Thinking Like a Trader
The biggest leap forward in my trading career came early on when I realized that in order to BE a successful trader, I needed to think like a successful trader. It sounds simple and obvious, but unfortunately it's not as easy as it sounds.
This important realization was a result of training my brain to think in terms of probabilities - and completely removing sentiment or emotion from the equation. I needed to divorce my personal feelings from my trading decisions and replace that emotion with pure statistical analysis.
Thinking in probabilities did a lot more for me than just help analyze my trades. It allowed me to trade with more confidence because I always knew the likely statistical outcome of an individual trade as well as a given series of trades.
To be able to think in terms of probabilities takes practice, lots of practice. Doing these things over time will help you to develop a level of confidence and consistency in your trading. And this is the essence of what trading is all about. Jason and I both adhere to these rules and hope to assist all of you in thinking like a trader.
Mark Douglas's book Trading in the Zone is an essential read for any serious trader. It has helped countless traders better understand how thinking like a professional trader will lead to trading with more confidence and being more consistent.
If you asked me to distill trading down to its simplest form, I would say that it is a pattern recognition numbers game. We use market analysis to identify the patterns, define the risk, and determine when to take profits. The trade either works or it doesn't. In any case, we go on to the next trade. It's that simple, but it's certainly not easy. In fact, trading is probably the hardest thing you'll ever attempt to be successful at. That's not because it requires intellect: quite the contrary! But because the more you think you know, the less successful you'll be. Trading is hard because you have to operate in a state of not having to know, even though your analysis may turn out at times to be perfectly correct. To operate in a state of not having to know, you have to properly manage your expectations. To properly manage your expectations, you must realign your mental environment so that you believe without a shadow of a doubt in the five fundamental truths. - Mark Douglas
Thinking in terms of probabilities also helps remove the emotional risk of trading. Mark Douglas talks about the 5 Fundamental Truths in Trading in the Zone. They are as follows:
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
When you train your mind to think in this way, the emotional stress and fear of pulling the trigger diminishes. You become less concerned with the outcome of each individual trade and more concerned with how it fits into the larger statistical set.
