The closest thing to a Forex trader’s bible – Trading in The Zone

In the trading world, there are a few reads that are a must, regardless of what instrument you trade. While Jesse Livermore’s Reminisces of a Stock Operator is often the first that comes to mind (and for good reason), the absolute must read is Trading in The Zone by Mark Douglas.

So, what makes this book a mandatory read for every  trader?

Well, the main premise of Trading in The Zone isn’t about teaching you a Forex trading system or strategy, instead the book covers a widely overlooked aspect of trading, how to deal with the psychological challenges of trading itself. Anyone who’s been trading for a decent amount of time should know that the right mindset is crucial to success, however this mindset is difficult to achieve, especially without help, which is where this book comes into power.

Trading in The Zone breaks down all the emotions that traders go through each day in the markets, whether in a trade, placing a trade taking profits, etc, Mark defines actionable tips and methods that can be used to achieve ‘The Zone’ mindset needed to profit consistently as a trader.

Many retail traders believe that the reason they lose money is because they’ve analysed the market incorrectly. To fix this they try to learn more about the markets when they should be learning more about how they think and make decisions

“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”

Traders often find that they can make money on a demo account but can’t seem to replicate those results with real money, why is this?

Transitioning from demo to real money is often too great for most traders to handle. Nothing changes in the market, the charts haven’t changed, the trading system doesn’t change. The only difference is that now your money is at risk.

When you have something that’s of value to you at risk, you will feel a fear, and it’s this fear that causes mistakes. What’s more than evident, is that you certainly didn’t care if you missed out on some profits, or whether you were right or wrong whilst trading a demo, and it’s this carefree mindset that needs to be achieved when trading live. Whilst it’s clichéd, the saying “don’t trade with money you can’t afford to lose” holds very true. If you can’t afford to lose the money you’re trading with, then how are you going to replicate the carefree mindset that’s required to trade live?

“If you perceive the endless stream of opportunities to enter and exit trades without self-criticism and regret, then you’ll be in the best frame of mind to act in your own best interest and learn from your experiences.”

We’ve all had days where we do everything right, time our trade entry perfectly, take profits when we should, hit out stops like a champ… basically, executing our trading plan flawlessly.

So what causes these days? Well, it’s not amazing market analysis or some guru skill that only you possess. It’s the mindset and attitude you have on that day!

If you were to wake up tomorrow morning and begin trading after having lost every trade the previous day, you’re unlikely to be able to make clear trading decisions because the losses are still fresh in mind, as will the incorrect decisions that caused the losses in the first place.

Conversely, if you start the day after having won every trade the previous days, all of which made you profit, your attitude will be vastly different. You’ll have more confidence and optimism which results in you having no hesitation when it comes to executing trades that meet your trade criteria.

The only way to enter the right mindset to make quality trading decisions is to put yourself in a situation where you’re always making money. When you’re making a profit, the weight of past mistakes is minimal, which makes it easier for you to take advantage of the opportunities that the market is offering because previous mistakes aren’t influencing your current ability to take a trade.

“People see what they’ve learned to see, and everything else is invisible until they learn how to counteract the energy that blocks their awareness of whatever is unlearned and waiting to be discovered.”

This quote really makes a point of bringing to attention how traders get caught in the trap of thinking they know everything there is to know about the markets, when in fact they’re only really scratching the surface of what needs to be known.

Think of it this way, for many traders, all the information they’ve gathered about the markets is from what they see on a chart. Say if you use an indicator to trigger a trade, you’re going to believe that that’s how you trade, making every other piece of knowledge that you’re yet to acquire invisible to you. It may take a while to sink in, but your choice of indicator isn’t the key to making a profit.

So what is it then? It’s understanding what’s happening behind the chart. What’s causing it to move? Why did it reverse here? The only way to figure this out is by studying how other traders make their decisions in the market.

In Forex trading, knowing the “why” of things is far more important than knowing the “what”. An infant could tell you if a chart is pointing upwards or downwards, but they won’t be able to tell you why.

“There is a random distribution between wins and losses for any give set of variable that define an edge. In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 12 will be winners and 8 will be losers. What you don’t know is the sequence of wins and losses or how much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game. When you really believe that trading is simply a probability, concepts like ‘right’ and ‘wrong’ or ‘win’ and ‘lose’ no longer have the same significance.

This is perhaps the most important message in the book, but it’s also one of the least understood components of the Forex market. It’s a firm understanding of probability and how it relates to you and your strategy that will determining the reality of your expectations of the markets.

If you’ve tested your trading strategy over a sample size of trades, say two thousand for the sake of this example, you’ll know how many trades out of two thousand you have won and lost. Also, you’ll know what the highest streak of winners and losers you’ve had in a row.

Knowing this information allows you now to trade from a perspective of probability instead of chance. If you know that out of 2000 trades, you’re going to win 1000 of them, then there is absolutely no purpose in being scared of losing money. That’s how you trade with the right mindset, with complete autonomy and without hesitation.

Source: Vantage FX Blog