Trading in the Zone with these 12 steps

The following principles are taken from the “Trading in the Zone” by Mark Douglas.

Here they are in numerical order:

The 5 Fundamental Truths of Trading:

1. Anything can happen.        You have an edge and you may have probability on your side. But at the end it is just a probability and not guaranty. Lot of things which are not quantifiable can take place in market.   

2. You don’t need to know what is going to happen next to make money.  Ignorance is bliss . Just execute your edge and place the probability on your side.No Body knows what is going to happen next.

 3. 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 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 game, concepts like ‘right’ and ‘wrong’ or ‘win’ and ‘lose’ no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.

4. An edge is nothing more than an indication of a higher probability of one thing happening over another. An edge  is just a likely hood  of one things over other .Probability => Quantifiable likelihood (chance) of the occurrence of an event expressed as odds. 

5. Every moment in the market is unique. It is important to remember that every moment in the market is unique. Just because the market did one thing one day does not mean that it will do the same thing the next day. The participants in the market change from day to day and even hour to hour which makes every single experience in the market completely unique.

The 7 Principles of Consistency:

1. I objectively identify my edges.  You already know what you are looking for. You should know your entry , risk parameter , profit objectives. Edge  can be combination  of any sets of pre determined variable , which have been back tested and found to give 50-55% winning trade.

2. I predefine the risk of every trade.  We know that every trade  has a potential to be a loser , so we should be pre decided about the dollar amount we are going to risk on the trade to find out whether the trade is working or not .Best time to  put a stop is before you put the trade on.

3. I completely accept the risk or I am willing to let go of the trade.  Sometime we can be uncomfortable with the dollar amount we have to risk to put the trade on . if you are not completely comfortable , then either you cancel the trade or scale back on your position to make yourself comfortable with dollar amount .

4. I act on my edges without reservation or hesitation.  Once the edge present itself just put the trade ON.We have learned, usually quite painfully, that we don’t know in advance which edges are going to work and which ones aren’t. so, I have stopped trying to predict outcomes. I have found that by taking every edge, they correspondingly increase their sample size of trades, which in turn gives whatever edge they use ample opportunity to play itself out in their favor, just like the casinos.

5. I pay myself as the market makes money available to me.  I take money out from my system after execution of 30 trades and and if I am in profit . You can have your rule .

6. I continually monitor my susceptibility for making errors. Common Errors are 

•  Refusing to define a loss.
•  Not getting rid of a losing trade when it is obviously a loser.
•  Getting locked into a bullheaded opinion about market direction.
•  Focusing on monetary value of trade instead of market structure.
•  Revenge trading to recoup a loss.
•  Not reversing a position when the market is clearly changing direction.
•  Not following the rules of your strategy.
•  Planning for a trade and then not taking it.
•  Not acting on your intuition.
•  Giving back recent gains due to over trading or inconsistency. 

7. I understand the absolute necessity of these principles of consistent success
and, therefore, I never violate them.  Read  it every day before market Opens  and follow it.

Source: “Trading in the zone”