(Trading Psychology Analysis) - Mark Douglas
The first edition of this book was published in 2011, with content that gradually deepens, mainly focusing on trading psychology analysis. The first eight chapters are relatively introductory, predominantly instilling abstract and subjective psychological concepts. The last three chapters refine the previous content into concrete practical suggestions, which is a complex combination that requires prolonged experience to absorb and digest. I spent three days on the first eight chapters, dedicating two hours a day to reading and taking notes, and four days on the last three chapters. The entire sharing process took 18 days.
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1. The essence of trading is 'contradiction'
2. All trades have risks, and the outcomes are only possibilities, with no guarantees.
3. You need to learn how to adjust your trading attitude and beliefs in a way that is fearless during trading.
4. Trading activities provide individuals with unlimited freedom to express creativity, as well as the freedom of expression that most people cannot achieve for most of their lives.
5. Our needs and desires originate in our minds and are then realized in the external environment. If the two environments resonate with each other, we feel satisfied or happy in a state of internal balance; if the two environments do not resonate, we experience dissatisfaction, anger, and frustration, or what is generally referred to as emotional pain.
6. A simple fact in trading is that we may cause significant harm to ourselves. This harm can be far beyond our imagination, disproportionately large.
7. The market flows like a river, continuously moving. There is no beginning or end, and it does not wait.
8. No matter how good a trade looks, long-term losers will almost do everything in their power to avoid accepting the reality of possible losses.
9. Trading does not have a formal end; the market will not force you to exit a trade unless you have the appropriate mindset structure and always end trades in ways that align with your best interests; otherwise, you may become a passive loser.
10. Trading has many contradictions; one contradiction is that it provides both benefits and drawbacks. The benefits are that we can finally control everything we do completely; the downside is that there are no external rules or boundaries to regulate or organize our behavior.
11. Most people have learned or developed several skills to make the external environment align with our mental environment. However, these skills are completely useless in the trading market; the market will not respond to control and manipulation (unless you are a market maker or a whale).
However, we can change to not control the environment, but to learn to control ourselves, so that our views on the situation align with the environment.
12. Eliminating fear is only half of the success formula; the other half is cultivating self-control. Exceptional traders understand that internal discipline or mental mechanisms are crucial to countering the adverse effects that can arise from euphoria or overconfidence following a series of profitable trades. If traders do not learn how to examine and control themselves, making profits can become extremely dangerous.
13. There is a strange anomaly in trading. If your trade starts to profit, you will automatically experience a carefree mindset. This mindset is a byproduct of the attitude of pursuing victory, but it is not an actively cultivated attitude.
14. Junior analysts have skills but lack the attitude to pursue victory; they operate based on fear. New traders can experience the feeling of pursuing victory because they are not afraid. However, this does not mean that the novice has the attitude of pursuing victory; it only indicates that they have not yet experienced the pain that makes them fearful from trading activities.
15. Responsibility means acknowledging and accepting deep within yourself that you are fully responsible for your trading success or failure, rather than the market being responsible. Refusing to take full responsibility can create two significant psychological barriers that hinder your pursuit of profit. First, you will develop an adversarial relationship with the market, distancing yourself from ongoing opportunities; secondly, you will mislead yourself into thinking that your trading problems and failures can be corrected through market analysis.
16. Your attitude or mindset is not created by the market; this notion is perhaps the hardest to accept. The market is merely a mirror reflecting back what is inside you.
17. You may also think that the way to solve your problems is to learn more about the market. Learning is always good, but if you do not take responsibility for your attitude and perspective, you are learning valuable things for the wrong reasons. The wrong reasons will drive you to use incorrect methods to utilize what you have learned.
18. To maintain long-term profitability, when you think about trading issues, you must learn to think independently of the intentional or unintentional influences of mental processes. To avoid basing your thoughts on things that make you happy, fulfill your expectations, or avoid pain, you must not conceal, obstruct, or selectively choose information.
The threat of pain generates fear, and 95% of the mistakes you might make stem from fear.
How can you think about trading issues without fear, thereby making yourself no longer influenced by mental processes, allowing you to stop blocking, concealing, and selectively choosing information?
The answer is to learn to accept risks.
19. Accepting risks means you accept the consequences of trading without feeling anxious or fearful emotionally. This indicates that when you think about trading and your relationship with the market, you must learn not to let the possibilities of making mistakes, losing money, missing opportunities, or not making money trigger your defensive mechanisms, guiding you away from the opportunity flow.
20. If you learn to create a mindset that is unaffected by the market, you will no longer struggle. Once the inner struggle disappears, everything becomes easy. At this point, you can fully utilize all of your analytical skills and other abilities to unleash your trading potential.
21. It takes courage, iron will, or self-discipline, indicating an inner conflict that must use one force to counter the influence of another force.
22. If you take risks like a winner, you will not feel threatened when observing any market behavior; if nothing threatens you, there is nothing to fear; if you are not afraid, you do not need courage; if you are not under pressure, why do you need iron will? If you have established an appropriate review mechanism and are not afraid of becoming reckless, then you do not need self-discipline.
23. The fundamental goal of traders is to recognize existing opportunities, not to see painful threats.
24. In a losing streak, you hold a negative mindset based on fear, thus paying more attention to the possibility of failure, leading to indecision. In a winning streak, you hardly consider the risks at all, even thinking the market will make your dreams come true, thus easily over-investing financially.
25. If traders are categorized based on their achievements, they can be divided into three main categories.
The smallest group among active traders accounts for no more than 10% and consists of long-term profitable winners. Their asset curves steadily rise, with only occasional small decreases. When assets decrease, it usually represents the normal losses that any trading method or system would incur. They not only learn how to make money but are also no longer influenced by the psychological forces that trigger cycles of rise and fall.
The second major category is long-term losers, who account for about 30% to 40% of active traders. Their asset curves reflect those of long-term winners, only in the opposite direction. They have many losing trades and only occasionally make a profit. Regardless of how much trading experience they have, there is still much they have not learned. They either misunderstand the nature of trading or are trapped in that illusion, making it almost impossible for them to become winners.
The largest group is the 'winners and losers' category, accounting for 40% to 50% of active traders. They have learned how to make money but do not know how to keep their profits. Therefore, their asset curves resemble a roller coaster, rising significantly and then plummeting sharply. This cycle repeats.
26. The reason we cannot create long-term achievements lies in our thinking patterns. To cultivate and maintain a mindset that can recognize market opportunity flows, without being influenced by pain or overconfidence, requires deliberate effort to control the associative process.
27. The secret of trading:
(1) Trade without fear and without excessive confidence.
(2) Interpret the information provided by the market from the market's perspective.
(3) Continuously focus wholeheartedly on the 'current opportunity flow'.
(4) Naturally enter 'flow' (now commonly referred to as 'being in the zone'), which is a firm belief in oneself under uncertain outcomes.
28. You know that your strengths increase your probability of success, but at the same time, you must fully accept that you do not know what the outcome of any trade will be.
29. Extreme divergent beliefs can emerge at any moment and in any market, causing anything to happen.
Failing to predefine risks, not stopping losses, and lacking a systematic way to take profits are the three most common and often the most costly trading mistakes you might make.
30. The way the market appears on the chart at any moment may look exactly the same as at a previous moment. The geometric measurements and mathematical calculations used to determine each advantage may be exactly the same as those used to calculate the next advantage, but the actual consistency of the market itself at different moments will absolutely not be the same.
The current behavioral pattern must be exactly the same as at a previous moment; therefore, every trader who participated in the market previously must now be present; additionally, during the same time period, every trader must interact with other traders in exactly the same way as previously, to produce identical results, making the probability of this situation almost zero.
31. The condition of the market 'now', the behavior of the market 'now', and the advantages of the market 'now', are always unique situations with completely independent outcomes from each other.
However, understanding the nature of uncertainty and probability does not equate to being able to operate effectively from a probabilistic perspective.
32. Mechanisms for avoiding pain merely protect us from information that reveals the conflict between our expectations and what the environment offers.
33. We must adhere to the rules while being flexible in expectations. However, what general traders often do is the exact opposite: they are flexible with the rules but rigid with their expectations. In practice, the more one insists on expectations, the more likely they are to distort, violate, or break their own rules.
34. The mindset related to trading and based on probability consists of the following basic facts:
(1) Anything can happen.
(2) You do not need to know what the next change will be to make money.
(3) The profits and losses generated by any defined set of variables indicating advantages are randomly distributed.
(4) Advantage merely indicates that the probability of one event occurring is higher than another.
(5) Every moment in the market has a unique nature.
35. The unknown means: 'Before tossing a coin, rational thought cannot be considered; it can only be fully accepted.'
36. Traders cannot allow themselves to indulge in the thought of 'I know what changes the market will make.'
37. Definitions of trading psychology terms
Goal: Make money.
Skill: Consistency.
Open mindset: Openness means confidence, but not euphoric excitement.
Objectivity: It is a mindset where mechanisms to avoid pain do not stop or change anything.
Always be prepared: This means trading from a perspective where you do not need to prove anything. You will not strive to profit or avoid losses, will not withdraw funds, nor seek revenge on the market. In other words, you enter the market with no preconceived notions, allowing the market to develop freely; while maintaining the best mindset to identify and leverage the opportunities provided by the market.
Now: Trading based on the current situation means that you will not associate entry, exit, scaling in, or scaling out opportunities with your existing experiences.
38. Anything can happen, and a trader anywhere in the world can offset the favorable outcomes created by your advantages; it only takes one trader.
39. Any exceptions existing in your mind will become sources of conflict, possibly prompting you to view market information as threatening.
40. You do not need to know what the next change will be to make money because the distribution of profits and losses in any set of variables determining advantages is random.
41. In terms of a defined set of variables indicating advantages, profits and losses are presented in a state of random distribution.
42. Advantage merely indicates that one event has a higher probability of occurring than another.
43. Every moment in the market has a unique nature.
44. When you truly acknowledge that you do not know what the next change will be, you can prepare yourself for the market to tell you what the next change will be based on its own perspective, thus interacting with the market.
45. Many people mistakenly think that once they understand something, the subsequent insights will automatically become a practical part of their identity. In most cases, understanding a concept is just the first step in integrating that concept into practical use, especially when thinking probabilistically about related concepts.
46. Ignoring beliefs is a common phenomenon, and the most apparent characteristic of beliefs seems to be that what we experience becomes self-evident and unquestionable.
47. Useful things are facts. We can measure the relative correctness of beliefs by the usefulness of those beliefs.
48. The three stages of trader development
The first stage is the mechanical stage, where in this stage you must:
(1) Establish the self-confidence needed for trading in any environment.
(2) Learn how to perfectly execute a trading system.
(3) Train your mind to think probabilistically (5 basic facts).
(4) Create strong and unwavering beliefs that you can become a long-term successful trader.
The second stage is the subjective stage of trading. Once you complete the first stage, you enter the subjective stage of trading. In this stage, you will utilize everything you have learned about the nature of market fluctuations to do what you want.
The third stage is the intuitive stage, where trading based on intuition is the most advanced development stage. The difference is that you cannot figure out how to become intuitive. The only way to become intuitive is to cultivate a mindset that is most amenable to accepting intuitive impulses and acting on them.
49. At some point, if you wish to change, you must embark on the journey to become a long-term winner. When it comes to personal change, the most critical factors are your willingness to change, having clear goals, and possessing a strong desire.
50. The first step in creating long-term sustainable profits is to start paying attention to your thoughts, discussions, and actions. The process of becoming a long-term winner is essentially a psychological process, with the final goal being to learn to objectively examine your thoughts and actions to avoid trading mistakes. Your first line of defense is to catch yourself thinking about trading mistakes, and your last line of defense is to catch yourself engaging in erroneous behaviors.
51. The definition of self-discipline is the mental skill of redirecting attention to goals or desires when they conflict with other beliefs.
52. The sole purpose of mechanical trading is to change oneself, to transform into a trader capable of creating long-term achievements.
53. Beliefs of long-term winners:
(1) I objectively recognize my strengths.
(2) I define the risk of each trade in advance.
(3) I fully accept risks and am willing to forgo trading.
(4) I act based on my strengths, without reservation or hesitation.
(5) When the market makes me money, I reward myself.
(6) I continuously examine the possibility of making mistakes.
(7) I understand that these long-term success principles are absolutely necessary, so I have never violated them.
54. Review the five major facts of the trading market:
(1) Anything can happen.
(2) You do not need to know what the next change will be to make money.
(3) The profits and losses generated by any defined set of variables indicating advantages are randomly distributed.
(4) Advantage merely indicates that one event has a higher probability of occurring than another.
(5) Every moment in the market has a unique nature.
55. Norms of trading systems:
1). Trading entry points
2). Stop loss
3). Time framework
4). Take profit
5). Trade based on sample size
6). Testing
7). Accept risks