The Disciplined Trader - Mark Douglas

Chapter 5 - Prices are in Perpetual Motions with no Defined Beginning or Ending

• What are usually thought of as three simple decisions of enter, hold, or liquidate a trade become a perpetual process of deciding how much is enough from both a profit and a loss perspective. If you are in a profitable trade, is there ever enough? Greed stems from a belief that there is never enough or there won't be enough. In an unlimited environment that is in perpetual motion, isn't there always the possibility of getting more? The appetite of true greed can never be satisfied; it will always leave the greedy ones with a feeling of lacking regardless of how much they have acquired. If you are in a losing trade, you won't want it to exist because it represents failure, so you can just act as if it doesn't, by convincing yourself that you are in a winning trade that hasn't gone in your favor yet.
• Your last trade obviously has nothing to do with the potential that exists in the market at any given moment. When you feel compelled to get back, it puts you in an adversary relationship with the market.

Chapter 6 - The Market is an Unstructured Environment

• In an unstructured and unlimited environment, it is essential that you establish rules to guide your behavior. You will need to create definition and give yourself direction. Otherwise, you will feel overwhelmed with too many possibilities. Without these rules one of the most likely possibilities is that you will create devastating losses for yourself. The big psychological problem here is, if you make up and have to play by your own rules, you also have to take total and complete responsibility for your actions as well as the outcome of your actions
• Most outside people would be shocked to learn that except for a small minority of successful traders, the rest fall into a group that, at any given moment, have no idea about what they are going to do next or know why they are 
• even doing what they are doing. If you asked them to tell you specifically how they make money or lose money, they couldn't tell you
• If you don't know what you did to win the last time, you obviously don't know what to do to keep from losing this time. The end result is intense anxiety, frustration, confusion, and fear. You feel out of control, experiencing a sense of powerlessness as you are swept along by the ensuing events and wondering what is the market going to do to you today.
• Taking responsibility is a function of self-acceptance. You can measure this degree of self-acceptance by how positively or negatively you think of yourself when you make what you perceive as a mistake. The more negatively you think of yourself, the greater your tendency to avoid taking responsibility, so you can avoid the pain of your harsh thoughts, thus generating a fear of making mistakes. However, the greater the degree of self-acceptance you have for yourself, the more positive your thoughts will be and the greater the degree of insight you will be able to extract from an experience, instead of generating fear. The more self-accepting you are, the easier it is to learn because you are not trying to avoid certain information. 

Chapter 7 - In the Market Environment Reasons are Irrelevant

• The reasons traders would give for their actions are irrelevant. Most traders don't know why they did what they did because most traders don't plan their trades, thus eliminating any connection between themselves and the results of their trades. Most traders act spontaneously and impulsively and then ascribe the rationale for their behavior after the fact. Most of these after-the fact reasons are either justifications for what traders did or excuses for what traders didn't do
• If you want to learn to predict price movement, you don't need to pay attention to reasons. What you need to do is determine how the majority of traders perceive the external conditions in relationship to either their fear of scarcity, or their fear of missing out, or both

Chapter 8 - The 3 stages to becoming a successful trader

• In an unlimited environment, if you can't confront the reality of a loss, then the possibility exists for you to lose everything, in each and every trade. If you believe trading is like gambling, it isn't. In any gambling game you have to actively participate to lose and do nothing to stop losing. In the market environment, you have to actively participate to get into a trade and actively participate to end your losses. If you do nothing, the potential exists to lose everything you own. When you participate in gambling games, you know exactly what your risk is and the event always ends. With the markets you don't ultimately know what your risk is, even if you are disciplined enough to use stops, because the market could gap through your stops. Also because the event never ends and is in constant motion, there is always the possibility of getting back what you are losing in any trade. You won't need to actively participate to get back what you are losing; you just have to stay in your trade and let the market give it to you
• So even though you can't actually control the market's movement, you can learn how to control your perception of the market's movement in a way that allows you the maximum objectivity. Learning to perceive objectively will increase your ability to let the market tell you when to get in and when to get out. You can learn how to trade where you won't be using information to justify your beliefs but rather to perceive the most likely possibilities in any given moment.

Part III - Building a framework for understanding ourselves

• We will thoroughly explore the nature of fear and how it compels all of us to act without a perception of choice. The predominate underlying force behind most traders' actions causing prices to move is fear—the fear of missing out (competing for the supply) and the fear of loss.

Chapter 10 - How Memories, Associations, and Beliefs Manage Environmental Information

• The implications are that much of what we experience of the outside environment is shaped from the inside, not from the outside as most people would assume. In other words, our first-time experiences shape the meaning, as well as determine the quality of energy connected with that meaning, and then once the meaning exists inside of us, it shapes our experience of the outside by the way we pick and choose information and how we feel about that information.
• What you have just been given is an example of why the vast majority of traders cut their profits short and let their losses run. In a winning trade, the fear of losing will cause us to focus our attention on information that the market is going to take our profits away, compelling us to get out early. In a losing trade we will focus our attention on just the opposite information— anything other than that which would indicate the trade is a loser. Fear causes us to act without a perception of choice. When we are afraid to confront certain categories of market information, it drastically limits the choices that we perceive as available. Cutting a loss isn't a choice if we systematically block from our awareness any information that would indicate that we are in a losing trade. Staying in a winner isn't a choice if we are consumed with the fear that the market is going to take away our money.
• To prevent these blind spots in our perception, we have to learn to trade without fear. And to trade without fear we need to completely trust ourselves to confront and accept whatever information the market is offering about itself, and we need to be able to trust ourselves to know that we will always act in our best interests without hesitation, regardless of the conditions. Any endeavor will require some degree of trust

Chapter 13 - Managing Mental energy

• In other words, we pass on our ignorance, as well as our wisdom, without knowing at the time the difference between the two. And what was passed on that was dysfunctional will be regarded as the truth just the same as the wisdom.
• You can wish and hope that the market will come back, or you can cut your loss and make yourself ready to take the next opportunity. To be able to cut your loss and be ready to take the next opportunity requires that you change anything in your mental environment that would cause you to avoid confrontation and consequently wish and hope. The less cause you have for wishing and hoping that something will happen, the more you will know that when you get that certain feeling, it is a true intuitive impulse, and the more confidence you will have to follow it.

Chapter 15 - The Pyschology of Price Movement

• If, for example, a market has been making consistently higher highs and higher lows, to determine what is likely to happen next, ask yourself the following questions: 1. What kind of price action will sustain the buyers' beliefs that they can make more money? 2. When are sellers likely to come into the market in force? 3. Where are old buyers likely to take profits? Where are old sellers likely to lose faith in their positions and bail out? 4. What would have to happen for buyers to lose faith? What would have to happen to draw new buyers into the market? You can answer all these questions by identifying certain significant reference points where buyers' and or sellers' expectations are likely to be raised and where they are likely to be disappointed if they don't get their way.

Chapter 16 - Steps to Success

• First and foremost, you may need to change your perspective or the focus of your trading. Until now your focus may have been to make money. If this is so, you will need to change your perspective to "What do I need to learn or how will I have to adapt myself to interact more successfully?" You need to stay focused on mastering the steps to achieving your goal and not the end result, knowing that the end result, money, will be a by-product of what you know and how well you can act on what you know. There is a tremendous difference between focusing on money and focusing on using your trading as an exercise to identify what you need to learn. The first will cause you to focus on what the markets are giving you or are taking away from you. The second perspective causes you to focus your attention on your ability to to give yourself money. With the first perspective, you are placing some of the responsibility onto the markets to do something for you. With the second perspective, you assume all the responsibility.
• Predefine what a loss is in every potential trade. By "predefine," I mean determine what the market has to look like or do, to tell you that the trade no longer represents an opportunity, at least not an opportunity in the time frame in which you trade.
• Execute your losing trades immediately upon perception that they exist. When losses are predefined and executed without hesitation, there is nothing to consider, weigh, or judge and consequently nothing to tempt yourself with. There will be no threat of allowing yourself the possibility of ultimate disaster.
• To help you learn how to be with the flow of the market, I pose a series of questions that are designed to keep you focused in the "now moment" to determine what is true about the market. 
• 1. What is the market telling me at this moment? 
• 2. Who is paying up to get in or get out? 
• 3. How much strength is there? 
• 4. Is momentum building? 
• 5. Can it be measured relative to something? 
• 6. What would have to happen to indicate the momentum is changing? 
• 7. Is the trend weakening or is this a normal retracement? 
• 8. What would show that? If the market has displayed a fairly symmetrical type of pattern and that pattern has been disturbed, then it is a good indication the balance of forces has shifted. 
• 9. Are there any places where one side will definitely gain dominance over the other? If that point is reached, it still may take sometime for the other side to be convinced they are losers. How long are you willing to give them to stampede out of their positions? 
• 10. If they don't stampede out of their positions, what will that tell you? 
• 11. What did traders have to believe to form the current pattern relative to the past? Remember that people's beliefs don't change easily unless they are extremely disappointed. People are disappointed when their expectations aren't fulfilled. 
• 12. What will disappoint the predominate force? 
• 13. What is the likelihood of that happening? 
• 14. What is the risk of finding out in a trade? 
• 15. Is there enough potential for movement to make the trade worth the risk?
• If you can't determine the significance of any particular high or low or any other significant reference point for that matter, then you have to ask yourself if it is worth the risk of finding out? How much room will you have to give the market to define itself before it is evident that the flow of the market is not in the direction of that trade?
• Keep in mind that since the market is in perpetual motion, it puts you in a position of having to make never-ending assessments of the current risk in relationship to the current possibilities for reward. To do this effectively, you will have to learn to observe the market as if you were not in a position. This perspective will free you to take whatever action is appropriate for the situation instead of hesitating, hoping, and wishing that the market will make you right.
• Which, of course, is always going to be less than what is possible from the market's perspective. If we are perceiving much less than what is available, then we are out of touch with what is possible from the market's perspective and setting ourselves up for a painful forced awareness. To be objective you have to make "uncommitted assessments of the probabilities." Which simply means that you have no commitment to any particular outcome. You just observe what is happening in each moment as an indication of what will probably happen next. Here is what objectivity feels like, so that you can recognize when you have achieved it. 
• You feel no pressure to do anything 
• You have no feeling of fear 
• You feel no sense of rejection 
• There is no right or wrong 
• You recognize that this is what the market is telling me, this is what I do 
• You can observe the market from the perspective as if you were not in a position, even when you are 
• You are not focused on money but on the structure of the market