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Mark Douglas - Trading In The Zone PDF

121 Pages·2001·2.6 MB·English
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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- ro ,gnitnuocca ,lagel gniredner ni degagne ton si rehsilbup eht taht gnidnats 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 SLOOHCS DNA SNOITAROPROC :NOITNETTA -acude rof esahcrup klub htiw stnuocsid ytitnauq ta elbaliava era skoob llaH ecitnerP tional, business, or sales promotional use. For information, please write to: Prentice Hall, ,NBSI ,koob fo eltit :ylppus esaelP .256 ,tP7ra0 0uFra4 or]mi2sCNuc hs, s,elaS laicepS .dedeen etad ,desu eb lliw koob eht woh ,ytitnauq ECNANIF FO ETUTITSNI KROY WEN An Imprint of Prentice Hall Press P2a5r6a7m0 JuNs, http://www.phdirect.com NYIF and NEW YORK INSTITUTE OF FINANCE are trademarks of Executive .cnI ,tceriD llaH ecitnerP yb esnecil rednu desu .cnI ,stropeR xaT o 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

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