This Trading 'Bible' Will Change The Way You See The Market
As a trader, you will come across tonnes of articles and books about trading psychology. But this wasn’t always the case and in many senses, it is a very modern concept.
Then Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude came along and that all changed.
Trading in the Zone by Mark Douglas is highly regarded by traders across the world for its insight and details on the subject of trading psychology. Some even refer to it as the “bible of trading psychology”.
Mark Douglas is famous within the world of trading and is currently the president of Trading Behavior Dynamics, which delivers training programmes to assist with trading psychology at financial institutions.
His unique insight into the psychology of trading makes this one of the most useful trading books available today and is arguably one of the most important trading books ever written.
The book’s importance, if anything, has only increased over the years as it has become apparent that the vast majority of retail traders lose money. Some argue that up to 95% lose money - the real number is actually debatable - and then quit altogether.
Mark Douglas believes these losses are due to poor trading psychology and the resulting lack of money management.
If you only read one book on trading psychology, make it this one.
Mark Douglas and why he matters to your trading strategy
Mark Douglas was an experienced author with a wide variety of books under his belt. During his career in finance, he worked with hedge funds, money managers and some of the largest floor traders.
Before that, Douglas was educated at Michigan State University, majoring in Interpersonal Communications and Political Science.
Douglas started coaching traders in 1982 and amassed a wealth of experience in teaching them how to develop the right mentality around it.
This experience was crucial to his books; he knows exactly how to talk to traders, how they think and understands what concerns them.
He wrote his book under the assumption that all traders want to create an income they can rely on. The book is also for traders who fully understand that trading is not a get-rich-scheme or just an alternative to a savings account - it can be a full-time job.
In 1990, Douglas wrote his first book The Disciplined Trader which gained him moderate success and attention. However, much of his success was gained with Trading in the Zone in 2000.
Following on from that, Douglas primarily wrote alongside co-author Paula T. Webb, who specialises in prosperity psychology. From 2010 onwards, the two gave seminars and workshops around the world on trading psychology.
Douglas’s work earned him many awards, particularly in finance-related publications.
The most prestigious of which is the Bull/Bear Award, which he won in 2006, 2008 and 2011, and again in 2015 and 2017.
Other books by Douglas
Douglas’s other books include:
- The Disciplined Trader. Douglas’s first book on trading, published in 1990.
- The Complete Trader. Written with co-author Paula T. Webb, published in 2015.
- Little Book of Trading Performance. Also co-authored by Paula T. Webb, 2016.
- Becoming “The Disciplined Trader”. Also co-authored by Paula T. Webb is an updated version of The Disciplined Trader, 2014.
- Simple Wisdom for Prosperous Trading. Also co-authored by Paula T. Webb, 2013.
Douglas has also written about how to become a successful author and a number of motivational books.
Many of his books have been translated into a variety of different languages, including German, Japanese, French, Chinese (Simplified and Traditional), Italian, Korean, Polish, Portuguese, Czech, and Spanish.
If English isn’t your first language, it's worth taking a look to see if there is a translation available.
You can also check out other books reviewed by Trading Education here.
What does Trading in the Zone teach?
Trading in the Zone can teach traders a variety of lessons concerning risk management, consistency and finding new levels of fulfilment and enjoyment from successful trades.
The main lesson which traders can take away is learning how to understand the root cause of common trading mistakes.
Douglas highlights that many poor trades are often a result of deep-rooted emotional issues, which influence a trader’s interactions with the market.
During childhood, we all experience failure in different ways and we gradually learn to overcome these feels of hurt.
Our upbringing leads to patterns which are so deeply woven into our psyche that we are unaware of the impact they create.
An unsuccessful trade will inevitably feel like a failure and can quickly stir up negative feelings from our childhood. This book can teach the coping mechanisms needed to avoid these negative emotions.
Overcoming negative feelings related to failure can help traders become consistent in their trades as consistency is what is needed to be successful.
Psychology and successful trading strategies
In many cases, the feeling of failure can lead traders to chase their losses at which point they are no longer following a trading strategy but gambling and putting everything at risk.
As we mentioned earlier, before Trading in the Zone was published, trader psychology was rarely discussed. It was a completely new concept.
Successful trades were seen as strictly the outcome of exceptional market analysis, while unsuccessful trades were the opposite.
We now know that this is not the complete story.
In reality, the outcome of a trade is the result of the decisions we make. Decisions which can be influenced by the pressure that comes along with the risk of losing money and how we respond to such pressure.
These decisions are also influenced by personality traits such as fear and greed, for example. Those are characteristics which make up our personality, but we are not always aware of. They impact our trading plan, trading style and even the goals we set ourselves.
Moreover, Douglas explains how if you are winning a lot you will have a positive attitude. Likewise, if you are losing a lot you will have a negative attitude. This then affects how you perform your next trades.
Trading in the Zone seeks to assist readers in adjusting their attitudes towards trading, so that it is possible to trade without fear or greed, resulting in the elimination of reckless behaviour.
A game of probability
The book aims to help people trade in a way which is free of psychological constraints, where a loss is seen as a possible outcome rather than a failure.
Douglas explains that the right way to think about trading is a game of probability. There is no right or wrong, win or lose, only probability.
After all, financial trading should be seen as a business and with every business, owners need to put their emotions to the side and make appropriate decisions for their business’s survival.
Losses should be accepted and moved on from.
Mark Douglas comprehensively covers the processes required to help traders analyse the market with a clear, dispassionate viewpoint, which hopefully will lead readers to make a profit.
The famous five 'truths'
One of the most useful sections Trading in the Zone covers is Douglas’s famous five 'truths' theory, which can be summarised as:
- Anything is possible.
- There is no need to know what will happen next to make a profit.
- Wins and losses do not follow a pattern, they are randomly distributed.
- An edge is an indication of a higher probability, it is never a certainty.
- The market is unique at every moment.
Douglas believes that once a trader accepts these truths, they are able to leave their psychological baggage behind.
The advice is to choose your edge, stick to it and trade so that over time the random distribution will at some point fall in your favour.
The four fears
In Trading in the Zone, Douglas also wrote about what he calls the four fears. They are:
- Fear of Missing Out (FOMO). This is the fear that you are missing out on an opportunity while everyone else is gaining from it.
- Fear of Loss. This is the fear of losing what you already have.
- Fear of Being Wrong. This is the fear that your next trade won’t work out, a crisis of confidence.
- Fear of Letting a Win Turn into a Loss. This is the fear of losing all that you have gained.
Douglas teaches us the importance of trading with confidence. We must remove fear from our trades but must remain disciplined.
Are there any areas for improvement?
At Trading Education, we would advise every trader to read this book. At the time of writing, it has a rating of 4.2 out of 5 on Goodreads and 4.9 out of 5 on eBay.
Trading in the Zone has also stood the test of time well, too.
Published in 2000, many traders are still learning plenty from it despite how much trading has changed over the last (almost) two decades, particularly with the advent of the Internet and retail trading.
What do the critics say?
Trading in the Zone has plenty of critics, both in terms of how the book is written and the accuracy of its content.
You should be prepared for a number of long-winded metaphors which can be found throughout the book.
The book is also very repetitive. Some even say that if you cut out the repetition, it would be very short. So you may end up skim reading some parts if they feel too similar.
Many of the book's critics question Mark Douglas’s authority on trading, saying he is not actually a trader. He is, instead, a coach of traders.
These critics feel that unless you are a successful trader, it is dangerous to coach or advise other traders because you haven’t been in their shoes.
If that’s not enough, Douglas has revealed that he lost a lot of money trading which has led many to be sceptical of his trading knowledge.
On top of that, there are many that say the book is diluted with too much psychobabble.
By that, we mean psychological terms, phrases and explanations that don’t actually mean much in the context of trading or are questionable in terms of scientific accuracy.
However, we urge readers to look past this and focus on the positive and practical things the book teaches.
In defence of the book, while some may call Douglas’s writing psychobabble and knock the fact that he devalues technical analysis, it should be pointed out that technical analysis is also sometimes called a pseudo-science as well, particularly by academics.
In the real world of trading though, both are vital.
Key chapters to read
If you are looking to take away the key points, without spending too much time reading the full book, we would recommend reading the first seven chapters:
- The Road to Success: Fundamental, Technical, or Mental Analysis
- The Lure (and Dangers) of Trading
- Taking Responsibility
- Consistency: A state of Mind
- The Dynamics of Perception
- The Market’s Perspective
- The Trader’s Edge: Thinking in Probabilities
Then finish off with the final chapter - chapter 11, Thinking Like A Trader - which pulls everything together. And at the very end, there is also an exercise that is highly recommended.
That said, the book is only 240 pages at the longest and can easily be read in a short amount of time.
There are also a number of traders who would recommend reading this book at least once a year to remind themselves of what it teaches.
Who would benefit most from this book?
Trading in the Zone would best suit three types of traders:
1. Beginners who are still trying to find their place in the world of trading.
Trading in the Zone can help mentally prepare beginners for what they are about to undertake and make them understand how important trader psychology is to avoid mistakes and make successful trades.
2. Traders who are not confident in their trades. There are a lot of risks involved in trading and without confidence, traders may never make the dive.
Sometimes people just need to trust their instincts, which is what Trading in the Zone can teach.
Traders may find that when they make a mistake if they had followed their initial instincts they may have avoided it. Instead, they felt anxious and decided against their original instincts, which lost them money.
3. Traders who are losing more than they are earning. This book can help them evaluate the potential reasons why this is happening.
With it, they can think about their own mentality and, hopefully, identify psychological reasons that are causing them to make mistakes. More importantly, attempt to find solutions to these problems.
Where does Trading in the Zone fall short?
A key thing to remember about Trading in the Zone is that it focuses on trader psychology, which is one part of learning how to trade.
You still need to learn the technical basics and how the market actually functions. Without them, you will not know what you are doing. Confidence in your trades compliments a trader, it doesn’t make you a trader.
In a sense then, while this is definitely a book you must read, it should not be your first read. Ideally, you should focus on reading something more technical first.
That said, the technical side rarely changes. Once you learn it, you can be sure you know it.
Our personality, however, can be more complicated to understand as everyone is different. A lot of us don't really know ourselves that well, or at least, not as well as we think we do.
It can be hard to isolate destructive behaviours that may be negatively affecting your trades. Often we need someone to help point us in the right direction.
Then it can get even more complicated when you start trying to change your behaviour, which for some can take years or even a lifetime.
If you enjoyed reading this article from Trading Education, please give it a like and share it with anyone else you think it may be of interest too.
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