Mark Douglas Trading Psychology 4/7 Probabilities
Summary
TLDRThe transcript discusses the concept of trading from a probabilistic perspective, emphasizing the importance of understanding and accepting the inherent risks involved. It highlights the psychological challenges traders face, such as the fear of losing and the societal pressure to win at all costs. The speaker argues that successful trading requires a shift in mindset, where one must view trading as a series of events rather than individual outcomes, and execute trades based on a well-defined edge without letting emotions interfere. The transcript also touches on the role of analysis in managing risk and the need for traders to be systematic in their approach.
Takeaways
- 🎯 Understanding probabilities is crucial in trading, but executing trades flawlessly based on probabilistic thinking is challenging.
- 💡 The gap between knowing about probabilities and actually applying them in trading can lead to a reality disconnect.
- 🤔 Successful trading often involves accepting losses as a part of the process, similar to how casino-goers accept the risk of losing.
- 📈 Patterns in trading can be identified and quantified, but the outcomes they predict remain random and unpredictable.
- 🔄 The repetition of patterns in the market does not guarantee predictable outcomes, which is a key concept for traders to grasp.
- 🚫 The illusion of analysis can lead traders to believe they are not taking risks, which is a misconception.
- 💰 The primary aim of trading should not be to avoid being wrong, but to manage risk and extract profit from a proven edge.
- 🔄 Changing one's perspective on trading and risk can lead to better execution and less emotional attachment to outcomes.
- 📊 Backtesting and defining one's edge is essential, but it's also important to execute trades without altering the variables within a sample size.
- 🧠 Psychological acceptance of risk and loss is a significant factor in trading success, often more so than technical analysis or strategy.
Q & A
What is the main concept discussed in the transcript?
-The main concept discussed in the transcript is the understanding and acceptance of probabilities in trading, emphasizing the importance of executing trades without fear of loss and embracing the probabilistic nature of market outcomes.
Why is there a reality gap between understanding probabilities and functioning from a probabilistic perspective?
-The reality gap exists because while one might intellectually understand probabilities, it requires a significant mental shift to believe in and execute trades based on those probabilities without letting fear of loss or societal pressures affect decision-making.
What does the speaker mean by 'edge' in the context of trading?
-In the context of trading, 'edge' refers to a trader's competitive advantage or the potential for profit that is derived from a pattern or strategy which has been identified through technical analysis and is expected to yield positive results over a series of trades.
How does the speaker describe the societal belief system regarding winning and losing?
-The speaker describes the societal belief system as being obsessed with 'Winning is Everything, avoid losses at all costs.' This mindset can create internal conflict for traders who must accept the probabilistic nature of losses in order to be successful.
What is the significance of赌场 (casinos) in the discussion?
-Casinos are used as an example to illustrate how entities can operate successfully by understanding and embracing probabilities and the randomness of outcomes, without the need to predict individual events, similar to how traders should approach their trades.
What does the speaker suggest about the relationship between technical analysis and risk?
-The speaker suggests that technical analysis helps in defining patterns and managing risk but does not eliminate it. It is a tool for understanding market behavior and making informed decisions, but the outcomes remain unpredictable and must be accepted as part of the trading process.
How does the speaker propose traders should view their losses?
-The speaker proposes that traders should view losses as a normal part of the business, akin to expenses in any other enterprise. This perspective helps traders to emotionally detach from individual trades and focus on the overall sample size of trades for assessing success.
What is the importance of having a sample size of trades for a trader?
-A sample size of trades is important for traders to adequately test their edge and to ensure that their trading strategy is consistent and reliable. It allows them to assess their performance over a series of trades rather than focusing on individual outcomes, which helps in managing risk and improving the trading strategy over time.
Why is executing trades flawlessly important according to the speaker?
-Executing trades flawlessly is important because it allows traders to fully realize the profit potential of their trading edge. It minimizes errors and ensures that the trader is following their strategy as defined by their tested variables, leading to more consistent success and a better understanding of how the strategy performs in various market conditions.
What does the speaker mean by 'trading in the zone'?
- 'Trading in the zone' refers to a state of mind where a trader operates carefree and without fear, being fully immersed in the process and executing trades based on their defined edge without being affected by emotional responses to market outcomes.
How does the speaker address the idea of changing one's perspective on trading?
-The speaker suggests that changing one's perspective on trading is a matter of desire, clarity, and focus. It involves understanding and accepting the probabilistic nature of trading, letting go of the need to predict outcomes, and embracing the process as a series of calculated risks rather than a quest for certainty.
Outlines
🎯 Embracing Probabilities in Trading
The speaker emphasizes the importance of understanding probabilities in trading. They explain that while everyone may grasp the concept of probabilities, applying this understanding in a practical, probabilistic manner is challenging. The key is to execute trades flawlessly and to internalize the probabilistic perspective as a core belief to manage the emotional aspects of trading. The speaker critiques the societal focus on winning and avoiding losses, highlighting the conflict between this mindset and the probabilistic nature of trading.
📊 Technical Analysis and Collective Behavior
The speaker discusses the role of technical analysis in identifying patterns in market behavior. They explain that these patterns, which result from collective order flow, repeat with statistical reliability. However, the outcomes these patterns predict are random, akin to casino games. The speaker argues that the belief in analysis leading to guaranteed outcomes is flawed, as no analysis can predict the actions of all market participants, making it impossible to guarantee any single trade's success.
💡 Accepting Risk and the Illusion of Control
The speaker addresses the misconception that analysis can eliminate risk in trading. They argue that trading is about managing risk rather than avoiding it. The speaker compares traders to casino gamblers, who accept the randomness of outcomes and the inevitability of losses. They stress that traders must adopt a similar mindset, viewing losses as a natural part of the trading process rather than as personal failures.
🔄 The Cycle of Winning and Losing
The speaker explores the cycle of winning and losing in trading, emphasizing that even a high percentage of winning trades does not guarantee success if the trader does not manage risk properly. They discuss the psychological impact of losses on traders and the common failure to define risk in advance, which leads to emotional responses that can hinder trading performance.
🎲 The Casino Analogy and Emotional Risk
The speaker uses the analogy of casino games to illustrate the difference between the emotional risk in trading versus gambling. They explain that the lack of emotional risk in casino games allows players to enjoy the experience without fear of loss. In contrast, traders often carry the emotional burden of past experiences and societal pressures, which can interfere with their ability to accept losses as a normal part of the trading process.
📈 The Inevitability of Market Uncertainty
The speaker stresses the unpredictable nature of market movements and the impossibility of accurately predicting each trade's outcome. They argue that traders must accept the inherent uncertainty and focus on managing risk over individual trades, rather than trying to control or predict market outcomes. The speaker highlights the importance of understanding order flow and the influence of various traders' orders on market prices.
🔄 Systematic Trading and Sample Sizes
The speaker introduces the concept of trading in sample sizes rather than individual trades. They advocate for a systematic approach where traders define their edge through a set of variables and test these over a series of trades. The speaker emphasizes the importance of maintaining consistency within sample sizes and adjusting variables only after a series has been completed to avoid skewing results.
💡 Expanding the Definition of Success
The speaker encourages traders to expand their definition of success from individual trades to a series of trades. By doing so, they argue that traders can become detached from the outcome of each trade, focusing instead on the overall results. The speaker suggests that this mindset allows for flawless execution and true profit potential, akin to the approach taken by casinos.
🌪️ Overcoming Psychological Barriers
The speaker addresses the psychological barriers that traders face, such as fear and the need for a reason behind market outcomes. They suggest that traders can overcome these barriers by changing their perspective on trading, viewing it as a business expense rather than a personal failure. The speaker emphasizes the importance of desire and clarity in making these psychological shifts.
Mindmap
Keywords
💡Probabilities
💡Edge
💡Risk Management
💡Collective Behavior
💡Emotional Attachment
💡Execution
💡Sample Size
💡Discretionary Trading
💡Systematic Trading
💡Belief Systems
Highlights
Understanding probabilities is essential for trading, but executing trades flawlessly based on that understanding is what truly matters.
There's a reality gap between understanding probabilities and being able to execute trades without making errors.
Believing in the probabilistic nature of trading is different from actually executing trades without fear of loss or judgment.
Society's obsession with winning and avoiding losses at all costs creates a powerful belief system that can hinder trading.
The essence of trading is being able to lose without feeling like a loser, which is difficult due to societal pressures and personal experiences.
Technical analysis defines patterns in the market, but the outcomes these patterns predict are random and cannot be guaranteed.
The law of probabilities works over a series of events, but each individual outcome remains unpredictable.
Casinos make money by relying on the law of probabilities over a series of events, not on predicting individual outcomes.
Traders often use analysis to avoid the emotional risk of losing, but this doesn't work because no analysis can eliminate risk.
Accepting risk is crucial in trading; it's about changing your perspective to view losses as part of the process rather than as failures.
The key to trading is not about predicting the market, but about managing risk and executing a strategy consistently.
The concept of 'edge' in trading refers to a tested, reliable pattern with a defined win-loss ratio, but not a guarantee of success on each trade.
Traders should focus on a series of trades rather than individual trades to evaluate the success of their strategy.
The idea of 'trading in the zone' involves being in a carefree state of mind where emotional discomfort does not affect trade execution.
Changing beliefs and perspectives can happen instantaneously with clarity, focus, and desire, and does not necessarily require a lengthy process.
Traders must be aware of their motivations and beliefs about money and success, as these can impact their ability to trade effectively.
Backtesting a set of variables until satisfaction is reached is a straightforward process that helps define a trader's edge.
Executing trades without emotional attachment to the outcome is a sign of truly accepting the risk involved in trading.
The overflow of orders in the market has the same impact on price movement as a random chip generator in a slot machine, emphasizing the unpredictability of individual trades.
Transcripts
[Music]
thank you
okay before I ask you guys if you have
any questions about some of the stuff we
did yesterday oh I just want to
elaborate on something that John just
said because it's really important
he said when you understand
probabilities
they're probably isn't a person in this
room who doesn't
understand probabilities
it's being able to function from a
probability probabilistic perspective
there can be a huge reality gap between
let's say our understanding of what of
what it means of what probabilities mean
like you know I'm saying hey uh our
pattern gives us an edge you know over a
series of Trades you know over a series
of 10 trades seven are going to be
winners three are going to be losers the
problem is we don't know which ones are
going to win and which ones are going to
lose so if I'm going to if I'm gonna
actually extract The Profit potential in
that edge it requires that I'd be able
to take every single trade in the series
or the sequence without making errors
makes sense right
understanding that
and believing it at the core of your
personality
so that you can actually do it are two
completely different things
we can say we we can we can think of
ourselves as a probabilistic thinker
so yeah oh yeah I get it I understand it
but if you can't execute all 10 trades
flawlessly
but I can guarantee you you're not you
can't function at a probabilistic
perspective because when you can
you will be able to lose without
thinking you're a loser
you'll be able to be wrong
without thinking there's anything wrong
with you
because that's an Essence where we're
going
this is what makes trading so hard
we live in a society that's completely
obsessed with Winning is Everything
avoid losses at all costs
Winning is Everything avoid losses at
all costs these are very powerful belief
systems
you think they're just gonna go away and
not assert themselves on what you do and
how you behave just because you have
this understanding and probabilities
just because you might read a book or go
to a conference say hey you know what
this is a probabilistic environment that
we're dealing in and you know you got to
think at odds oh yeah oh that makes
sense I can see that
try doing it
because what you do is going to be a
function of what you believe
and if you can't do it it means that
there's there are conflicting beliefs
that say that you know what no this is
not right
I think my analysis should tell me
what's going on
and even though at a conscious level
you're thinking no that's not what this
is all about it doesn't mean that those
that that energy isn't asserting itself
on on how you behave
otherwise you wouldn't be afraid
you were epic scene of last night
how is it that if that that if we lose
it caps us into okay you know we have a
losing experience it can tap us into all
the accumulated negative energy like I
put yesterday of what it means to lose
in our life
it has a losing has the potential to tap
us into all this emotional negative
emotional energy I don't want to feel
that way
most people with let's say a normal
psychological makeup also don't want to
feel that way
we will avoid this at all costs
I don't like the feeling of
what it means to be wrong all the
negative energy
brings up all the times we're berated as
kids someone ridiculing us teachers
coaches whatever
so if my experiences if my trading
experiences have the potential to tap me
in to these two belief systems or these
memories the memories of what it means
to lose and what it means to be wrong
well you know what I got big problems
because you know what if I don't if I
can't lose and I can't be wrong without
it without it resonating you know
negative emotional energy there's a
there's only got one other way that I
can think of to help me avoid tapping
into all this and this through analysis
so in one sense we're gonna say well I'm
a Trader which means I'm a risk taker
but the reality is we're using risk
we're using analysis to do everything to
avoid
tapping into the losing of the memories
of losing and the memories of what it
means to be wrong
and it doesn't work what we're trying to
tell you as this doesn't work
because there isn't any analysis
analytical regimen or system that you
can come up with that will guarantee
that the next trade is going to work
okay
what technical analysis does is it what
is it it defines patterns in other words
in other words when you know when we got
the order flow we got we got buys coming
to the end of The Exchange we got full
of cells coming into the exchange when
there's an imbalance between the buys
and the cells and there's no buys the
the price has to pick up when there's an
imbalance between the cells in
relationship to the buys the price has
to tick down as these price up and down
as the price ticks up and down up and
down up and down up and down it creates
what we call Collective Behavior
patterns I say Collective because
everyone who submits an order to The
Exchange contributes to the pattern
and what we found is that not only can
these patterns be identified Quantified
but they repeat themselves with
statistical
reliability over and over and over again
in every time frame
you guys with me on this
where's the problem
hold on go ahead Tommy oh well yeah no
no the problem
the problem is the patterns repeat
themselves over and over again with
statistical reliability the outcomes
that the patterns are predicting are
random
I want you to get this this is big
okay the out the patterns repeat
themselves with statistical reliability
but the outcome that the pattern is
predicting is random in relationship to
the previous the previous outcomes
there was a completely random
distribution between wins and losses
over a series of edges or or you know
the or the criteria that Define your
edges
exactly
that's right that's how casinos make
money
they're gambling on each individual they
know that's a gamble each individual
outcome is unpredictable and unknowable
but the but over a series of events the
law of the law of probabilities will
work its magic
and they don't need to worry about the
about the outcome to each individual
event
so now you tell me no nobody nobody
likes peeling nobody likes tapping into
the pain no one likes tapping into the
pain
and yet walk into the casino and watch
people sit in front of a slot machine
for hours
and put money into that machine
knowing they're going to lose not only
knowing they're going to lose experience
losing and why is it that they're not
experiencing emotional pain
they are losing why aren't they
experiencing emotional pain
well it's one of the times somebody
raised their hand whatever go ahead
yeah
let's put it this way you say they're
expecting the next one they don't know
what the next one's going to be winner
the next one may be a winner and and the
whole idea that had Dean buttons because
they're going to be surprised if it is
but the point is they are expecting wins
and losses as a matter of fact if you
watch somebody playing slots or you
experience playing slots you are no you
know that you're going to lose more
times than you win
and as long as you accept the risk
meaning and how do you know you accept
the risk your behavior will tell you
except the risk because you don't have
any problems putting the money in the
machine
see if you couldn't accept the risk then
you would find it difficult to actually
put the money in the machine
gambling forces us to accept the risk in
advance because if we don't we can't
play you can't sit on a blackjack table
and just decide to play and without
putting your money out there first they
won't let you
but the illusion that analysis creates
with trading is that I can actually get
into a trade
and believe that I'm not taking any risk
and if the market happens to go in my
favor immediately it's without giving
any heat it like gives me it it
reinforces the idea that yes I don't I
can do this without risk I can do this
without risk I don't have to experience
this if I just find the right method
that method doesn't exist get it in your
brain it doesn't exist
if I had a method that produced 99
winning trades I guarantee you if you're
risk adverse and you haven't accepted
the risk you will not make consistent
money you'll always be worried about
that one time
that's why you know like like you take a
traitor who you know has uh uh you know
uh uh nine out of ten winning trades
except maybe seven four five or six or
seven in a row and you know you're
talking to the Traders at conferences
and chat rooms and they'll tell you
about all these winning trades that they
had they didn't tell you that the 10th
trade they lost all their winnings on
the first nine and more they didn't tell
you that
yeah nine out of ten nine out of ten
yeah
and do they have to lose all their
winnings from the previous nine trades
no
they're defined the risk in advance no
and why didn't they Define the risk in
advance why did they not put a stop in
the market
because they thought they had a
guaranteed win it's that simple
do you think that people could sit there
and play Slots for hours if there was
the emotional risk if there was the
emotional risk
that Traders have about
if they're wrong or they lose they're
going to tap into that pain people we
don't enjoy that it has to be enjoyable
the emotional risk of playing slots for
most people just doesn't exist
they're enjoying themselves because they
know the outcomes are random they know
they cannot it is senseless it is it
would be an effort in an absolute
futility to think that they're going to
predict what what the pattern what the
pattern of those wheels are going to
come up with on the next spin
they might know anything about might not
know anything about the architecture of
the of the computer chip that generates
a random outcome but the point is it is
Iran purely random outcome and when we
learn that it's purely a random outcome
the whole idea of of predicting or even
being right or wrong is irrelevant it
doesn't apply does not apply
and so it takes it takes it out of it
takes what we're doing the activity out
of a right or wrong context and so I can
sit there and push the button and I love
nothing to be right or wrong about
because I'm not predicting the outcome
now that's a little bit more tricky in
trading because we're using an
analytical process to actually make a
prediction but what we have to do is we
have to apply the principles of the law
of probabilities on that prediction and
say you know what this is a prediction
correct okay I think I mean this is yes
I am making a prediction you know I
don't have any Illusions about the fact
I've used this an analytical process I
come to a conclusion I'm making a
prediction but you know what it's still
just a guess
and in that way we're not responsible
for what the market does after we put on
a trade how can we be when you
understand order flow when you
understand there is no way that I can
predict the intent that other Traders
have after I get into a trade there are
other Traders all around the world
waiting to enter orders for whatever
reason pops into their brain whatever
agenda they have whether it's commercial
whether it's contractual whether it's
hedging or whether it's pure speculation
they have their reasons for sending a
buy or a sell order and to The Exchange
and you know and and how big that order
is there isn't anything that we're doing
from a technical or even fundamental
perspective where the mathematics of our
system can predict what those guys are
going to do or women okay there's just
no way
and that's if I'd have to know who's
who's about to who's about to send an
order to The Exchange what kind of
orders are going to be is going to be a
buy or sell how big is it going to be
and then I and then and then with that I
can you say okay well you know we've got
all these buys come in we've got all
these cells coming in and so in this
moment right here we should get an
uptick
but then again you know let's say
there's a huge let's say in the moment
there's a huge uh abundance of buy
orders coming into the into the exchange
that overwhelms the number of sellover
inventory to take the other side of
those trades and the market starts to
shoot up but then some other some other
Traders somewhere in the world sees the
opportunity for what he thinks to sell
high and and just slams that rally with
a huge order
now you would think well who who could
trade that big well hedgers can trade
that big because they're not taking the
risk
they're eliminating the risk they're
already long or short they're already
what I call naturally long and short
based on their business
so yeah they can put that big of an
order in the market and and actually
defend the price you heard words like
defending a price this is what it means
you tell me how mathematical equation is
going to predict that
somebody please
but that's exactly the way you trade
isn't it
isn't it not exactly the perspective in
what you take you think that this
mathematical equation is going to gonna
accurately tell you every single time
what the intent of all these other
Traders are around the world
it's just the probability game everybody
that's it
and Analysis makes it thinks it makes us
think it's something else because of the
erroneous and you know connections that
we make and erroneous assumptions that
we make it's like yeah okay again I've
said it again I did my analysis I made a
prediction the prediction was absolutely
correct that was so the reasons why I
made the prediction must be the same
reason why the market went in my favor
and that way I you know I knew what was
that I knew what was going to happen I
knew what was going to happen
making us think that the risks cannot
exist
if you're trading to avoid being wrong
if you're using analysis to avoid being
wrong in any capacity at all even just
the tiniest bit if you're using analysis
to avoid being wrong and avoid losing
it doesn't work
the only way you're going to make this
work is to adjust the way you think
is to change your perspective that what
you're doing doesn't have anything to do
with you you're going to need your your
predictions have to be correct but your
reasons for making the predictions do
not
in most cases for the typical
screen-based Trader most of the trades
they put on there's virtually very
little correlation between the reason
why the market went in their favor and
the reason why they put on the trade
fairly little correlation and what I
mean by correlation how would I find
that out I would have to be able to
inventory if I if I went long based on a
moving average and my moving average
cost and and I put a buy order in the
market and you know and then three four
minutes late as Market started rallying
and I'm thinking that okay that's you
know well I have the right reason for
making this my my technical reasons uh
must be you know be correct because it
made the correct prediction I would
actually have to go out and determine
all the traders who put buy orders in
the market that actually cause my trade
to become a winner because I couldn't
make my own trade become a winner I
can't trade at a level where for example
if you know and there are a lot of
traders who can a lot of traders who
have strategies to do exactly do exactly
this okay that when they see when they
see um
how many bids and offers there are at
certain price levels and certain
significant reference points that they
know they might be able like I said
yesterday you know like Stampede people
out of a position or or even into a
position that helps them out okay all
they have to do if the price is at 10
all they have to do to bid it up to 11
is just is just simply take out all the
offers
if there's X number of offers at 11 all
they got to do is hit them that's it the
price automatically goes to 11. then all
I have to do to get it to 12 is hit all
the offers again
that's it
they're actually creating their own
price movement they know why the
Market's moving they know why it's
moving because they're doing it
and they are making their own trades
winners
because everyone who took the other side
of their trade at 11
when it gets bit up to 12 is a loser
everyone who took the other side of
their trade at 12 when they visit up to
13 is a loser
now this can be a dangerous strategy
you have to have a lot of a lot of
capitals and a lot a lot and a lot of
balls because because it has has their
position size grows for them to get out
of that trade what do they have to do to
get out of that trade
they got to reverse everything in other
words they have to become sellers which
means that if they have a huge a huge
position that they've built a huge long
position they've built up they have to
there has to be buy inventory without
to get out of that position in other
words they become Sellers and if there
isn't enough buy inventory for them to
get out of that position they can
actually Force the price swap back right
back down again
well you know hey yeah it's like right
you know there's there's a a very famous
doer on TV I'm not going to mention his
name but about six or seven years ago he
was doing an interview uh on the street
as a matter of fact and um
and kind of bragging actually before you
become really before you became really
really famous and he talked about a
strategy and this is this is uh
something I I was probably still down I
don't I couldn't really I don't watch
the markers enough to really say but you
know it's like if if you watch to see
what kind of orders are flowing the size
of the orders that are falling into the
exchange towards the close so let's say
we've been on we've been in a a an
uptrending market and it's like
and it's like retail traders who need
the most confirmation they're the most
risk adverse and they need the most
confirmation that something's going to
work
okay so to get into a trade so so and so
this is a particular stock for example
so they see a lot of 50 share 100 share
200 share orders flowing into the
exchange on the close what do they know
they know a lot of retail people are
buying into the whole idea right
so what they're going to do is you know
they're going to see they're going to
they're going to see what kind of bids
and offers are lining up before the
close or before the open the next
morning and he would say hey you know
what depending on the stock he might
have to allocate you know anywhere from
30 to 50 million dollars to take out to
take out all of the all of the bids so
let's say the market is slated to open
right here he might allocate 50 million
or whatever it took to to take out all
the bids to drive the price down in the
open at the open
and all those not all but many of the
people that bought on the close the
previous day this is the close the
previous day they're going to think oh
my God what did I do
they're going to start
selling okay their sell orders are now
going to help create this downward
movement because there's an imbalance
between the number of the buys the
number of cells and as soon as they
start coming into the market with their
sell orders he reverses his position and
starts taking the other side of those
sell orders as a buyer so he was able to
get in on this trending market for an
example at a lower price
so you just forced the market lower he
gets in at a much lower price and then
the market just reverses back up again
and keeps on going
this is a valid strategy that people
been using for years
and this doesn't surprise anybody
doesn't
so it's like it's like you've got to be
able to do this
you got to be able to do it you got to
be able to to you know get yourself into
an emotional state of mind like a person
who's playing a slot machine it's like
how do I lose without feeling like a
loser real simple you're not losing
you're you this business requires
expenses
yeah you're laughing but it's true do
you think that's the way you think the
casinos the the board of directors and
the Man in the casinos when you know
they're looking Hand by hand they say oh
my God
what am I going to do here what am I
going to do
these are expenses
the losing the amount of money that we
pay for the trade the edges that don't
work
is simply the cost of doing business to
make ourselves available
for the trades that do
how many people in this room have ever
owned a business
when you when you had to buy supplies
we need to buy pencils or office
supplies did you feel like a loser
writing a check
didn't really did it tap you into this
pain I'm such a loser
would it even occur to you think that
way
but yet you think that way now why why
do you think that way now
come on why do you think that way now
what yeah but no why do you think that
when why do why why does the potential
exist
for you to experience a losing trade and
tap you into the pain of what it means
to be what what it means to lose why
yeah because just think they know what's
going to happen
you think you knew what was going to
happen and that it shouldn't be
happening because I knew I have because
I have an expectation I have an
expectation that is not in line with the
reality of the environment that we're
operating in
yeah yeah we're just you're not thinking
of it as an expense I've got X number my
my Edge like I said my Edge I tested my
Edge
I have a certain expectation about what
the outcome would be in other words over
a series of Trades
but I don't know what the outcome is
going to be on each individual trade and
it goes as far as this it's like if if I
said
uh I'll give you an edge that has a 70
win loss ratio 70 winners 30 losers
would that imply to you that on each
individual trade there's a 70 chance of
winning
absolutely not
no 100 no
[Music]
there is no way to calculate think about
this think about what I just said five
minutes ago there's no way to calculate
the odds of Any Given individual trade
working
because we don't know what the intent of
other Traders are
if I don't know what the intent of other
Traders are how in the world can I
calculate the odds of Any Given
individual trade
I can't it's impossible
I can be ready to put on a trade
where it's destined what I mean by
Destin it's destined to lose the the
instant I get filled and why
because I don't know that some big hedge
fund manager is going to unload a whole
you know a whole half is inventory of a
particular commodity or stock in the
opposite direction of my order how would
I know that that his orders coming down
the pike one minute after I get billed
how would I know that
and if I can't know that then how do I
calculate the odds of success of that
trade
that means the risk always exists
I can't even calculate the odds of
success of Any Given individual trade
and what I do it would let's say in the
discretionary mode it would be based on
my experience but in essence I still
know I'm guessing
I can say yeah I think this trade has a
good has a good good likelihood of
working out based on the pattern that at
the same time you know if the pattern
you know whatever pattern I'm looking at
whatever's going on in the market in
relationship to let's say news or
anything else like that I you know I
still don't know what that one
individual Trader might be doing or are
intending to do keep in mind that the
patterns the collective Behavior
patterns that give us our predictions
are consist consistently and
consistently show up over and over and
over again and they are reliable but it
only takes one Trader somewhere in the
world just one Trader somewhere in the
world to negate the positive outcome of
that pattern
we have an expectation based on the
pattern it only takes one Trader just
one
unloading a huge order
within minutes or whatever after we get
into our trades that's all
tell me how you're going to predict that
tell me how you're going to calculate
the odds of that trade working
so
it is not a 50 50. I'm going to stop you
right now there's no there's no way you
can save 50 50.
there's there's no you just don't
there's no way you can say it's 50 50.
oh I just said I just said that that
that a trade could be destined to lose
there's a hundred percent there's a
virtual 100 percent
you know certainty that you will lose
but even before you put the trade on so
how's that 50 50.
[Music]
um
analysis we have any decisions
yeah you have to make a decision but
keep it now keep in mind these decisions
that you have to expand you have to
expand your your perspective you're
making you you want to make this
decision on a trade by trade basis what
I'm saying is that we're going to expand
our definition of success from a trade
by trade basis this is trade one three
two three four five six seven nine ten
eleven twelve thirteen fourteen fifteen
sixteen Seventeen eighteen nineteen
twenty to what I call a sample size of
Trades
in other words I am not concerned with
the outcome of any particular individual
trade within the 20 trade sample size
what I do is trade in 20 to 25 trade
sample sizes and what I mean by that is
that is that I'm saying to myself I'm
based on testing the particular
variables that Define my Edge
I have found that
I've got you know let's say uh a 60 40
win loss ratio
and we're not talking about you know and
how your profit in relationship to you
know into what you're expensive but just
like let's just keep it a 60 40 win loss
ratio
and so I say to myself
what I'm gonna do is I'm going to take
the next 20 trades
and find out what my results are
I like trading at 20 to 25 trade sample
sizes because what you want is you want
your sample size to be large enough to
adequately test your Edge
you want it to be small enough so that
if your Edge starts deteriorating over
time
because we're dealing with a fluid
environment
edges can get better and edges can get
worse
and you want to be able to you want to
be able to stop your sample size so that
if your Edge is actually deteriorating
you can change the variables
before you lose too much money But You
Gotta Be You got to take this expanded
view that I'm not trading trade by trade
anymore it's over a series of Trades
and so if I like my outcome at the end
of 20 trades and I look at I look at
what my outcome is what my profits and
losses are if I like what I experience I
take another 20 trades
I do not under any circumstances change
the variables within the sample size
because that would be trading randomly
I'd be adding random variables that will
skew the results
but if I like the results
then I'll take another 20 trades if I
don't like the results since I know
exactly what I did and why I did it in
every single trade I can go back and
look at my variables and say you know
what if I tweak this you know if I just
take a little bit more risk on each one
of these trades I actually would have
been in more winning trades and and
experience more profit or if I or or I
could even see that I might not have to
take as much risk
or if I just move my confidence my
profit objectives a little bit further
away or a little bit closer
in other words you're trading now
trading instead of trading randomly your
Trading systematically
because you're going to learn what works
and what doesn't
as long as you're adding random
variables into your into your equation
you never learned what works and what
doesn't
you will over a period of time it might
take you five years or ten years or
whatever but you can you can have that
learning curve back you know real quick
just just stop trading randomly
those variables
and that's why we that's why we change
the trade a limited sample size that's
exactly why you're right
yeah
I think so yeah
I think usually between 20 and 25 trades
if it isn't working I'll change the
variables
yeah absolutely
yeah
so when you expand
your your definition of success from
trade by trade
to a series of Trades
then the sign then the outcome you
become detached from the outcome of each
individual trade
it doesn't matter
what I'm concerned about is my end
result at the end of the sample size
because the most important part of this
once you once you have your variables
that Define your Edge the most important
part of after that is being being able
to execute
can I execute flawlessly
in other words can I get into these
trades exactly when my ad says again or
am I going to get in late because I
think oh you know I don't really think
this is what's going to work now you
know and then it starts to work and
mixing it on chasing the market well am
I going to get in too soon because you
know the last time you know it's like uh
uh you know the market didn't really
come down and hit my price and I missed
out on a trade so I'm going to get in
beforehand and it turns out not to work
it's like all these all these ways that
we can we can make errors
deteriorate my results because I know
there was one person in this room who
hasn't seen the possibilities of being
able to execute an edge over a series of
Trades and not not have more money and
if the only reason why you don't is
because you're not executing your rent
properly
because look what happens
when we're trading with fear
see this can only be done in a Carefree
State of Mind
and if it doesn't matter then I can get
in exactly when I need to get in I can
get out when I exactly need to get out
based on the tested variables that
Define that edge
and then I can experience the true
potential profit potential that that
edge has built into it I can then
experience the true profit potential
that has that edge has built into it the
same way a casino does
casinos execute flawlessly do they not
I'm not saying dealers don't make
mistakes once in a while but for the
most part casinos execute flawlessly
as Traders we can't execute flawlessly
because why we think we know what's
going to happen
[Music]
and if we think we know it's because we
think we can know
we think we know and we think we know
because we think we can know
once you start getting it firmly
implanted in your mind
it isn't even necessary to know
for you to be consistently successful in
this business you'll start letting the
idea go
ahead
they're both definitely trading The Zone
just one Trader and and reinforced and
taught in different ways in the new book
yeah
but you can see you know if it's like a
lot of people in this room who are
trading in the zone so am I saying
anything you haven't read
and yet it's still like uh it's going to
be still like resonating like oh
you know this is getting too real this
is just getting it's just getting a
little too real
yeah you've already read it
all right
yeah yeah the whole idea trying to
figure out why you're wrong with
mathematical equations or even
fundamental analysis is such an epic
futility it's it's when you really
understand order flow it it falls into
the category of being absurd
because until we can find out who placed
the orders and why they did it we'll
never know
I'm not saying some people don't know or
some people can't find out I'm saying as
typical screen-based Traders it is
completely out of the realm of our
reality
26 years
26-year registered nurse okay and if I
have a patient with diabetes the blood
sugar is an oxidative body someone comes
back to me and says big what is going on
with this person and I say well she's
diabetic instead of eating a piece of
watermelon she ate the whole thing I can
give you a reason for that outcome and
it just feels so good to be released
from having to have a reason for the
outcome follow the methodology right
this is something you hear what you just
said have you not read that over and
over again I heard that over and over
again no not just not just in my books
but just even other places right and yet
it now is sinking in right okay
see everyone is a certain psychological
distance away from from not only one
being aware of these Concepts to
understanding these Concepts free
embracing these Concepts and then
actually assimilating these Concepts at
a core level of their identity so to
become a part of their personality
and it usually happens in stages it
doesn't have to though all of us have
probably you know had experiences where
we made you know seismic shifts on our
perspective instantaneously it can
happen instantaneously it really can
when people have like an epiphany you
know it's like it's just like they're
they're a different person from one
moment to the next
changing is not a function of of time by
the way we usually think that it is
because we if we want to change we're
gonna we're gonna usually employ some
sort of technique and technique implies
you know doing something over a period
of time or a process it's not a function
of time at all it's a function of Desire
simply a function of actually Focus
Clarity and desire now those once you're
really genuinely clear about how you
want to change
and that Clarity is sincere and resolute
and depending on the degree of Desire
the change can happen instantaneously
we get the idea you know once we get the
idea and find it in our brain then
analysis can take away the risk
these beliefs become so entrenched they
and so powerful that it takes having to
lose fortunes several times over and
really painful experiences to finally
come to the conclusion of the awareness
that you know this isn't working
that's the Common Thread that you hear
everyone that's broken through that
threshold will tell you about
what I'm here to say is that it doesn't
have to be that way
you can make these changes in your
perspective at a conscious level you can
take control of this process and you
don't need pain to have to go through it
or to even prompt you to do it for that
point for that matter
[Music]
security
now
they can't do anything with respect to
the rest no no yeah analysis yes
managing the risk is different than
accepting the risk I'm talking about
accepting the risk from a psychological
perspective
but yeah we use analysis to manage you
know position size and how far we're
gonna let the market go against that
position to tell us that the trade isn't
working or is it worth spending or any
more money to find out with respect to
the you know the profit objective yes
what I'm saying is accepting the risk at
a core level where it essentially
doesn't like I'm not really confused
guys if I say it that way
um
that it doesn't matter
well you can get in and out of a trade
without it resonating the slightest bit
of emotional discomfort no matter what
the outcome that's accepting the risk
you can get in and out of a trade
regardless of the outcome without it
resonating the slightest bit of
emotional discomfort
do you understand the distinction the
difference
people sit at a slot machine for hours
and they win and they lose without it
resonating the slightest bit of
emotional discomfort they're having fun
they're losing and having fun
and it's only because of their
perspective
because they don't Define what they're
doing is losing
they're spending money to have fun and
for the possibility that you know
they're going to get surprised and and
get money
[Music]
this isn't any different it really isn't
the Overflow has the same impact on
price movement as a random chip
generator in a slot machine
if anybody disagrees with that tell me
how and prove otherwise
you could yeah well you know that when I
answered somebody's question yesterday
about why people didn't do the exercise
I answered that question within that
context and I was actually actually
sorry that I did uh yes you're right
because what ends up happening is that
once we realize we can we can take
conscious control of what we believe and
how we experience our lives in trading
what's going to stop us from doing it in
other parts of our life it's not a
matter of what's going to stop us it's
like then we don't a lot of our excuses
start to start to melt away and that's
that's that can be pretty scary
the way I should have answered the
question yesterday was that I didn't
explain it well enough in trading in his
own
the reason why people didn't do the
exercise I really didn't I and I didn't
know that I didn't explain it well
enough until I started
in that same you know that that same
material for this third book and it's
like and then I started and I started
really breaking it down breaking down my
assumptions about what other people
understood and how they were going to
relate to this material and then it like
it all hit me like well no wonder why
they're not doing it
I didn't explain it well enough go ahead
exactly there's no other Nation
hurricane
I don't know where you're getting this
idea of no motivation but you're gonna
have to
say the words you use you see here's the
problem I'm sorry I didn't interrupt you
but the problem is that the words you
use are important okay and it's like
they imply certain Concepts and
principles that you're operating out of
so when you use the word motivation it's
like it's like it implies to me that
that somehow or another what I'm saying
is is impacting your motivation to do
one thing or another and it has nothing
to do but anyway go ahead
thank you
why are you training
[Music]
yeah no you say to make money but that
is the case with everybody why you know
it's like you can see the problem
the problem for you to answer that
question is that is that
what okay probably to ask that questions
that we you know I'd have to go into we
have to build a lot more depth it just
isn't that simple it just you know it
just isn't that simple for me to say it
just based just within the context of
what you asked me and I don't want to
really say anything that's you know
okay so we can talk later
okay
[Music]
what do you mean how does it
you backdest
yeah and when you no would you back test
a set of variables until you until
you're satisfied with results
you keep back casting until you're
satisfied with a set of variables that
can produce uh that can produce some
outcome over a series of Trades that is
acceptable to you it's that simple it's
whatever whatever you're satisfied with
it's that simple just whatever you're
satisfied with
and then once you are then you can then
I'm going to get into more detail we're
not I'm just just really building up to
this okay I'm gonna actually answer that
question a little later so I'm not going
to get into it right now who else
go ahead we got one over here soon
not necessarily not no just not
necessarily
the job
as long as that difference doesn't
doesn't uh doesn't prevent you from
doing what you need to do when you need
to do it in other words if they're if
there are competing agendas
that that prevent you from executing
properly or or or distorting the
information or distorting the way you
see the information yeah then it's a
problem
but you know like I think I mentioned uh
even yesterday it's like I work with
over the years you know there are
several traders that came to me for for
coaching and you know they uh they grew
up in a uh Christian fundamentalist
background that's you know very powerful
beliefs about you know rendering
services for uh rendering services for
you know being paid and and you know in
the render services for what you're
getting paid for and uh you know
gambling just doesn't fit into that the
benefit of that scenario
and even though they you know they would
try to convince themselves that they're
not gambling the reality is they are and
at a certain level you know they know
that they are and they're not and
they're acting in a way not not in
accordance with their religious beliefs
and even though they do everything they
can to like you know shove those shove
you know the expression of those beliefs
into the recesses of their mind where it
doesn't have any effect on the way they
see the market and the results guess
what it doesn't work
they have to be reconciled
so is that what you're talking about
yeah right
here as long as you don't think there's
anything wrong with it that's all that
counts if you're not feeling any guilt
if you're not feeling any regrets then
that's all that matters
that's all that matters
there's a lot of people who do it for
other reasons than making money than
what they would say they would say they
do it to make money but that's not the
reason real reason why they're doing it
they're doing it to be like they're
doing it to be hero they're doing it to
be the Big Man on Campus means impress
their relatives to impress their friends
you know the whole idea of making money
is a byproduct but that's not the real
reason why they're doing it
okay then that's then then that's that's
right
if I'm not saying that it isn't I'm not
anyway implying that it isn't
because it would be funny
but the problem is that people have a
lot of different beliefs even about
making money and about what money means
in their lives
it's like you you have a person that
says you know I'm doing this to make
money and yet I can't tell you how many
Traders I've worked with that have that
have a threshold of how much money they
allow them how much how far they allow
them their account balance to grow
and they get to this threshold and you
know they have a huge drawdown they
build it back up same almost as a dollar
amount boom go on them out they can't
get through it
in this scenario has nothing to do with
what's going on in the market
it has nothing to do with their Edge
now if they're trading mechanically you
see the thing is I'm not implying that
you even have to know what these issues
are I don't want to I don't want to
scare you guys you don't have to know
what these issues are and if you don't
want to get involved with them that's
all right you can still be very
successful as Traders
just don't trade in a discretionary mode
because see when you've traded in a
mechanical mode you know exactly what
defines your Edge you know exactly what
you're supposed to do and when you're
supposed to do it there's no question
about it when you trade in the
mechanical mode the market has to
conform to your specific specifications
of your Edge or you don't have a trade
you don't have anything to do
so there's even nothing to think about
all the thinking was done when you did
your analysis in your back testing you
did you decided what your Edge was going
to be and the variables you're going to
use to define that edge so all the
thinking was done in advance the market
either conforms to your Edge or it does
not if it does not you have nothing to
do with nothing to think about
therefore
if you have all these other side issues
coming into play
you don't have to know what they are you
just have to know you know what I'm
finding it difficult to execute my
system why can't I do it now
it's like you know I'm supposed to get
in right now in this moment and and
you're feeling resistance
or you're feeling resistance you know
putting your stuff in the market or
you're feeling compelled to pull your
stock
that energy is coming from somewhere you
don't have to know where it is but at
least if you know that you're not doing
what's appropriate you can at least shut
down and stop trading or if the desire's
strong enough step through it and do
exactly what you're supposed to do and
every time you do I'm like going to go
into this a little bit every time you do
you start building and you start adding
energy to your new beliefs about what it
means to be a successful Trader and you
just automatically start extracting
energy out of the con out of the
conflicting beliefs and you don't even
know where that energy is coming from
you don't have to know
you just have to stay out of the
description you just have to stay out of
the discretionary mode
because the skills that you're going to
need to trade discretionary are pretty
sophisticated at least to create
consistent results
they're pretty sophisticated mental
skills they really are
okay
do you know what the website yes okay
yeah
emotionally
accepted after him
but please please
yeah absolutely yeah
no I'm not saying that it won't uh again
I'm not a fight that's not gonna affect
you but what I am what I'm saying is
they have to be aware of it
and aware of the potential impact it has
on your ability to execute properly
yeah yeah taking a break yeah
you know what that's a good idea let's
take a break
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