Mark Douglas’ excellent book, Trading in the Zone explores the five fundamental truths in trading.
Five Fundamental Truths in Trading
To think in probabilities, you have to create a mental framework or mindset that is consistent with the underlying principles of probabilities. A mindset that understands probabilities believes:
- Anything can happen.
- You don’t need to know what is going to happen next in order to make money.
- There is a random distribution between wins and losses for any given set of variables that define an edge.
- An edge is nothing more than an indication of a higher probability of one thing happening over another.
- Every moment in the market is unique.
It’s important to keep in mind that your potential to experience emotional pain comes from the way you define and interpret the information to which you’re exposed. When you adopt these five truths, your expectations will always be in line with the psychological realities of the market environment.
I’m sure you see the paradox here; on one hand you have to have a rigid commitment to your rules but on the other hand, truly believe that each trade is a unique event with an uncertain outcome and random in relation to any other trade made in the past.
This is not easy to do. Unfortunately, making money consistently is a by-product of acquiring and mastering these kinds of mental skills. The degree to which you understand this is the same degree to which you will stop focusing on the money and start focusing on how you can master the skills needed to make money.
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