7 lessons from the must-read ‘Trading in the Zone’

This article takes its inspiration from the classic trading book: Trading in the Zone by Mark Douglas.


“It’s a number game”

The best traders treat trading like a numbers game. This is the same approach taken by the best sales people, sportsmen and poker players. Playing the numbers game means repeating the same process repeatedly many times, with many failures before reaching success.

A trader must understand the difference between outcomes in the short term (micro) and the outcome that matters, the one over the long term (macro).

Micro belief = each trade result is independent and random
Macro belief = the result of a series of trades produces consistent results
Micro level = unpredictable
Macro level = predictable


No need for a crystal ball

A trader does not need to know what will happen next in the market to make money trading. The only knowledge required is that some form of market analysis has shown that under certain circumstances the market will act in a predictable way ‘most’ of the time, or that when it does act predictably, it will produce more profits than all the times it does not. This is the TRADING EDGE.

Each trade (the micro level) is statistically independent because to act the same way as another trade would require all market participants to act in exactly the same way at the same time. This is impossible. Unless a trader trains his mind to perceive every market situation as unique, that uniqueness will automatically be filtered out by the trader’s perception.


Accept uncertainty for good ‘stop-losses’ and ‘take profits’

When a stop-loss order is placed, it should be done so with the belief that the result of the trade is uncertain and so it is entirely likely that the order will be hit. With this belief, a trader will make sure that if the stop loss does get hit, that it won’t be a problem financially and emotionally. Then the next opportunity can be taken with a clear mind.

When a trade is in a profit, a trader should maintain their pre-defined profit-taking strategy to take profits. If a trade is not working out, leave it! It does not matter if this one trade works out because the trader is confident that the strategy works in the long run, over the course of a number of trades.

Probabilities: no need to win every trade

Professional traders allow every trade to work itself out so that the probabilities are given room to work. If a trader breaks the rules of their trading system, there is no way to trust the long run probability of success. As an example, a trader can still be successful with a 2:1 risk: reward on every trade and only win 40% of their trades.

When a trader completely accepts the uncertainty of each ‘edge’ and the uniqueness of each moment, the frustration with trading will end. That is huge!

Past trades have no affect on market risk

Most trader’s perception of risk is a function of their last two or three trades. The best traders however are not impacted negatively or positively by the outcomes of their last several trades.


Overcome fear of being wrong

A trader must train his mind to stay focused on the current possibilities and not be thinking of previous trades. A trader must have an unshakable belief in the uncertainty of the current opportunity, but equally an unshakable belief in the longer-term edge of his trading system that will provide the profitability. There should be no expectancy for the current trade – only for long term profitability

The fear of being wrong makes us perceive only the information that tells us we are correct. This makes a trader take bad trades. The fear of being wrong also causes us to be scared of taking a trade after a loss, which can make a trader miss good trades.


Really believe markets can do anything

‘Trading in the Zone’ is trading in harmony with the collective mind of every market participant. The market environment is different to all others and so must be treated as so by adapting the way a trader thinks. The market can do virtually anything at any time. It is important to believe this.

There is nothing to stop prices going as high as some trader in the world believes (or as low). It only takes one other trader to have a different perspective to null a trade, even reverse it. From this perspective when ANYTHING can happen ANYTIME, it would be ridiculous not to have an acceptable stop-loss or a systematic way to take profits.

Only the best traders have learned to believe that anything can happen, and always account for what they don’t know. - Trade on what you know, account for what you do not.

A trader needs an inner mechanism in the form of strong beliefs that compels him to always act appropriately. The most effective and functional belief is that anything can happen. This is the founding belief of all necessary beliefs to trade successfully.



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