Why do some people achieve consistent success as financial traders while others fail? Do the successful few have special insider knowledge? Better trading strategies? Astounding good luck? In Trading in the Zone, Mark Douglas says one factor distinguishes successful traders: a winning mindset.
Drawing on over two decades of experience as a trading consultant, Douglas explains that when trading, we often mistakenly embody a fear-based mindset and avoid risk, which prevents us from being objective. Therefore, no matter how much time we spend studying the market or tweaking our strategies, we fail to establish a pattern of winning.
To achieve consistent trading success, Douglas says, we need to train ourselves to think differently, and he shows us how. In this guide, we’ll cover three main topics that you must understand to achieve success:
Throughout the guide, we’ll examine research in psychology, biology, and finance that explores the concepts Douglas presents. We’ll also share practical steps to reduce interference from negative thoughts so you can start accumulating wins (and profits).
The financial market gives us ample opportunity to generate money. Yet, as Douglas explains, most of us struggle to make the gains we want. The crux of the problem is that we don’t fully understand how the market operates. In this section, we’ll therefore first review the two main strategies traders use to analyze market fluctuations.
As Douglas says, these strategies are useful for predicting which trades are likely to be profitable, but if you rely on them without a solid understanding of probabilities, you may become disillusioned when your predictions don’t come through. If that happens, you’re vulnerable to a fear-based mindset that will sabotage your future success.
After reviewing the two main market analysis strategies, we’ll therefore examine probabilities—the key distinguishing feature of the financial market—so you’re prepared to move past fear, embrace a winning mindset, and use information from your analyses to maximum benefit.
As Douglas explains, discerning patterns in market activity can increase your chances of posting favorable trades. We’ll review the two main types of market analysis that traders commonly use to probe for patterns and discuss why Douglas believes they’re insufficient preparation for consistently successful trades.
First, fundamental analysis is a method of assessing the value of an investment using mathematical models. These models take into account multiple variables that could affect the relative balance of supply and demand for that particular investment. Variables include interest rates, competitors, weather patterns, employment rates, and financial statements of the company issuing the stock or bond. By analyzing this data, Douglas says, you may be able to make a plausible forecast of what the price should be at some point in the future. If data suggests a price will rise, you could be wise to invest. But, if data indicates a price will fall, you should likely avoid investing.
According to Douglas, a drawback of this type of analysis is that it doesn’t take into account the potential for other traders to affect prices in an unpredictable way. Traders often make decisions based on emotion, not logic, and this irrational trading activity can dramatically influence prices. For example, traders may panic and sell off stocks in a company based on unfounded rumors that the company’s highly successful CEO is going to resign, thereby causing the price of that company’s stocks to plummet. Thus, fundamental analysis can generate clear and compelling price predictions based on supply and demand factors, but those predictions may nonetheless be grossly inaccurate due to non-rational activity by individual traders.
Pros and Cons of Fundamental Analysis
Although Douglas mentions the inability of fundamental analysis to account for traders’ nonrational behavior, he doesn’t elaborate on the many other shortcomings—or, the many advantages—of this method. Here are some pros and cons based on experts’ insights:
Pros:
Useful for long-term investors—Fundamental analysis looks at earnings, profit margins, and economic performance measures over a period of months or years. If you hold onto your stocks for long time frames, you can use this analysis strategy to identify—and then capitalize on—favorable patterns that play out over time.
Helpful during panic—When everyone is selling stocks during a panic, fundamentally strong stocks recover quickly whenever the market bounces back. Using fundamental analysis will help you find these hardier stocks.
Reveals the financial performance and prospects in a whole industry—You can see the market share of one company in relation to competitors and can identify up-and-coming innovators.
Cons:
Irrelevant for short-term trades—Some economic indicators used in this type of analysis are only released every few days, and company financials are only released quarterly. This is too infrequent to be useful for day traders who must respond to changes minute by minute.
Time-consuming and tedious—It takes considerable time and effort to conduct a thorough fundamental analysis.
Cannot account for random events—In A Random Walk Down Wall Street, economist Burton Malkiel notes that random events in the external social and political environment can radically influence prices, including a new legal regime, an environmental emergency, or the development of groundbreaking technology.
Cannot account for bad actors—Malkiel also points out that firms can fudge the financial reports used in this type of analysis. Furthermore, analysts can produce biased reports that make the stock seem better than it is, possibly due to conflicts of interest resulting from loyalty to their employers’ clients.
Given these varied pros and cons, it’s wise to avoid relying on fundamental analysis exclusively when making trading decisions, as Douglas says.
The second market analysis that’s commonly used is technical analysis. Douglas explains that technical analysis looks at patterns in the price of an investment to predict how that investment’s price is likely to shift in the future. In contrast to fundamental analysis, technical analysis takes into account traders’ activity by attempting to uncover behavioral patterns. Patterns tend to emerge when a group of individuals interacts over time, and these patterns reliably repeat over and over. This allows you to predict the direction prices are likely to move in over set time frames.
As Douglas says, technical analysis is now the favored approach among traders. Whereas fundamental analysis predicts what the market will do based solely on what mathematical models say is logical, technical analysis makes predictions based on how current market activity relates to what’s happened in the past. Therefore, technical analysis is more likely to accommodate nonrational activity that can radically influence prices because it factors in past nonrational events.
Despite the superiority of technical analysis, most traders struggle to translate insights from their analyses into steady profits. Why? Douglas says 95% of trading errors have nothing to do with knowledge. Instead, these errors stem from our fears about losing money, being wrong, or taking profits lower than we could’ve gotten if we’d held onto an investment longer. Therefore, even the most sophisticated technical analysis won’t turn an unsuccessful, frustrated trader into a consistent, confident winner.
(Shortform note: It’s difficult to find data that validates Douglas’s claim that 95% of trading errors stem from traders’ fears. Even the best traders sometimes post losing trades, but it’s impossible to say whether their errors stem from fear or bad information. Whereas Douglas says the way to increase wins is by mitigating the influence of traders’ emotions, others seek to improve knowledge through new technologies such as artificial intelligence (AI) and big data. Both AI and big data can be used to combine and test insights from fundamental and technical analysis as well as information on market sentiment, thereby giving traders an advantage.)
Pros and Cons of Technical Analysis
As we've noted, Douglas presents technical analysis as a better option for traders because it looks at trends over time. However, this assessment is arguably based on a shallow evaluation of the method: In reality, technical analysis has many pros and cons that may influence whether it's suitable for individual traders. Here’s what financial experts say about additional benefits and drawbacks of this approach:
Pros:
Can be used for many time frames—Chart patterns happen often, so you can analyze data in time frames ranging from hours to a century.
Some tasks can be automated—Once you learn how to perform a technical analysis, you can automate some of the process to save time. You can use this saved time to analyze and trade in a wider variety of stocks. Indeed, many elements of technical analysis are applicable to multiple markets.
Cons:
Involves a degree of subjectivism—Indicators often contradict each other and you might be emotionally swayed to favor one interpretation of the data over another. For example, if you’ve achieved sizable profits off a particular stock in the past, you may hopefully predict rising prices even though the data suggests otherwise.
Doesn’t take into account a company’s industry or external events—Technical analysis doesn’t automatically consider political changes, business announcements, or quarterly earnings reports, which can cause significant price movements.
As these insights reveal, your interpretations, choices, and emotions can influence your technical analyses. Thus, to maximize your return on investments, you should likely heed Douglas’s advice to address the emotional, subjective aspect of trading. We’ll discuss his strategies for doing so later in the guide.
According to Douglas, most of us don’t use information from our market analyses in a sensible way. Why? Because we don’t understand probabilities. Douglas maintains that a knowledge of probabilities is essential to overcome the mental barriers that prevent us from achieving consistent trading success. In this section, we’ll discuss the nuances of probabilities that affect trading by focusing on three main issues: the shallowness of similarities between market trends, why we struggle to understand probabilities, and how we can use probabilities to our advantage.
(Shortform note: Although Douglas asserts that you need to understand probabilities to achieve consistent success, others note that understanding doesn’t necessarily facilitate winning: There’s a difference between knowing and doing. For example, most people know what it takes to improve their level of fitness: eat healthily and exercise. Yet, few people follow through with a consistent fitness regimen. Similarly, you might thoroughly understand probabilities and still make trading decisions that contradict how probabilities work.)
Market activity is based on probabilities, which means that every outcome is unique and random, totally disconnected from every other outcome. As we’ve already mentioned, patterns do emerge; however, you can’t rely on those patterns to predict outcomes with 100% certainty. As Douglas says, this year’s market activity might appear identical to previous years’ activity, but the similarity doesn’t run any deeper than that.
In reality, says Douglas, this year’s activity stands on its own, distinct from everything prior. Why? Because the combination of traders who generated previous patterns are not the same combination of traders who will generate the next pattern. You’d also have no way to account for a multitude of other variables, including the number of traders planning to enter the market, whether those new entrants will buy or sell, how many shares they’ll want to buy or sell, and whether the traders who are currently involved are planning to exit. Therefore, Douglas asserts, it’s impossible to account for every possible variable.
(Shortform note: Douglas focuses on the potential for individual traders to alter a pattern. However, this isn’t necessarily the full picture—other forces can drastically alter price patterns. For example, an act of terrorism can radically affect stock prices. After the 9/11 terrorist attack in New York, prices plunged more than 11% then rebounded quickly within a month. Other influential forces include inflation, a rise in energy costs, a change in economic policy, and company mergers.)
Although we can never know for sure what’s going to happen next, Douglas says, we often delude ourselves into thinking we can manipulate odds that are out of our control. Imagine this scenario: The price of one stock shows a consistent pattern of rising sharply mid-year after a short springtime slump. You observe this pattern and buy shares of that stock in late spring, anticipating big profits later in the year. But this year, the stock price actually continues to drop throughout the remainder of the year, contrary to your expectations.
When you incur losses like this, Douglas says, you might set out to acquire more and better information, thinking this will put you in a better position to profit in future trades. Or, in an alternative scenario where the stock price does rise as expected and you reap huge rewards, you might become overconfident and reckless in future trades, thinking you’re on a “winning streak.” Both of these tendencies reveal a misunderstanding of how probabilities work. Market activity is random—it’s not subject to manipulation, and it doesn’t play favorites.
The Illusion of Control Influences Traders
Although Douglas doesn’t provide any data on how trading outcomes influence traders’ future behavior—and whether and how traders attempt to increase their odds of winning—statistics provide strong support for his claims. For example, research shows that investors are more likely to repurchase a stock that they previously sold for a profit than one previously sold for a loss. This could indicate an overconfidence in this investment choice due to its prior success and a lack of recognition of the true randomness of trading.
Studies also show that traders who rely heavily on analytical data place a lot of trust in their market knowledge and their skill in implementing that knowledge. In one study, 74% of analysts said they believed in their superior investing abilities, 26% said their abilities were average, and no one said they were below average. This faith in data and the belief that more knowledge leads to more wins can create the illusion of control over market outcomes. As a result, many traders underestimate risks and overestimate their ability to generate wins, leading to poor decisions (just as Douglas says).
There’s a reason we have a hard time grasping probabilities. As Douglas explains, our brains aren’t wired to think in terms of probabilities and random outcomes. Rather, we’re programmed to base our decisions on what we’ve experienced in the past, specifically driving us to seek pleasure and avoid pain. For example, if you burn your hand by touching a hot stove, you (hopefully) avoid repeating that same behavior in the future.
But that pain-avoidance/pleasure-seeking programming doesn’t serve your interests when it comes to trading. According to Douglas, more knowledge won’t improve your chances of avoiding the pain of losing, and one wildly profitable trade today doesn’t guarantee you’ll experience the pleasure of winning tomorrow. Remember, probabilities dictate that market outcomes are random, which means they are utterly immune from your efforts and desires to avoid painful losses and experience pleasurable wins.
Losing Money Is Painful—Literally
Although Douglas doesn’t provide any evidence to support his claims about the brain’s programming, research backs up his assertion that our brains are hardwired to seek pleasure and avoid pain. This inclination is part of our evolutionary design and is what drove our ancestors to find food, shelter, and mating opportunities—and steer clear of dangerous creatures and situations.
Additional research reveals that losing money activates an area of the brain involved in responding to fear and pain and changes the brain’s wiring to be acutely sensitive to signals linked with monetary loss. In other words, our brains register losing money as painful and use information about the circumstances surrounding the loss to predict when we have a chance of losing money in the future. Thus, we are programmed to recognize signs of imminent loss and take action to avoid pain associated with that loss. As Douglas says, this tendency is counterproductive when it comes to trading given the random nature of market activity.
Douglas asserts that being a consistently successful trader is simply a matter of conducting a sufficient volume of trades, as your odds of winning improve over a large number of trades (assuming you have a sound strategy). Here’s how this works: Each trade has an edge, which is simply a sign that a price is more likely to move in one direction. Through your market analysis, you can identify a favorable edge, an approach that you think will bring you success and profits. There’s never a guarantee that this edge will turn out to be profitable—as we’ve seen, the randomness of the market means that things can go wrong.
However, if you’ve indeed picked a favorable edge based on market patterns, you can guarantee that you’ll see success consistently over a large period of time. You might not win every time due to the unpredictability of the market, but you'll win a lot of the time if you stick with it for long enough (and if you have, in fact, picked a profitable edge).
According to Douglas, this is similar to casino operations: even if the house occasionally loses, they know that over time, they'll eventually win consistently enough to make a profit. This confidence isn’t based on hope, luck, or pure staying power. Rather, casinos impose rules on gamblers that give casinos a roughly 4.5% edge over players. Knowing this, casinos don’t panic each time an individual gambler wins big; they simply keep welcoming players to the games, knowing that the more games people play, the higher the casinos’ profits will be in the end.
Is Investing the Same as Gambling?
Douglas uses the example of casinos to illustrate the effect of probabilities (and how profitable patterns play out over time), but he doesn’t comment on the vastly different levels of risk involved in gambling versus trading. It’s important for you to understand this variance in risk so you can appreciate (and capitalize on) the way investing pays off in the long term while gambling does not. Financial experts highlight the following points of similarity and difference:
Similarities:
Investing and gambling both involve risking money with the hope of future profit.
A key principle in both activities is to minimize risk while maximizing reward.
Both investors and gamblers must choose how much money they want to put “in play.”
Differences:
Gamblers have fewer ways to mitigate losses than investors do. For example, investors can spread their capital across different types of assets to help minimize losses. In pure gambling, there are no loss mitigation strategies.
Investors have more sources of relevant information than gamblers do. While investors conduct market analyses, casino gamblers playing cards are limited to studying the mannerisms and betting patterns of their opponents.
Gambling is a short-lived, time-bound event, meaning gamblers either win or lose once play is over. Investing can last several years, and investors can profit over the long-term as long as they hold onto their investments.
Over time, the odds will be in your favor as an investor and not in your favor as a gambler.
That last difference is arguably the most important. To clarify, each time you play at a casino, there’s a statistical probability against you winning: The more you play, the more money you are likely to lose. In contrast—and as we’ve already mentioned—when you invest, your odds of winning increase over a large number of trades. As Douglas states, this is how you can take advantage of probabilities to win consistently on the market—as long as your edge is real and you adopt a long-term mindset.
Now that you know why a clear understanding of probabilities—and a steady, long-term approach—is essential to achieve consistent profits and operate from a winning mindset, we need to examine your willingness to embrace risk. According to Douglas, you must embrace risk to ward off irrational fears that corrode your winning mindset and your potential to profit.
In this section, we’ll first examine what embracing risk means, according to Douglas. Then, we’ll look at the factors that cause us to avoid risk and develop an unhealthy relationship with the market: misguided goals and irrational fears. Once you’re clear about the obstacles to relinquishing fear and embracing risk, you’ll be ready to learn and implement the steps Douglas lays out for becoming a consistent trading winner—and putting fear and doubt in your past, which we’ll address in the final section.
According to Douglas, embracing risk means accepting the possible outcomes of your trades without fear or regret—even negative outcomes. Remember: 95% of trading errors stem from our fears about losing money, being wrong, or selling investments prematurely and therefore missing out on maximum profits. So, to achieve consistent success, you need to be mostly free of fear and related emotions like anger, bitterness, and frustration.
(Shortform note: Although Douglas says we should seek to eliminate fear to trade successfully, others say fear of failure may be helpful in achieving success as a trader. Ray Dalio, founder of Bridgewater & Associates (the world’s largest hedge fund), says he always works out the worst-case scenario in any trade so he can take all appropriate steps to minimize potential loss.)
Douglas acknowledges that getting rid of fear can be challenging. After all, the stakes in trading are often very high. Being wrong about a trade and losing money can cause emotional pain and financial ruin. But, Douglas asserts, we need to recognize that our fears are irrational and stem largely from misguided goals that cause us to see the market as a threat. These misguided goals include fulfilling an addiction to intermittent variable rewards, impressing people in our social network, being a savior for our family, and getting a blissful high from winning.
According to Douglas, if we’re motivated by these goals—even just a little—we’ll interpret any market information that indicates we’re wrong as painful. Why? Because by tying our happiness, fulfillment, status, and identity to positive market outcomes, we experience any indication that our goals won’t be fulfilled as a personal threat.
(Shortform note: Is Douglas right that most traders have misguided goals that lead them to see the market as threatening? It’s impossible to know the private goals of all traders. However, research shows that many traders claim to have healthier and more productive goals for investing—everything from compiling savings for retirement, to ensuring the financial security of younger generations, to making donations to charities. Others invest to support businesses they align with ethically. For example, some investors only support businesses with robust environmental initiatives.)
When we perceive the market as a threat, we’re driven by fear to do everything we can to prevent pain (by avoiding risk and losses). We’ll—consciously or unconsciously—second guess our analyses, miss prime buying moments, hesitate to take profits when we should, hold onto losing stocks way too long, and distort or ignore information that goes against our predictions. Meanwhile, Douglas explains, opportunities to cut our losses or make money pass us by. Thus, efforts to avoid risk and pain virtually guarantee failure. Although we might achieve an occasional win, we won’t be consistent winners.
Two Cognitive Biases That Hamper Critical Thinking
Are trading errors due exclusively to risk-avoidance behaviors stemming from fear, as Douglas claims? Perhaps not—investment experts point to other potential sources of trading missteps, including two common cognitive biases.
Availability bias occurs when we draw conclusions based on the information that’s most readily available to us—but it’s often inaccurate. For example, if we see a series of news reports trumpeting Company A’s release of a new product, we might feel compelled to buy Company A’s stocks under the assumption that prices will climb. Our positive interpretation will persist even if we learn that deeper market analyses reveal declining stock values.
Another bias that causes us to make errors is loss aversion, which is the tendency to view loss as more significant than an equivalent gain. Because we hate loss so much, we actively avoid experiencing it. Therefore, we cling to losing trades and refuse to cut our losses, wishfully thinking the trade will inevitably come back in our favor. This ultimately results in even more significant losses that we could have avoided had we admitted defeat sooner.
As these examples suggest, it’s important to examine the motives behind your trading decisions, as Douglas recommends, so you can achieve consistent success.
Now that you know the obstacles to eliminating fear, embracing risk, and adopting a winning mindset, it’s time to examine how you can overcome those obstacles to become a consistent winner. Douglas says you need three critical ingredients: a clear goal focused exclusively on winning consistently, a system of rules and boundaries for making trades, and disciplined follow-through. Let’s explore each ingredient in detail.
First, Douglas says you need to decide with absolute certainty that what you desire more than anything else when you trade is to win consistently. You have to desire consistency to such an extent that you abandon all other motivations for trading. Once you commit to this singular goal, you’ll willingly accept any outcome the market delivers without emotional distress or fear. Then, you’ll approach market activity not as a way to avoid pain or prove something but as a means to gain an edge and profit.
Douglas says overcoming fear may be faster and easier for some people. Why? People who’ve experienced childhood traumas may have more persistent fear. Also, people may have beliefs that conflict with accumulating wealth, such as the belief that having more money than others is selfish. Nevertheless, Douglas seems to say that everyone—through focused effort—can shift from negative, disempowering beliefs to optimistic, empowering beliefs that form the foundation of a winning mindset.
Conflicting Views on How to Overcome Fear
Can anyone eradicate fear independently through focused effort (and consequently approach trading with a healthy mindset), as Douglas seems to suggest? While some say it’s possible to conquer fear gradually over time, it can be hard to face (and overcome) deeply rooted fears on your own. Therefore, it’s often beneficial to seek professional help.
Mental health experts attest that persistent fear generally requires dedicated time, energy, and often professional support to overcome. Psychologists use numerous therapeutic approaches to address people’s fears. For example, cognitive behavioral therapy involves helping patients gradually overcome fears by identifying and changing negative thought patterns over time. The more entrenched the fear, the longer it can take to resolve.
Further, Douglas says, your ultimate goal as a trader should be to achieve consistent success as an automatic, free-flowing expression of who you are. Then, you can experience trading as easy, effortless, fun, and rewarding.
Douglas explains that you can’t force consistency or achieve it through effort. The very act of trying indicates that you’re resisting or struggling against something, or that you’re emotionally attached to getting something from the market. That inclination, though natural, is self-defeating. It ensures that you’ll continue to make fear-based errors.
(Shortform note: While Douglas says effort hinders consistency, many people offer actionable tips for improving trading consistency, implying that you can improve your consistency through effort. For example, trading experts suggest safeguarding your consistency by working to downplay your “herd instinct,” the impulse to follow the crowd and make trading decisions based on what others are doing. The urge to follow the crowd may seem safe, but this reactionary approach can lead to errant and unprofitable trading decisions, thereby sabotaging consistency. Instead, always make sure you base your trading decisions on a coherent strategy, not popular sentiment.)
However, when you’re simply open to whatever the market offers, you can spontaneously enter the “zone.” Douglas describes the zone as a state of mind in which you feel no fear and act intuitively without hesitating. When you’re in this state, your actions always generate a favorable result—without strain or conscious effort. Although Douglas says you can’t intentionally generate a zone mindset, you can set up the conditions for it to spontaneously emerge.
Trading in the zone, Douglas says, is similar to the experience many athletes describe when they spontaneously enter an inherently creative state while performing. While in that state, they perform with astounding proficiency—with an ease and effortlessness that seems almost impossible. They aren’t “trying,” weighing the consequences of their actions, or feeling any fear about messing up. Rather, they’re performing intuitively and seizing opportunities that present themselves moment by moment.
Can We Enter the “Zone” at Will?
Although Douglas says you can’t deliberately trigger a zone mindset, sports psychologists say that with systematic training using sports psychology techniques, anyone (not just athletes) can enter the zone almost at will. Here are some techniques you can use:
Create the right conditions. Psychologists agree with Douglas that creating the right mental conditions is critical to reaching a zone mindset. To create these conditions, make sure your skill and confidence levels match the challenge level of the task. Research shows that there’s an optimal level of anxiety at which we perform best, so a task must feel doable at the upper reaches of our ability to find a perfect location between boredom and anxiety.
“Park” your errors. When you make a mistake, symbolically “transfer” that mistake from yourself to an object: wipe away the error onto your shirt, scribble it out on your notepad, or shake it out through your limbs. This physical act can help you release anger and frustration and regain concentration.
Use self-hypnosis. Focus on the regularity of your breathing, repeat a mantra such as “relax,” or listen to music. The music can be upbeat and rhythmic, or more sedative, depending on what works better for you. Self-hypnosis helps limit conscious mental activities and tame anxiety.
There are thus many factors you can control to enter the zone with more ease and frequency. However, it’s difficult—if not impossible—to eliminate distracting thoughts and emotions indefinitely. Therefore, you likely won’t be able to stay in the “trading zone” that Douglas describes indefinitely, but you can at least train yourself to reach that state more consistently.
Second, Douglas says you need an organized, systematic set of rules for identifying opportunities to buy or sell. You can purchase a system from an expert, or you can define your rules through fundamental and/or technical analysis. Douglas doesn’t make specific recommendations about a system to use, but he says whichever system you choose must have two specifications:
By creating a precise system, Douglas explains, you’ll eliminate any need to make subjective decisions. You’ll also ensure that no extraneous variables interfere in your analysis.
Two Good Strategies for Beginning Traders
Nearly all financial experts agree with Douglas that systematic trading is crucial for long-term success. Sticking to a trading strategy with exact variables and time frames allows you to remain focused and consistent amid a huge influx of news and economic data. While Douglas doesn’t promote or describe the details of any particular trading system or strategy, other investment experts outline the pros and cons of various strategies that can help you decide which approach to use. Let’s look at two strategies suitable for novice traders that you can customize with precise variables.
First, end-of-day trading involves trading near the close of markets when it’s clear that prices are going to “settle.” To execute this strategy, you compare current prices to the previous day’s price movements, then speculate how prices will move. This approach requires less time commitment than other trading strategies because you only need to study charts at opening and closing times. However, one drawback is that trades left open for multiple days are more vulnerable to shifts that happen overnight.
Second, position trading involves holding investments for a long period of time, usually months or years. You’d ignore minor price fluctuations, aiming to profit from long-term trends. This approach frees you from having to check price shifts on a daily basis and reduces the potential for mistakes common in more active trading strategies, such as when traders react prematurely to minor price movements. Having said that, you may incur significant losses as a position trader if you ignore minor fluctuations that become full trend reversals.
Whichever trading strategy you choose, Douglas accurately points out that adhering to a strategy will help reduce errors that stem from impulsive, subjective decisions.
Lastly, Douglas says you need to exercise self-discipline to firmly integrate the beliefs and behaviors that support your goal. You must simultaneously do two things: redirect negative thoughts and emotions, and execute the system you’ve established.
The first part of exercising self-discipline involves closely monitoring your thoughts and emotions. Douglas claims the process of becoming a consistently successful trader is psychological, so you must stay alert to any thought that causes you to doubt your system, yourself, or the market. As we’ve discussed, any time fear surfaces, you become vulnerable to making errors. Therefore, if you detect any fear or negative thoughts, gently redirect your thoughts to the core beliefs that all successful traders internalize, which we’ve already covered:
According to Douglas, by routinely redirecting negative thoughts, you can create the mental conditions that allow you to enter the zone. Then, you’ll see market activity as just neutral information, telling you what the odds are for success or failure. In other words, you’ll view the market from a truly objective perspective, seeing it not as a threat but as a source of unlimited opportunities to win and profit. As a result, Douglas says, you won’t be inclined to distort or deny information based on what you’re afraid will happen. Instead, you’ll act without hesitation even in the face of constant uncertainty—with the appropriate amount of restraint.
Research on How to Control Negative Thoughts
Douglas suggests you can—and should—willfully redirect negative thoughts, but research suggests this might not be so easy. Psychologists agree with Douglas that persistent negativity can be harmful and can prevent you from entering the zone and viewing events objectively. However, they say that glossing over these negative thoughts and feelings with positive thinking is only a temporary fix. Positive affirmations operate at the surface level of conscious thinking, leaving negative thoughts rooted at the subconscious level undisturbed. This means that ultimately, you’d still risk falling short of the calm, objective, restrained mindset that Douglas recommends.
If positive affirmations aren’t enough to tackle your negative mindset, here are some steps you can take to empower yourself to think more positively and achieve the mindset Douglas says is essential to be a winning trader:
Have designated “negative thought time.” Commit 10 minutes every day to stewing on negative thoughts. When you know you’ve got time set aside to review lingering fears and concerns, you’re less likely to let them dominate the rest of your day.
Write down your negative thoughts. Writing helps purge negative thoughts so you have more mental space to move forward and think positively.
Consider what you’d say to your best friend. If your friend were experiencing the same negative thoughts and feelings, what would you say to them? This technique can help you see things more objectively.
Ask yourself some questions. Research shows that asking ourselves questions rather than issuing commands is a more effective way to create change because it triggers the problem-solving areas of the brain. For instance, ask yourself, “What’s a different way to think about this?”
The second part of exercising self-discipline involves perfectly implementing the system you’ve established, resisting any temptation to make adjustments. According to Douglas, by staying disciplined in your thoughts and actions, you’ll accumulate positive experiences that align with your objectives and the beliefs you want, thereby reducing interference from fear, doubt, and negative interpretations of your experiences. Then, you’ll see the market objectively, perceive opportunities clearly, and achieve consistent success. All internal resistance will be gone.
(Shortform note: Can positive experiences offset negative experiences, as Douglas says? Researchers say yes: Studies show that it takes three positive experiences to offset one negative experience. Why do we need more positive experiences to outweigh the effect of a single negative experience? Our brains have a built-in negativity bias that causes us to perceive or overinflate negativity, even when a situation is positive or neutral, and dwell on negative events more than positive ones.)
Thus, if you incur a trading loss, Douglas says your best course of action is to continue trading according to the rules you’ve established in your system (assuming your system is sound). As market activity unfolds, you’re sure to win over the long term due to the probabilistic nature of the market.
Given the dynamic nature of the market, Douglas notes, you’ll likely need to adjust your trading variables and rules at some point. Any edge you define is based only on a single moment in time. As market activity unfolds—and traders come and go—the effectiveness of your system may decline. However, you need to give your current system a chance to work. Remember: You need a large enough sample size for probabilities to play out in your favor.
How many trades are enough to test your variables? Douglas recommends a sample size of at least 20 trades. Then, if needed, you should make adjustments and complete your next 20 trades using the new set of variables. By trading in sample sizes, you’ll be able to accommodate changes while maintaining a steady approach.
Some Investment Experts Dispute Douglas’s Advice
Many investment experts dispute Douglas’s assertion that a sample size of 20 trades—or even 100 trades—is sufficient to judge whether or not a trading strategy works. Instead, they recommend automated trading, which allows you to execute and assess the profitability of 1000 trades or more in a short time frame. A high trading volume and short turnaround time allow you to quickly determine if you have an edge and make adjustments as needed.
Other experts advise against making individual investments on your own altogether. Given the random, unpredictable nature of the market, they say it’s unlikely you have an edge—no matter which analysis strategy you use. Instead, they recommend that you put your money in a passively managed index fund, which doesn’t require you to actively manage your investments. Investments are chosen automatically to match an index with the intention to keep pace with market returns by mirroring certain market segments.
Ultimately, though, there’s no consensus among financial experts about which investment strategy is best, so be sure to choose carefully when you’re deciding how to invest your money.
Mitigating the influence of negative thoughts and emotions is key to becoming a consistently successful trader. Explore your fears and take away their power.
Describe your goal(s) for trading. Go beyond “making money” to see if there are other motivations lurking in the background (for example: proving something, being right, getting an emotional high, or impressing your colleagues).
What fears stem from those goals (for example: being wrong, looking bad, or missing out)?
When do those fears surface? See if you can identify any patterns in the circumstances that trigger your fears. (For example, you might uncover that you’re more fearful of posting a trade after you experience two or more consecutive losses.)
What techniques can you use to manage your fears going forward? (For example, you might focus on wins you’ve had in the past, get input from a friend, write down your negative thoughts, or recite a mantra like “Every loss brings me closer to a win.”)