Think Like a Trader

[TimRacette 11]

The biggest leap forward in my trading came when I began to think like a trader. This important realization was a result of training my brain to think in terms of probabilities. The best book hands down (for me at least) that helped me think this way was Trading in the Zone by Mark Douglas.

 

Thinking in probabilities did a lot more for me than just help analyze my trades. It allowed me to trade with more confidence because I knew the likely statistical outcome of a series of trades. (As a side note you can see what I do each night as part of my nightly homework here).

 

I’d like to pull from some of Mark Douglas’s work in this post to help you better understand how to think like a trader.

 

 

Think in Sample Sizes

Looking at the markets in terms of probabilities is extremely important, both to help you understand your edge and to calm your emotions from trade to trade. I like to think in sample sizes of 20 trades. I am not looking at my profit/loss for the day or week; rather I am monitoring my p/l for the last 20 trades.

 

Each trade you make is simply one of thousands of trades that you will make over the course of your trading. If you keep this in mind and limit your risk on every trade then mentally there is no need to fret over one or two losing trades, or even a string of losing trades.

 

Monitor your last 20 trades. What is your worst string of 20 trades? What is your best string of 20 trades? The numbers may surprise you.

 

Eliminate the Emotional Risk

Thinking in terms of probabilities also helps remove the emotional risk of trading. Mark Douglas talks about the 5 Fundamental Truths, they are as follows…

1. Anything can happen

2. You don’t need to know what is going to happen next in order to make money

3. There is a random distribution between wins and losses for any given set of variables that define an edge

4. An edge is nothing more than an indication of a higher probability of one thing happening over another

5. Every moment in the market is unique

 

When you train your mind to think in this way, the emotional stress and fear of pulling the trigger diminish. You become less concerned with the outcome of each individual trade and more concerned with how it fits into the larger statistical set.

Become an Observer

Think about how objective we are when observing the markets with no money on the line. This is the state of mind we are looking to create throughout the entire trade. Win, lose, or scratch. One exercise I find useful is to visualize yourself standing just behind yourself, watching over your shoulder as you trade.

 

Does this trade meet your entry criteria? Is this a trade taken out of boredom? Are you sure you want to break your rules? These are some questions the observing self would ask your conscious self. Once you’ve identified your edge, practice executing your trades the same way, each and every time. Use this observer exercise to help keep you in check and remain disciplined.

 

The 7 Principles of Consistency

Mark Douglas talks about 7 principles which help beginning traders develop into consistent winners over time. The following are his list of guiding principles…

1. I objectively identify my edges

2. I predefine the risk of every trade

3. I completely accept the risk or I am willing to let go of the trade

4. I act on my edges without reservation or hesitation

5. I pay myself as the market makes money available to me

6. I continually monitor my susceptibility for making errors

7. I understand the absolute necessity of these principles. I never violate them.

 

So to think like a trader means to think in terms of probabilities, identify your edge, execute your trades the same way each and every time taking every setup that first your criteria and then analyze your trades not individually, but in sample sizes. Doing these things (over time), can help develop a level of consistency trading the markets.

[gosu 10]

Perhaps Douglas should get more credit (or blame) for the current prominence of the "psychology" of trading as separate from other aspects.

 

TITZ is OK. The analog in chess literature is not "Think Like a Grandmaster" by Kotov, but something akin to "Chess for Beginners" by Horowitz.

[MightyMouse 12]

Douglas' "trading in the zone" is a good beginner book. If you reread it, you understand why he writes and does not trade.

[TimRacette 11]

I find that I'm constantly internalizing trading ideas while off doing other things away from the screen. Often I go back and re-read books like this (along with the Market Wizards Series, Reminiscences and Pit Bull to name a few more). I always end up pulling out more great nuggets.

 

Sometimes it's reading something at the right time when you're in the right frame of mind. I think that was the case with Trading in the Zone. After reading it a few times, and at different stages of my trading I would absorb different pieces of information.

 

p.s. I enjoy reading your comments MM, lots of insight, thanks.

[JEHs 10]

I know this is blasphemy but I have to say, I thought "Trading in the Zone" was a ridiculous book. Every time I have read something by Mark Douglas or listened to one of his recordings I come away thinking I have just wasted a bunch of my time.

I am not denying the importance of proper mindset and control of emotions or psychology or whatever you want to call it, but that book is not the place to get insight into the matter.

It's a great example of someone making money off wannabee traders with books and speaking tours.

my:2c:

[MightyMouse 12]

I know this is blasphemy but I have to say, I thought "Trading in the Zone" was a ridiculous book. Every time I have read something by Mark Douglas or listened to one of his recordings I come away thinking I have just wasted a bunch of my time.

I am not denying the importance of proper mindset and control of emotions or psychology or whatever you want to call it, but that book is not the place to get insight into the matter.

It's a great example of someone making money off wannabee traders with books and speaking tours.

my:2c:

 

When I first read it, I thought it was good, then as I learned more and more from practical trading experience, I realized that his main audience is fledgling traders. If you are lost and need help I suppose learning that you have to be in the right mindset is good, but if you are lost and need help, you should really go do something else because there are a lot of traders who are not lost and do not need help and they will steal your lunch right from under your nose. There has to be a point where you call it quits. In life, perseverance is important. In trading, perseverance will kill you.

[TimRacette 11]

Ya, JEH I can see your point. I was more focused on relaying what's resonated and worked for me, the message of thinking in terms of probabilities and that there is no one who can predict the market.

[SIUYA 11]

plus often going back to books for ideas, or reinforcement of crap (or good stuff ) is often worthwhile in itself. Sometimes its just the one or two things a book resonates with you that is all it needs.

Look at market wizards.....a great book, and yet full of DIFFERENT styles, ideas and personalities and yet we can all learn a little bit from each of them.

[RealDemo 10]

Douglas' "trading in the zone" is a good beginner book. If you reread it, you understand why he writes and does not trade.

 

...what am I missing? I've read it at least 4 times, why doesn't he trade?

 

When anyone mentions this book it often attracts comments that belittle it from "pro-traders" and often they never say why.

 

...I'd be interested in a discussion of why and where it lacks, whatever it lacks.

[zdo 20]

more focused on relaying what's resonated and worked for me

Thanks.

 

JEHS, No, it’s not “blasphemy”. I can see how MD’s (and others’) material can become trite to experienced traders. It's called the Apex Effect... However, I’ve noticed when I discount this level of trader development, somewhere I have confused ‘cognitive grasp’ with ‘deep mastery’… I observe same tendency in others too…

 

It's not so apparent in the books, but MD's material simultaneously ranges from beginner material for beginners to master material for masters...

 

Once a year, usually in March, I still go back and substitute his tapes for music during trading sessions and skim his books (whether I think I need to or not.) Doing this brings variable (and diminishing) returns. But invariably, I still get a fresh insight into some beliefs and / or biases and / or tendencies and sometimes new leverage for dealing with them... prevents the Apex Effect...

 

btw someone mentioned "he writes and does not trade"… actually he does trade… trades selective fibs… akin to Pesavento’s style…

Edited December 16, 2011 by zdo

[MightyMouse 12]

Thanks.

 

JEHS, No, it’s not “blasphemy”. I can see how MD’s (and others’) material can become trite to experienced traders. It's called the Apex Effect... However, I’ve noticed when I discount this level of trader development, somewhere I have confused ‘cognitive grasp’ with ‘deep mastery’… I observe same tendency in others too…

 

It's not so apparent in the books, but MD's material simultaneously ranges from beginner material for beginners to master material for masters...

 

Once a year, usually in March, I still go back and substitute his tapes for music during trading sessions and skim his books (whether I think I need to or not.) Doing this brings variable (and diminishing) returns. But invariably, I still get a fresh insight into some beliefs and / or biases and / or tendencies and sometimes new leverage for dealing with them... prevents the Apex Effect...

 

btw someone mentioned "he writes and does not trade"… actually he does trade… trades selective fibs… akin to Pesavento’s style…

 

TITZ will lead a lot of traders into thinking that all you need to do is find an edge, which is not clearly defined, and trade it and you will take money from the market in a similar fashion to the way a casino takes money from players. Nothing can be more misleading, especially if you know how a casino really works.

 

The edge he speaks of seems more like a set up than an edge. There are plenty set ups which will lead your account to hell if you trade them religiously.The book gives the trader hope, but I think it leads him down the wrong path.

 

I do not know if he actually trades or not. I made the assumption that he does not. Shame on me.

[zdo 20]

TITZ will lead a lot of traders into thinking that all you need to do is find an edge...

 

 

Hm, seems to me about 90% of new traders show up already thinking that.

TITZ (and 98% of books, the internet publishing, and forum posts also) may reinforce that thinking, but “lead”?

 

You’re right, TITZ doesn’t really fish out “edge” properly. Positive expectancy across a stat significant sample, etc… while these concepts and terminologies click cognitively to sufficient degree for most, they don’t ever become ‘real’ for most. For many, the ways in which he describes 'risk acceptance' will also make sense, but never really click...

 

TITZ misses covering one important point for sure. "Edge" management. MD doesn't really get down to the imbedded emotional components involved in real 'probability thinking'.

In every “sample” of trades, there are going to be one or two that present unusual challenges that most are not prepared to handle… for most beginners, it never really gets to “across the whole sample” because of those one or two make or break trades etc etc.

[gosu 10]

TITZ is a book written for the losers in the trading game. In that regard the message is not that useful to people outside the general population of losers.

 

The gist of the message is that people lose because of their mental orientation towards the market and trading. That's hardly a revelation. However, Douglas prescribes a remedy that has as its ingredients his 5 fundamental truths.

 

Many people on trading sites extol the book's virtues. No doubt the message is effective in reaching its intended audience.

 

But how useful are these "truths"? Are they even truths at all? Does it matter?

[MightyMouse 12]

All in all, I thought TITZ was a good as a beginner. I Suppose TITZ could still be useful to many traders. Two things I know for sure is that TITZ are harder to get when you are older, but it is still exciting to talk about TITZ.

[Do Or Die 10]

Positive expectancy across a stat significant sample, etc…

 

Terminology like 'expectancy', 'edge', 'profit factor' can be very misleading for new traders.

 

The probabilities in market, whether they are about a pattern or setup or strategy, are NOT definite- they are estimation only. (in practice they are not even estimation, turn out to be wild guesses).

 

The method of new trader will be constantly evolving, every 50 trades or so. His method will evolve irrespective he is making money or losing, simply because he will be learning a lot about market behavior and trading in general.

 

How do you expect a person to *statistically* define 'edge' in such situation.

 

I agree with MM that trading a setup religiously is the sure way to hell for a beginner trader.

 

TITZ will lead a lot of traders into thinking that all you need to do is find an edge, which is not clearly defined, and trade it and you will take money from the market in a similar fashion to the way a casino takes money from players. Nothing can be more misleading, especially if you know how a casino really works.

The edge he speaks of seems more like a set up than an edge. There are plenty set ups which will lead your account to hell if you trade them religiously.The book gives the trader hope, but I think it leads him down the wrong path.

 

I do not know if he actually trades or not. I made the assumption that he does not. Shame on me.

Edited December 17, 2011 by Do Or Die

[youngamerican 10]

You "professional" guys crack me up. On every thread a professional saunters in like a sixth degree blackbelt and criticizes the thread subject, book, setup, etc. and insinuates that it is the path to failure. Douglas would probably say that these boards act as feedback loops for the self proclaimed and I would agree.

[gosu 10]

Douglas defines the term "edge" and includes it as one of his 5 fundamental truths. As the OP quotes:

 

4. An edge is nothing more than an indication of a higher probability of one thing happening over another

 

Now, if a person likes the term "set up" better and wants to substitute it in, then it's only fair that the same definition be kept:

 

4. [A set up] is nothing more than an indication of a higher probability of one thing happening over another

 

The person who says Douglas's "edge" seems like a "set up" and that "there are plenty set ups which will lead your account to hell if you trade them religiously" is not following Douglas's definition.

 

If you want to point out that discerning such an edge or set up in the market is not as simple as Douglas makes it sound, I think a lot of people can attest to that. But let's not continue the straw man fallacy.

 

For me, the bigger issue is making up a definition of a term and then claiming it as a fundamental truth when it isn't clear to me at all that is the case. It's sort of like defining "marriage" as being between one man and one woman and proclaiming that as a truth.

[TheDude 10]

...what am I missing? I've read it at least 4 times, why doesn't he trade?

 

When anyone mentions this book it often attracts comments that belittle it from "pro-traders" and often they never say why.

 

...I'd be interested in a discussion of why and where it lacks, whatever it lacks.

 

ok, how about this......

 

 

 

in TITZ, one of the main lesson for the new trader is that 'the market can do anything at any time'. this is bullsh!t.

 

why?

 

markets work in phases. they have to in order to absorb order flow. markets trend, they reach a climax, they correct, then they balance, then they trend again. its a cycle. sometimes the balance between trends is missed as the market reaches its climax and the correction develops into a new trend.

 

Also, volume activity will tend to lead price. or rather, price reacts to volume. it has to. there is no other way it can be.

 

to suggest 'anything can happen at any time' implies (to me) a sense of randomness in the market. randomness is a term we use for something we dont understand.

 

so the douglas idea is flawed. it may appear to be great for the new trader, but i believe it will in fact act as an excuse mechanism for the newbie when he gets stopped, rather than encourage him to find out why he got stopped out. its a cop out.

 

as for douglas' other book, that too was even worse bullsh!t. i just developed a phobia about dog bites that i never had before reading that book. go figure.

 

imo, if you want a good book on trading mindset, read brett steenbarger enhancing trader performance. this is written by a psychologist who has an interest in trading, not an author who says hes a trader to try and get kudos.

 

the brett book is for people who want to continually progress their trading, not for a 'nice read' by the fireside as many peoples 'favourite trading books' seem to be/ it's tough work and most wont be bothered with the effort involved when they realise to get good at this gig is going to take more effort than reading a couple of cosy douglas books.

Edited December 17, 2011 by TheDude

[gosu 10]

ok, how about this......

 

 

 

in TITZ, one of the main lesson for the new trader is that 'the market can do anything at any time'. this is bullsh!t.

 

why?

 

markets work in phases. they have to in order to absorb order flow. markets trend, they reach a climax, they correct, then they balance, then they trend again. its a cycle. sometimes the balance between trends is missed as the market reaches its climax and the correction develops into a new trend.

 

Also, volume activity will tend to lead price. or rather, price reacts to volume. it has to. there is no other way it can be.

 

to suggest 'anything can happen at any time' implies (to me) a sense of randomness in the market. randomness is a term we use for something we dont understand.

 

so the douglas idea is flawed. it may appear to be great for the new trader, but i believe it will in fact act as an excuse mechanism for the newbie when he gets stopped, rather than encourage him to find out why he got stopped out. its a cop out.

 

as for douglas' other book, that too was even worse bullsh!t. i just developed a phobia about dog bites that i never had before reading that book. go figure.

 

imo, if you want a good book on trading mindset, read brett steenbarger enhancing trader performance. this is written by a psychologist who has an interest in trading, not an author who says hes a trader to try and get kudos.

 

the brett book is for people who want to continually progress their trading, not for a 'nice read' by the fireside as many peoples 'favourite trading books' seem to be/ it's tough work and most wont be bothered with the effort involved when they realise to get good at this gig is going to take more effort than reading a couple of cosy douglas books.

 

Your comments are spot on about Douglas's "anything can happen" fundamental truth. I think his motivation comes from a correct stance: to convince the reader that predicting is unnecessary. However, the statement itself overstates the case and I don't think he believes it himself. Consider how he defines "edge" - "a higher probability of ONE THING HAPPENING OVER ANOTHER." If he really believed that anything can happen at anytime, the definition would need to be altered to "a particular thing happening, period" or "one thing happening over all other things."

 

Your recommendation of Steenbarger's book is interesting. I am one of those people you describe as wanting to continually progress in my trading, so I do put in the time to try to keep up to date with the current trading literature. What's so good about it in your opinion? I read it and was rather put off by his unending praises for Woodie's CCI Club.

 

I find there are no books being written for expert traders nowadays. Probably there is no money in it. Of past books that are accessible, Gann's books come the closest in my opinion, with the exception perhaps of "Tunnel Through the Air."

[Kiwi 16]

This is a little bizarre guys. Here are a bunch of people who I've known to be intelligent and may also be good traders. But you're slagging Douglas off for something he doesn't purport to be / do.

 

I read the book 10 years ago when I was new and sort of got it but sort of didn't. Then I have reread both books in the last couple of years and 100% get them. One of the differences in between is that I went from interday trading to interminute and intersecond trading and discovered a bunch of things about myself that were not present on longer timeframes. Things he talks about and attempts to address. Another is that I've run into a number of people who had valid edges (read setup, exit, management package) and never turned them into money.

 

The thing he's slagged off for seems to be not telling people how to do the trading bit. But if you note, he's up front about that and he does define some things that are important:

- your edge must have positive expectancy

- in the mechanical stage it must be so clearly defined that you can trade it without thought or hesitation.

So he clarifies key point for a training setup. Then, at least in the first book, he offered that anyone who didn't have such an edge could email him and he'd refer them for such an edge and potentially training if required.

 

I was new to day trading so I emailed him and sure to his word I got an email back with some advice (setups and exit disciplines plus possible trading) that I didn't take at the time but knowing what I know now would have worked.

 

So, the package was there.

 

**************

 

Someone also gave the traditional "hes an author not a trader" response. Not true; its a while since the books and he went back to trading although he does still pick up bucks from books, tapes, and the occasional seminar.

 

**************

 

I do agree that in terms of psychological techniques to address trading issues steenbargers books offer a lot of extra tricks. Although I think they would be well read as idea's for working within a framework like Titz or Tdt. If one is looking for books that address that area and provide extra technique for people having trouble following the learning process from Titz, a guy who primarily works with people with Obsessive Compulsive disorders wrote a book that might be even better than steenbargers:

 

- You are not your Brain by Jeffrey Schwartz MD

 

 

**************

 

But lets stop slagging Mark for stuff that isn't supposed to be in his (good but boringly written) books but was offered by him free to those who ask.

[MightyMouse 12]

 

as for douglas' other book, that too was even worse bullsh!t. i just developed a phobia about dog bites that i never had before reading that book. go figure.

.

 

Dude, that's funny s--t!

[phantom 16]

imo, if you want a good book on trading mindset, read brett steenbarger enhancing trader performance. this is written by a psychologist who has an interest in trading, not an author who says hes a trader to try and get kudos.

.

 

Also, The Investor's Quotient, by Jake Bernstein. I've got the 2nd edition. Jake's a trader and a professional psychologist, and this book on overcoming psychological issues in trading is phenomenal.

[Do Or Die 10]

Some people may like to check: The Heck About Trading Psychology

 

I do not really like any of the 'psychological' coach.

[RealDemo 10]

Quote:

Originally Posted by RealDemo »

...what am I missing? I've read it at least 4 times, why doesn't he trade?

 

When anyone mentions this book it often attracts comments that belittle it from "pro-traders" and often they never say why.

 

...I'd be interested in a discussion of why and where it lacks, whatever it lacks.

 

ok, how about this......

 

 

in TITZ, one of the main lesson for the new trader is that 'the market can do anything at any time'. this is bullsh!t.

 

Quote from his book TITZ:

 

"These behavior patterns are observable and quantifiable, and they repeat themselves with statistical reliability. Technical analysis is a method that organizes this collective behavior into identifiable patterns that can give a clear indication of when there is a greater probability of one thing happening over another."

 

This would seem at odds with that.

 

 

imo, if you want a good book on trading mindset, read brett steenbarger enhancing trader performance. this is written by a psychologist who has an interest in trading, not an author who says hes a trader to try and get kudos.

 

Quote from his book TITZ:

"By 1981, I was thoroughly disgusted with my inability to trade effectively while holding another job, so I moved to Chicago and got a job as a broker with Merrill Lynch at the Chicago Board of Trade. How did I do? Well, within nine months of moving to Chicago, I had lost nearly everything I owned. My losses were the result of both my trading activities and my exorbitant life style, which 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."

 

Really you think this is an attempt at attracting kudos?

 

I've read Brett Steenbarger and learnt plenty of stuff from him too.

[joshdance 10]

Perhaps some are not understanding "anything can happen at any time." This is true in every aspect of life. There is an element of chaos and randomness at every level. However, you organize your life around certain repeatable events.

 

For example, statistically your kid gets off the school bus at 4:00 every day for the last month, +/- 10 minutes. You plan to be there to meet the child every day at that time. However, one day the bus does not arrive. The bus had a flat tire. The randomness of the moment struck, and the expected event did not occur. Does that mean that tomorrow you expect the bus to not arrive? Is it now not statistically significant that the bus has arrived 99% of the time at 4:00 +/- 10 minutes, because ONE major deviation occurred?

 

Trading with any basis for success is dependent upon the trader believing that he has the ability to place a trade and profit from the market going his direction more often than not (or more correctly, by a larger amount than when he is wrong). I believe this is practically based on experience, and cannot be based practically on back testing, though that is another can of worms. If the trader did not believe this, he would not expect to make money and should not trade.

 

Yet, we also know that the randomness inherent in all things can cause an event in the market which will be completely out of the ordinary and not meet the expectation of the trader at any moment. This can be a huge bank getting pissed off and selling; it can be a catastrophic political or social event; it can be a computer which has a flaw in it which does the wrong thing (flash crash); it can be anything.

 

So each event is independent, yet, over a statistically significant sample size (this will vary depending on your needs), a probability can be determined.

 

That being said, I abhor the "it's just math, place your trade regardless" crap. If someone wants pure mechanical performance, write a f***ing black box and go do something else. The human element makes it possible to see that, for example, while 70% of the time this should work based on the past, it likely won't right now. Some people will say that's screwing up the probabilities. Well, so be it, and we just have to agree to disagree. But if someone is SO confident in their "edge" or "set up" (boy I hate that term) that they ALWAYS take it, then program it, and go play golf. Seriously.