shtnom enin nihtiw ,lleW ?od I did woH .edarT
in doing so, develop a trader's mindset.
eht erew sessol yM .denwo I gnihtyreve ylraen tsol dah I ,ogacihC
THOM HARTLE
hcihw ,elyts efil tnatibroxe ym dna seitivitca gnidart ym htob fo tluser
demanded that I make a lot of money as a trader.
From these early experiences as a trader, I learned an enormous
amount about myself, and about the role of psychology in trading. As
denilpicsiD ehT ,koob tsrif ym no gnikrow detrats I ,2891 ni ,tluser a
Trader: Developing Winning Attitudes. When I began this project I
nialpxe ro koob a etirw ot saw ti tluciffid woh fo tpecnoc on dah
something that I understood for myself in a manner and form that
em ekat ot gniog saw ti thguoht I .elpoep rehto ot lufesu eb dluow
between six and nine months to get the job done. It took seven and a
.0991 ni llaH ecitnerP yb dehsilbup yllanif saw dna sraey flah
gnidarT ,mrif gnitlusnoc a trats ot hcnyL llirreM tfel I ,3891 nI
sranimes tcudnoc dna poleved yltneserp I erehw ,scimanyD roivaheB
ylnommoc si tahw fo yticapac eht ni tca dna ygolohcysp gnidart no
rof snoitatneserp sseltnuoc enod ev'I .hcaoc gnidart a sa ot derrefer
dna ,sknab ,sesuoh egarekorb ,smrif gniraelc ,seinapmoc gnidart
xiv PREFACE PREFACE xv
lanosrep a ta dekrow ev'I .dlrow eht revo lla secnerefnoc tnemtsevni • To prove to the trader that more or better market analysis is not
level, one on one, with virtually every type of trader in the business, the solution to his trading difficulties or lack of consistent
-laiceps noitpo ,sregdeh ,sredart roolf tseggib eht fo emos gnidulcni
results.
setyhpoen sa llew sa ,sATC dna ,stsi
"dnim fo etats" dna edutitta sih s'ti taht redart eht ecnivnoc oT •
As of this writing, I have spent the last seventeen years dis-
that determine his results.
secting the psychological dynamics behind trading so that I could
-cus fo selpicnirp reporp eht gnihcaet rof sdohtem evitceffe poleved taht sedutitta dna sfeileb cificeps eht htiw redart eht edivorp oT •
,level latnemadnuf tsom eht ta ,taht si derevocsid ev'I tahW .ssec gninrael snaem hcihw ,tesdnim s'renniw a dliub ot yrassecen era
there is a problem with the way we think. There is some.tsheinitgil iibnhabero-rp ni kniht ot woh
-rahc eht htiw llew yrev tif t'nseod taht krow sdnim ruo yaw eht ni tne
ni sexodarap dna ,snoitcidartnoc ,stcilfnoc ynam eht sserdda oT •
acteristics shown by the markets.
ydaerla eh taht emussa ot redart lacipyt eht esuac taht gnikniht
ohw ,sedart nwo rieht ni ecnedifnoc evah ohw sredart esohT
.t'nseod yllaer eh nehw ,seitilibaborp ni kniht seod
era ,noitatiseh tuohtiw enod eb ot sdeen tahw od ot sevlesmeht tsurt
• To take the trader through a process that integrates this think-
citarre eht raef regnol on yehT .lufsseccus emoceb ohw seno eht
.level lanoitcnuf a ta metsys latnem sih otni ygetarts gni
behavior of the market. They learn to focus on the information that
helps them spot opportunities to make a profit, rather than focusing
(Note: Until recently, most traders were men, but I recognize
.sraef rieht secrofnier taht noitamrofni eht no
ot troffe na nI .sknar eht gninioj era nemow erom dna erom taht
gninrael ot nwod sliob lla ti ,detacilpmoc dnuos yam siht elihW
avoid confusion and awkward phrasing, I have consistently used the
to believe that: (1) you don't need to know what's going to happen
-rec sihT .sredart gnibircsed ni koob siht tuohguorht "eh" nuonorp
next to make money; (2) anything can happen; and (3) every moment
y pmart .n) o saib yna tcelfer ton seod ylniat
is unique, meaning every edge and outcome is truly a unique experi-
hcaorppa lacigolohcysp suoires a stneserp enoZ eht ni gnidarT
ence. The trade either works or it doesn't. In any case, you wait for
to becoming a consistent winner in your trading. I do not offer a
the next edge to appear and go through the process again and again.
trading system; I am more interested in showing you how to think in
-hsaf modnar-non ,lacidohtem a ni nrael lliw uoy hcaorppa siht htiW
the way necessary to become a profitable trader. I assume that you
lliw uoy ,tnatropmi sa tsuj ,dnA .t'nseod tahw dna skrow tahw noi
already have your own system, your own edge. You must learn to
build a sense of self-trust so that you won't damage yourself in an
trust your edge. The edge means there is a higher probability of one
environment that has the unlimited qualities the markets have.
lliw ti reisae eht ,ecnedifnoc ruoy retaerg ehT .rehtona naht emoctuo
eht era smelborp gnidart rieht taht eveileb t'nod sredart tsoM
be to execute your trades. This book is designed to give you the
woh ,yllacificeps erom ,ro gnidart tuoba kniht yeht yaw eht fo tluser
fo erutan eht dna flesruoy tuoba deen uoy gnidnatsrednu dna thgisni
they are thinking while they are trading. In my first book, The
trading, so that actually doing it becomes as easy, simple, and stress-
Disciplined Trader, I identified the problems confronting the trader
free as when you're just watching the market and thinking about
from a mental perspective and then built a philosophical framework doing it.
for understanding the nature of these problems and why they exist. I
In order to determine how well you "think like a trader," take
had five major objectives in mind in writing Trading in the Zone:
the following Attitude Survey. There are no right or wrong answers.
xvi PREFACE
Your answers are an indication of how consistent your current men- ATTITUDE SURVEY
tal framework is with the way you need to think in order to get the
most out of your trading.
MARK DOUGLAS
tekram eht tahw wonk ot evah uoy redart a sa yenom ekam 1oT.
.txen od ot gniog si
eergasiD eergA
2. Sometimes I find myself thinking that there must be a way to
trade without having to take a loss.
eergasiD eergA
3. Making money as a trader is primarily a function of analysis.
eergasiD eergA
.gnidart fo tnenopmoc elbadiovanu na era sessoL .4
eergasiD eergA
.edart a retne I erofeb denifed syawla si ksir yM .5
Agree Disagree
6. In my mind there is always a cost associated with finding out
what the market may do next.
Agree Disagree
7. I wouldn't even bother putting on the next trade if I wasn't sure
that it was going to be a winner.
Agree Disagree
8. The more a trader learns about the markets and how they
.sedart sih etucexe ot mih rof eb lliw ti reisae eht ,evaheb
Agree Disagree
xviii ATTITUDE SURVEY ATTITUDE SURVEY xix
9. My methodology tells me exactly under what market conditions ing out if these patterns will play themselves out as they have in
to either enter or exit a trade. the past.
Agree Disagree Agree Disagree
ti dnif I ,noitisop ym esrever ot langis raelc a evah I nehw nevE .01 17. Sometimes I just can't help feeling that I am a victim of the mar-
extremely difficult to do. ket.
Agree Disagree Agree Disagree
11. I have sustained periods of consistent success usually followed
18. When I trade I usually try to stay focused in one time frame.
by some fairly drastic draw-downs in my equity.
eergasiD eergA
Agree Disagree
raf ytilibixelf latnem fo eerged a seriuqer yllufsseccus gnidarT .91
gnidart ym ebircsed dluow I gnidart detrats tsrif I nehW .21
.elpoep tsom fo epocs eht dnoyeb
a neewteb ni sseccus emos gninaem ,drazahpah sa ygolodohtem
Agree Disagree
lot of pain.
Agree Disagree
-ram eht fo wolf eht leef yletinifed nac I nehw semit era erehT .02
ket; however, I often have difficulty acting on these feelings.
-rep em tsniaga era stekram eht taht gnileef flesym dnif netfo I .31
sonally. Agree Disagree
Agree Disagree
21. There are many times when I am in a profitable trade and I
.stiforp ym ekat t'now llits I tub ,revo yllacisab si evom eht wonk
14. As much as I might try to "let go," I find it very difficult to put
.em dniheb sdnuow lanoitome tsap Agree Disagree
Agree Disagree
22. No matter how much money I make in a trade, I am rarely ever
eht ni dednuof si taht yhposolihp tnemeganam yenom a evah I .51 satisfied and feel that I could have made more.
nehw tekram eht fo tuo yenom emos gnikat syawla fo elpicnirp
Agree Disagree
.elbaliava ti sekam tekram eht
23. When I put on a trade, I feel I have a positive attitude. I antici-
Agree Disagree
pate all of the money I could make from the trade in a positive
way.
16. A trader's job is to identify patterns in the markets' behavior that
represent an opportunity and then to determine the risk of find-
Agree Disagree