In my Blog article called “5 Fundamental Truths in Trading“, we introduced the 5 Fundamental Truths in Trading from Mark Douglas’ excellent book, Trading in the Zone, and now we are going to expand on each of them.
- Anything Can Happen
… on any given trade.
There are always unknown forces operating in the market at every moment, meaning at this moment in this trade Anything Can Happen and that releases you from the expectations of what the market SHOULD do. The market shouldn’t do anything but be there each and every trading day.
- You Don’t Need to Know What Is Going To Happen To Be Consistently Profitable.
Why? Because there is a random distribution between wins and losses for any given set of variables 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. How much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game.
- There Is A Random Distribution Between Wins and Losses
If every loss puts you that much closer to a win, you will be looking forward to the next occurrence of your edge. Ready and waiting to jump in without the slightest reservation or hesitation.
On the other hand, if you still believe that trading is about analysis or about being right. After a loss, you will anticipate the occurrence of your next edge with trepidation. Wondering if it’s going to work. This, in turn, will cause you to start gathering evidence for or against the trade. You will gather evidence for the trade if your fear of missing out is greater than your fear of losing. And you will gather information against the trade if your fear of losing is greater than your fear of missing out. In either case, you will not be in the most conducive state of mind to produce consistent results.
- An Edge (Your Algorithm) Is Your Signal There Is One Thing More Probable Than An Other.
Creating consistency requires that you completely accept that trading isn’t about hoping, wondering, or gathering evidence one way or the other to determine if the next trade is going to work. The only evidence you need to gather is whether the variables (your ruleset) you use to define an edge (your algorithm) are present at any given moment. When you use “other” information, outside the parameters of your edge to decide whether you will take the trade, you are adding random variables to your trading regime.
Adding random variables makes it extremely difficult, if not impossible, to determine what works and what doesn’t. If you’re never certain about the feasibility of your edge, you won’t feel confident about it. To whatever degree you lack confidence, you will experience fear.
The irony is, you will be afraid of random, inconsistent results, without realizing that your random, inconsistent approach is creating exactly what you are afraid of. On the other hand, if you believe that an edge is simply a higher probability of one thing happening over another, and there’s a random distribution between wins and losses for any given set of variables that define an edge, why would you gather “other” evidence for or against a trade? To a trader operating out of these two beliefs, gathering “other” evidence wouldn’t make any sense.
- Every Moment in the Market is Unique
If each moment is like no other then there is nothing at the rational level of your experience that can tell you for sure that you “know” what will happen next.
Move Toward the Zone
When you totally accept the psychological realities of the market, you will at the same time accept the risks of trading. When you accept the risks of trading, you eliminate the potential to define market information in painful ways. When you stop defining and interpreting market information in painful ways, there is nothing for your mind to avoid, nothing to protect against. When there’s nothing to protect against, you will have access to all that you need to be a consistently profitable trader.
We’re the Plan in “Plan your Trade and Trade your Plan” – TraderJanie
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