Wednesday, January 25, 2012 EST

In his book, Trading In the Zone, Douglas discusses how a trader can begin to eliminate the emotional risk of trading with a probabilistic mind-set. 

A probabilistic mind-set is essential to understanding the market because the market is "always communicating in probabilities." 

A probabilistic mind-set consists of internalizing the following fundamental truths (Douglas):

1.  Anything can happen. Or as I like to say, anything can happen…and often does. Usually the market does the exact opposite of what we think it should do and when we begin to doubt the market it does exactly what we once thought it should do.  Get it?

2.  You don’t need to know what is going to happen next in order to make money. Trading is not about being right in our arrogant predictions, it is about making money.  We are never going to be able to predict what will happen next either in the market or in life so let’s just get over it once and for all.

3.  There is a random distribution between wins and losses for any given set of variables that define an edge. Trading is like tossing a coin: we can have five wins in a row or five losses;  we could win one lose one.  Wins and losses are random so do not bet the farm or the crops.

4.  An edge is nothing more than an indication of a higher probability of one thing happening over another. Call it what we will but if we have a system, a methodology, a strategy, an edge for locating a trade then we have found an indication of a high probability circumstance that has been historically proven to repeat itself over and over again and will probably do so in the future.

5.  Every moment in the market is unique. No matter how many times we have traded an edge the outcome can be different this time and no matter how perfectly matched this pattern is with the last one, this one is truly unique if for no other reason than in this market the participants are not the same as in the last one.  The market is too diverse and too fluid to be put in a box, wrapped up and sold to the next consumer.

If you have a method for trading Douglas says to stick to it 100%. He has a 20 trade plan to help a trader work on this issue.

Make 20 trades, using your trading method, and stick to it. This means trading when your "edge" appears using stops to get out, and not changing your rules or rolling the dice.

This will help take the emotion out of trading so that you do not make yourself "wrong" for losses or "right" for wins.  What does make you "right" is you stick to your trading plan and know that trading is a numbers game.

 
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