The Rules That Have Benefited Me Permanently
"The Disciplined Trader" by Mark Douglas – you might be more familiar with his other famous work, "Trading in the Zone."
Mark Douglas, a futures trader, summarized his past failed trading experiences and found solutions to his problems. This book offers a systematic, step-by-step approach to teach traders the psychological techniques needed to accumulate wealth, helping them overcome the fear of loss and adopt the mindset of market winners.
If you are currently experiencing fear and anxiety in trading, this book is worth a read.
Some say trading is suicidal, and not trading is waiting for death. I agree. Since both paths lead to death, why fear the journey? Trading toughens one's mind, making an ordinary heart more mature and courageous, returning it to simplicity and ordinariness. Speculation is an excellent way to toughen oneself, closest to the universal truth. Look, the universe has yin and yang, life has ups and downs, and the market has rises and falls. Let us follow the thoughts of our predecessors, step by step, towards the other shore.
Key Excerpts:
1. Whether it's fundamental analysis or technical analysis, 80% of successful trading depends on psychology, and 20% on methods. If you only have a rough understanding of fundamental and technical information but have excellent psychological control, you can still make money. Conversely, if you have a great system that performs well in simulations but lacks psychological control, you will be a loser.
2. Experienced traders know that in the long run, their number of losing trades will be higher than their winning ones. However, through money management, careful risk analysis, and the protection of stop-loss orders, they can avoid trouble and capture significant market moves, leading to overall profits. Money management consists of two critical elements: psychological management and risk management. Risk management stems from psychology, where traders mentally account for risk in advance.
3. I want to especially tell beginners and market participants that while it is necessary to interpret and analyze your motivations, it is even more critical to avoid frequent trading under pressure. Start slow and question every trade. What is my motivation for this trade? How am I managing it? Did it ultimately succeed? Why? Did I incur losses? Why? Write down and review your evaluations before making the next trade.
4. There is inevitably a difference between the few winners and the majority of losers. This difference is that consistently profitable traders conduct their trades with discipline. When asked for their secret to success, they straightforwardly say they were also losing at first until they learned discipline, emotional control, and trend following, after which they started to accumulate wealth consistently.
5. First, I want to point out that discipline, emotional control, and trend-following mindset are all related to psychology and have nothing to do with news services, advisory services, listening to tips, technical trading systems, fundamental trading systems, computer trading systems, or any other trading systems.
Secondly, based on my experience, observations, and research, I found that all traders, both winners and losers, share certain common experiences. In the early stages of their trading careers, all traders experience confusion, frustration, anxiety, and the pain of failure. Only a few traders actively work on resolving these psychological issues before they can start accumulating wealth; even for the best traders, this process of change takes several years.
6. If discipline and emotional control are the keys to success, it is unfortunate that we are not born with these traits. Instead, we must learn specific psychological techniques to acquire them. Learning these psychological techniques is a trial-and-error process, which is costly and often painful. The biggest problem with trial and error in trading is that most people lose all their money prematurely. Other traders, even if they don't lose all their money, suffer such severe psychological trauma that they cannot extricate themselves, making it impossible to learn consistently successful trading. Therefore, only a few people can succeed.
7. In the past, emotions like anger, tension, anxiety, and fear negatively affected them. At a certain stage, they find this influence disappears, realizing something has changed. There is a direct correlation between confidence and negative emotions; as someone's confidence increases, their confusion, anxiety, and fear decrease accordingly.
8. If I see risk and fear of loss in the market, it's not because the external environment is threatening me in some way. My fear stems from my inability to predict the future or take the most advantageous measures. What I truly fear is my lack of confidence and not knowing how to take the correct actions.
Also, I find myself always trying to avoid losses; in doing so, I actually create losses. Think about this: no one can predict the future. The environmental information we focus on is what we consider most important. As we devote more and more attention to this information, we automatically exclude other information. Because I try to avoid losses, I end up creating them.
9. Ironically, trading seems simple on the surface, but for most people, it is the most challenging undertaking. Success always appears within reach but remains elusive. Only by learning new ways of thinking can traders change this frustrating situation; these new ways of thinking are incompatible with traditional cultural and social environments.
10. Most traders are unaware of the difference between traditional culture and the trading environment and have not made the necessary adjustments, leading to mistakes in trading. Changing your mindset can redefine market behavior and help you avoid mistakes; it can also manage most undisciplined emotional reactions.
11. Only a few reactions lead to failure; this should be good news for you. If you know which reactions lead to failure, you can avoid mistakes and make decisions quickly.
The following are typical trading mistakes that need correction.
(1) Refusing to define a loss. (2) Even when recognizing a trade as a loss with no hope of recovery, being unwilling to close the position. (3) Being stubbornly bullish or bearish; psychologically, this equates to trying to control the market, as if saying, "I am right, the market is wrong." (4) Failing to analyze the market's potential movement based on its structure and behavior, instead obsessing over price or the profit and loss of each trade. (5) Seeking revenge on the market after a loss, trying to get back what was lost. (6) Even when sensing a market shift, being unwilling to reverse positions. (7) Not adhering to the trading system's rules. (8) Sensing a market opportunity and having planned accordingly, but not taking action when the opportunity arises, thus missing out on potential profits. (9) Not relying on intuition for trading. (10) Having a consistently profitable model but giving back profits in subsequent trades, repeating this cycle.
12. Any way of thinking includes methods for achieving goals and solving problems. These methods are best referred to as psychological techniques or techniques of mental application. For example, certain techniques can prevent you from making mistakes in specific situations. Common techniques include:
(1) Learning to focus on goals, enabling you to actively pay attention to what you want, not what you fear. (2) Learning to identify and master techniques useful to traders, not focusing on money, as money is just a by-product of the techniques. (3) Learning to cope with changes in fundamentals. (4) Establishing the risks you can accept—determine a loss amount you can tolerate—and then objectively assess the market and apply appropriate stop-loss measures. (5) Taking prompt action when you see an opportunity. (6) Letting the market tell you when it's over, instead of using your value system to judge when it's over. (7) Adopting appropriate beliefs to control your perception of market fluctuations. (8) Maintaining an objective attitude. (9) Identifying "genuine" intuition and consistently applying it correctly.
13. When someone fails, especially due to overly ambitious goals, three main psychological obstacles arise. We must overcome these three obstacles to succeed:
The first obstacle is feelings of helplessness, guilt, or shame, from which you must learn to liberate yourself; the second obstacle is the fear generated by painful experiences, from which you must learn to recognize and self-heal your psychological wounds; the third obstacle is inappropriate trading habits, from which you must learn the right techniques to accumulate wealth through trading.
These obstacles may seem daunting, but I do not wish to underestimate them. Even if you haven't experienced emotional trauma, learning proper techniques is challenging. Remember that if you overcome these obstacles, the rewards will be enormous. Compared to the enormous potential returns from stocks or futures, what other business can yield greater rewards?
14. Why should you change your mindset? My three reasons are as follows:
First, because you have decided to learn new techniques or new methods of self-expression. Second, because some of your current beliefs hinder you from learning new techniques. Third, more on this later.
15. You either adapt to the market or continue to suffer. My tip: the more you suffer, the more you need to change your trading to stop being afraid and achieve consistent success.
16. Certain beliefs of most people impact a trader's success. You are aware of some of these beliefs, but most such beliefs are unconscious. These beliefs significantly affect your trading behavior and cannot be ignored.
Many traders believe that as long as they do a good job analyzing the market, they can avoid the impact of these beliefs. Regardless of how good your analytical skills are, if you do not eliminate the influence of these beliefs, they will continue to affect your psychological system, and you will not succeed. Many market experts can accurately predict various trends, but they cannot make money when trading themselves. They either do not understand the nature of beliefs, do not know how beliefs impact behavior, or do not want to face the issues brought by these beliefs. You must address belief issues; otherwise, there will be no progress. If you are unwilling to address belief issues, you will repeatedly suffer from negative experiences. Eventually, you will either find a way to solve these problems or give up after going broke.
17. If your techniques cannot cope with market conditions, then you need rules and restrictions to guide your actions. When you were a child, you could not cross the street alone, and your parents would not let you. Once you understood the nature of traffic, they allowed you to cross the street alone.
18. Every trader defines opportunities and trades based on their reasoning. Perhaps you think others are completely wrong, but if collective actions by all traders push prices against your position, then you are wrong, and others are right, and you are the one losing money.
The market is never wrong; the market is always right. Therefore, as an individual trader interacting with the market—first seeking opportunities, then trading, and your actions causing market fluctuations—in the current environment you face, you are always wrong, and the environment is always right. As a trader, you must determine what is more important—being right or making money—sometimes you cannot have both.
19. Several psychological factors can accurately assess potential market direction. One such factor is abandoning the idea that every trade can fulfill your dreams. This fantasy hinders you from objectively viewing market fluctuations. Otherwise, if you always filter market information to support your beliefs, you will eventually go bankrupt and not have to consider whether you should be objective.
20. "What is a reasonable amount to earn, and what is a reasonable amount to lose?" The answers to such questions vary based on your money values, needs, importance to money, risk perception, and sense of security. Because there are other factors involved, you may feel that earning a certain amount is enough today, but tomorrow you may think it is not enough—there are no definite answers, and they change with the changing environment. The factors mentioned above have nothing to do with market conditions, so if you bring personal issues into trading, you will not objectively observe the market. This is why successful traders decisively say, "Only trade with money you can afford to lose," meaning you should only trade with spare money, which is money not significant to your living. If you trade with spare money, the question "earn more, or less" will not affect your perception of market fluctuations.
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