Book Summary: The Disciplined Trader by Mark Douglas


In this summary, you will learn

  • How and why Emotions and Beliefs affect your trading decisions; and

  • How to prevent emotions from causing you to lose money.

Take-Aways

  • Traders need to understand how their emotions affect their trading decisions.

  • Trading blunders, such as refusing to recognize losses, or failing to reverse positions when the market turns, are rooted in psychological and emotional blindness.

  • Your last trade is history – it has nothing to do with the future of the market.

  • Thinking of the market as being right or wrong is a mistake. The market is – that’s all.

  • Individuals’ beliefs help create the reality that they experience.

  • When people’s beliefs about reality differ from reality as it is, they should change their beliefs.

  • Memories are a form of energy and can move a person’s behavior.

  • Traders should liberate themselves from notions and beliefs that prevent them from considering all available information objectively and dispassionately.

  • Take direction from the market, not from your hopes, greed or fear.

  • Most traders do not see the market clearly.

A New Way of Thinking

“Losing all my possessions was a complete life-altering experience, an experience that taught me a lot about the nature of fear and the debilitating effects it has on a person’s ability to trade effectively.”

Most people who begin to trade do not know that habits and beliefs, which have served them well in the outside world, are likely to become stumbling blocks in the trading world. Trading requires much more self-discipline and self-control than many other activities.

The markets do not have the power to force you to act one way or another, any more than you have the power to force the markets to act in any particular way. As a trader, you are your own boss, completely free to make your own decisions. Moreover, you have an almost infinite opportunity to gain or to lose.

“Furthermore, I discovered that my mental framework was structured to avoid losses at all costs and in my desperate attempts to do so, I actually created them.”

The most important fact is that although you cannot control the market, you can control how you think about it. Self-control, emotional restraint and flexibility are not part of the market. They are part of you, but they are not innate; you have to learn them. You can learn by trial and error, but that can be a lengthy, expensive experience; few people are rich enough to stick with it.

Trading is, in fact, quite difficult, though it looks easy, and success is often fleeting, though it seems as close as the next trade. Most people live in structured, stable, relatively predictable environments. They lack the skills, beliefs and discipline to trade successfully.

“The few individuals who have achieved astronomical success in trading at some point learned to stop trying to conquer the markets, or make them conform to their expectations or mental limitations."

To prosper as a trader, you need to:

  • Learn to focus on your goals, not your fears.

  • Learn how to find out what you need to know.

  • Focus on improving your skills instead of on the money you have at stake.

  • Learn to tack with the market wind, flexibly adapting to new circumstances.

  • Determine how much risk you can comfortably bear, and how to bear more prudently.

  • Strike while the iron is hot, trading when opportunity presents itself.

  • Take direction from the market, instead of from your hopes, greed or fear.

  • Control your beliefs about the market.

  • Be objective. Think probabilistically.

  • Distinguish your true intuitions from false hunches.

What’s Right? The Market Is

“The market is never wrong in what it does; it just is.”

  • The market price is the consensus view of all traders. It doesn’t matter what traders actually believe, whether they are rational or crazy, whether their information is good or bad.

  • The market price is the right price – that is, it is the price at which the trade happens.

  • No trader’s personal opinion about the market can be more right than the market itself. Rarely do any traders have the financial clout to move the market and maintain the price at a level they consider “right.”

  • A careful observer can infer where the market is likely to go next. However, clinging to your inferences if the market moves in another direction is a mistake.

  • No matter what a trader thinks, believes, expects or knows – the market is always right.

Infinite Opportunity to Gain or Lose
  • A trade’s potential gains or losses are unlimited.

  • Gamblers can derive a pretty clear idea of their odds and what they can potentially win or drop with each bet, but traders know far less.

  • Prices can keep moving up or down, magnifying a gain or a loss indefinitely. The lack of limits can lead to dangerously wishful thinking.

  • Though any single trade carries the possibility of making a trader almost unimaginably rich, believing that will happen can lead a trader to disregard market evidence to the contrary.

  • Remain objective; see the market as it is, not as you hope it will be.

Prices Are Always Moving
  • Markets never stop moving, not even after they close.

  • Traders continue to think about trading after the close; winners, carried away by greed, and losers, hoping for a turnaround, continue to plan their strategies for the next open market.

  • To control your emotional turbulence, remember the old adage, “Only trade with money you can afford to lose.” When the money involved is relatively unimportant to you, you have a better chance of keeping your market perceptions clear and objective. Then you can take your profits or losses depending on what the market is doing, not on what you wish it would do.

  • Entering the market is easier than exiting it. Getting out of a trade means curbing greed, if the trade is winning, or recognizing losses, if the trade is going down.

  • Most traders do not see the market clearly. They are either so eager to win back what the market has taken, or to see a modest gain turn into an amazing win, that they see the market through a dark fog of their own making.

Unstructured Markets

“In an unstructured and unlimited environment, you [must] establish rules to guide your behavior. You will need to create definition and give yourself direction. Otherwise, you will feel overwhelmed with too many possibilities.”

  • The market is like a stream, but one that can reverse its flow. You may enter at any point and it can move in any direction.

  • Because the market does not provide structure or limits, you must provide your own. You write your own rules and you must take responsibility for your decisions – and their consequences.

  • Most traders do not want to take this responsibility. If they establish rules, then they have a standard to use to measure their performance. This means they have to face the fact that bad decisions are their own fault. They are unwilling to plan because plans also imply accountability. Yet they want to make money. They are impatient. So they follow the crowd, moving back and forth, implicitly turning responsibility for their decisions over to others.

  • When you develop self-control, self-discipline and accountability, and when you take responsibility for writing rules, making plans and holding yourself accountable, you separate yourself from the crowd. Then you can observe it from the outside. You can begin to understand and predict the crowd’s behavior precisely because you are not part of it.

“Once you know what traders believe about the future, it’s not that difficult to anticipate what they are likely to do next, under certain circumstances and conditions.”

Don’t Ask Why

  • Most traders don’t know why they take the steps they take.

  • Because the market consists of traders making individual decisions that they themselves do not clearly understand, no one really understands why the market does what it does.

  • Traders behave like a herd. They move together. Their movements cause prices to go up and down. But the herd is not homogenous. It contains small groups, sub-herds that tend to behave similarly.

  • Locals (who trade only for their own accounts) are the most short-term, impatient, impulsive, active traders. They tend to move together.

  • Retail and commercial traders have a different set of constraints, at variance from the locals and from each other.

  • Having insight into each group’s motives and behavior allows you to predict with reasonable accuracy what they’re likely to do in any given market situation.

“The more positive you feel about yourself, the more abundance...will naturally flow your way as a by-product of these positive feelings.”

Self-Value Leads to Monetary Value

“Much of what we experience of the outside environment is shaped from the inside.”

  • You are responsible for your perceptions of the market. You define it as an opportunity or a threat, depending on what you believe and understand. You assign the meaning to market moves. The market merely does what it does.

  • This means that you need to be able to distinguish one market situation from another accurately, which requires acting with discipline and without fear.

  • Negative emotions carry energy that blurs your vision and weakens your execution.

“Any new knowledge comes from those who question the status quo and have a willingness to go beyond it and a willingness to accept the next answer.”

  • Your fear is not really a fear of the market, but a lack of self-confidence. What you fear is acting decisively.

  • Fear can be paralyzing. Similarly, your ability to let profits grow depends on your valuation of yourself. You reward yourself by giving yourself money, but only to the extent that your self-valuation tells you that you deserve it.

  • If you believe that you do not deserve the money, you will not accumulate gains. Your ability to accept yourself as you really are determines your ability to change, grow, develop new skills and achieve new goals.

What the Mind Creates

“Once you know what traders believe about the future, it’s not that difficult to anticipate what they are likely to do next, under certain circumstances and conditions.”

  • You live in two environments: your external environment, which exists around you, and your internal or mental environment.

  • The internal environment determines how you define what your external environment means.

  • Your senses bring you information about the external environment. This data travels from your fingers, tongue, ears, eyes and nose to your brain in the form of electrical energy. Thus, the internal or mental environment is an energy environment. It has no physical dimensions, because it does not take up any space. It moves faster than physical objects.

  • Stories about a person’s life flashing before his or her eyes suggest how rapidly the internal environment can move.

“Each of our memories makes up a part of our identity, and because they exist as an energy form, they have the potential to act as a force on our behavior.”

  • Memories help constitute your persona and define your identity. They are part of who you are. They are energy and they can affect your behavior.

  • What you believe, what you remember and how you associate things with each other to shape your world are part of the continuous loop operating between your external and internal environment.

  • Data come from the external environment through your senses, and you turn it into information and understanding in the context of memory, belief and associations. You may respond emotionally to this information.

“The more positive you feel about yourself, the more abundance...will naturally flow your way as a by-product of these positive feelings.”

  • Fear can help you create the very thing that frightens you. Fear springs from beliefs about the external world and about yourself.

  • People tend to be attached to the correctness of their beliefs and are reluctant to admit that their beliefs could be wrong.

  • For example, suppose a trader fears losses, but sees an opportunity to profit. He enters the market, but it moves against him. Instead of accepting the fact that he was wrong about the opportunity, taking a small loss and getting out, the trader turns his attention to information that lets him go on believing that he was right. His fear of loss leads him into greater and greater losses. The same sort of trader, given a winning trade, is apt to exit prematurely, cutting profits short. Why? His fear of loss leads him to think only of the likelihood that the market will turn against him, and to disregard the fact that it is going his way.

How to Make Change Happen

“If you can’t personally move the market, then you will want to be able to identify the group that is demonstrating the greatest possibility of moving the market and you will want to trade with that group.”

You can change your emotions and beliefs. Here’s how:

  • Desire change – To change, you must want to change and you must think about changing. You may not be able to destroy your beliefs, but you can make them less powerful.

  • Belief exercise – Take 10 minutes and write a list composed of sentences starting with the words “I am.” Then, scratch out all the objective facts, such as the color of your eyes, your gender or height, and so on. The remaining sentences are beliefs about yourself. Another way to identify your beliefs is to interrogate yourself about what you believe.

  • Write – Write about what you think and see. Then read it. Writing helps you focus on your ideas and may even help you reshape what you think.

  • Exercise self-discipline – Do things you don’t like to do.

  • Practice self-hypnosis – This can help you get around the barriers that the conscious mind uses to block change.

  • Affirm yourself – Say positive things about yourself, to yourself, frequently. Repeating this positive tape eventually will change the way you think of yourself.

Stepping Stones

“Illusions result from beliefs that we know more than we do and can do more than we can.”

The steppingstones to trading success are:

  • Focus on learning.

  • Define in advance what level of loss you will accept on a trade; when you get there, cut your losses.

  • Develop expertise in one market pattern and trade within conditions you fully understand, disregarding others.

  • Trade systematically.

  • Think probabilistically.

  • Practice objectivity.

  • Continually assess your performance and your state of mind.


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© 2016 by aTrader