Trading in the Zone

If I had to distill all of the reasons down to one, I would simply say that the best traders think differently from the rest.

Ninety-five percent of the trading errors you are likely to make -causing the money to just evaporate before your eyes- will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.

A very loose rule of thumb is: Whatever we believe we were deprived of as children can easily become addictions in adulthood.

Many people are born to immature and unreasonable parents, or encounter emotionally disturbed teachers, coaches, and employees who subconsciously or intentionally inflict their personal problems on anyone they perceive as having less power.

Remember our definition of a winning attitude: a positive expectation of your efforts with an acceptance that whatever results you get are a perfect reflection of your level of development and what you need to learn to do better.

Did you ever wonder why leaving money on the table is often more painful than taking a loss? When we lose, there are any number of ways in which we can shift the blame to the market and not accept responsibility. But when we leave money on the table, we can't blame the market. The market didn't do anything but give us exactly what we wanted, but for whatever reason, we weren't capable of acting on the opportunity appropriately. In other words, there's no way to rationalize the pain away.

In many respects, a state of mind or perspective is like software code. You could have several thousand lines of perfectly written code, with only one flawed line, and in that one flawed line there might be only one character out of place. Depending on the purpose of the software and where that flaw is in relation to everything else, that one misplaced character could ruin the performance of an otherwise perfectly written system. You see, the solution was simple: Fix the misplaced character, and everything runs smoothly. However, finding the error or even knowing it exists in the first place can take considerable expertise.

Everyone has heard the expression, "People see what they want to see." I would put it a little differently: People see what they've learned to see, and everything else is invisible

As they sat there, the bean market was slowly trending down to the price the analyst said would be the support, or low, of the day. When it finally got there, the chairman looked over to the analyst and said, "This is where the market is supposed to stop and go higher, right?" The analyst responded, "Absolutely! This is the low of the day." "That's bullshit!" the chairman retorted. "Watch this." He picked up the phone, called one of the clerks handling orders for the soybean pit, and said, "Sell two million beans (bushels) at the market." Within thirty seconds after he placed the order, the soybean market dropped ten cents a bushel. The chairman turned to look at the horrified expression on the analyst's face. Calmly, he asked, "Now, where did you say the market was going to stop? If I can do that, anyone can."

A probabilistic mind-set pertaining to trading consists of five fundamental truths.

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.

According to Albert Einstein and others in the scientific community, energy can neither be created nor destroyed; it can only be transformed.