Mark Douglas Trading Psychology 6/7 Probabilistic Principles
Summary
TLDRThe transcript discusses the concept of trading with a probabilistic mindset, emphasizing that each trade is a unique event with no connection to previous outcomes. It highlights the importance of understanding that any analysis is ultimately a guess and that maintaining a proper money management strategy is crucial. The speaker advises traders to adopt core beliefs that promote consistent results, such as being reconciled to the necessary financial risk and recognizing the unpredictability of market movements due to diverse trader intentions. The transcript also touches on the psychological aspect of trading, suggesting that traders should actively reframe their thoughts to align with their desired beliefs and practices.
Takeaways
- 🎯 Embrace the concept of 'ballistic principles' as foundational beliefs for effective trading.
- 🔄 Recognize that every trading moment is unique and unrelated to previous outcomes, akin to a slot machine's independent spins.
- 💡 Maintain a probabilistic mindset to avoid being influenced by recent winning or losing streaks.
- 🧠 Be aware that the human mind is wired to find patterns and relationships, which can lead to biases in trading decisions.
- 🚫 Avoid money management errors by not letting past results influence the size of your trades or risk management strategies.
- 🔄 Understand that the outcome of each trade is a unique event with no discernible relationship to any previous or future outcomes.
- 🤔 Accept that the reasons behind correct predictions are often unknown, and thus should not be overestimated.
- 🌐 Acknowledge the diversity of intentions among traders, which can lead to unpredictable market movements.
- 💪 Develop and execute trades based on your 'Edge', while being prepared for either profit or loss.
- 📝 Reinforce your trading beliefs by writing them down and internalizing them through repetition and reflection.
Q & A
What are the core beliefs discussed in the transcript related to trading?
-The core beliefs discussed are that every moment is unique, and each trading outcome is also unique with no relationship to previous outcomes. This means operating with a genuinely probabilistic perspective and not letting past wins or losses influence future trades.
Why is it important to believe that every trade outcome is unique?
-Believing that each trade outcome is unique helps traders avoid the common cognitive bias of associating a series of wins or losses with the likelihood of future outcomes. This prevents potential money management errors and encourages a consistent, disciplined approach to trading.
What is the significance of understanding that anything can happen in trading?
-Understanding that anything can happen in trading promotes a mindset of preparedness and adaptability. It encourages traders to manage their risk effectively and to not be swayed by emotions or assumptions when making decisions.
How does the concept of 'Edge' relate to the core beliefs discussed?
-The 'Edge' in trading refers to a trader's competitive advantage or the favorable odds built into their trading strategy. It's important to remember that even with an Edge, each prediction is still a guess, and the outcome of each trade is independent and unique.
What is the role of self-talk in trading according to the transcript?
-Self-talk serves as a tool for reinforcing the core beliefs necessary for successful trading. By repeating affirmations and statements that align with the principles discussed, traders can manage their mindset and maintain discipline in the face of market unpredictability.
Why should traders not let past success with a particular trading pattern influence their expectations?
-Past success with a trading pattern should not influence expectations because each trade is an independent event. Relying on past patterns can lead to overconfidence and neglect of risk management, which can result in significant losses.
What is the impact of external events, such as a company missing its earnings, on trading?
-External events can have a significant impact on trading as they introduce new information that was not previously accounted for in the market analysis. Traders must be prepared to adapt to such events and not let them disrupt their overall trading strategy or risk management.
How can traders ensure they maintain a probabilistic perspective in their trading?
-Traders can maintain a probabilistic perspective by consistently reminding themselves that each trade is a unique event with no guaranteed outcome. They should focus on managing risk and following their trading plan rather than getting caught up in the outcome of individual trades.
What advice is given to traders who experience a series of losses?
-The advice given is to not let the series of losses affect their perception of the next trade. They should continue to execute their trading signals based on their Edge, understanding that each outcome is independent and that the risk of an Edge not working always exists.
How can traders develop and reinforce their 'Edge' in trading?
-Traders can develop and reinforce their Edge by continuously learning, refining their trading strategies, and executing trades with discipline. They can also seek out and utilize proven trading systems or strategies, and practice mindfulness to maintain focus on the process rather than the outcome.
What is the purpose of having the core beliefs and self-talk statements posted near the trading desk?
-Having the core beliefs and self-talk statements visible near the trading desk serves as a constant reminder and reinforcement of the mental discipline required for successful trading. It helps traders stay focused on their strategy and maintain a positive, probabilistic mindset.
Outlines
📈 Embracing Unique Trading Moments
This paragraph discusses the importance of understanding that each trading moment is unique and should not be influenced by past outcomes. It emphasizes the need to adopt a probabilistic perspective when trading, recognizing that every trade is an independent event with no connection to previous trades. The speaker uses the analogy of a slot machine to illustrate this concept, highlighting the fallacy of believing that a winning streak increases the likelihood of future wins. The paragraph also addresses the psychological challenges traders face, such as the temptation to increase position size after a series of wins, which can lead to money management errors. The speaker advises traders to disconnect the emotional associations from trade outcomes and to focus on the process rather than the results, emphasizing that the core belief should be that each trade is a unique event with no discernible relationship to any other.
💡 Navigating the Market with an Edge
The second paragraph continues the theme of trading psychology, focusing on the concept of having an 'Edge' in the market. It stresses that traders should execute signals based on their Edge and be prepared to accept either profits or losses. The speaker explains that the intentions of other traders can lead to unpredictable market movements, reinforcing the idea that each trade is an independent event. The paragraph also touches on the necessity of being reconciled with the risk involved in trading, emphasizing that even with a good Edge, there is always the risk that it may not work. The speaker uses the example of a Twitter earnings announcement to illustrate how external events can impact trades, highlighting the importance of a robust trading system or Edge to navigate such situations.
🧠 Overcoming Entrenched Beliefs in Trading
The final paragraph delves into the psychological aspect of trading by discussing the power of entrenched beliefs and how to manage them. The speaker suggests that traders should be aware of their beliefs and consciously shift their focus to align with their desired outcomes. It introduces a process of 'drawing energy' from inconsistent beliefs and 'instilling energy' into beneficial ones, using the analogy of believing in Santa Claus to explain how beliefs can drive behavior. The speaker emphasizes that beliefs, though intangible, have structured energy that influences perception and behavior. The paragraph concludes with a call to action for traders to put their beliefs into practice, suggesting that they should write down their principles and review them regularly to internalize these ideas and maintain focus on their trading Edge.
Mindmap
Keywords
💡Ballistic Principles
💡Trading in the Zone
💡Probabilistic Perspective
💡Money Management
💡Edge
💡Self-Talk
💡Diversity of Intentions
💡Risk Management
💡Market Uncertainty
💡Psychology of Trading
Highlights
The importance of understanding and applying core beliefs in trading, such as recognizing every moment as unique.
The analogy of a slot machine to illustrate the concept of unique outcomes in trading.
The necessity of a probabilistic perspective in trading to avoid the common cognitive bias of associating consecutive outcomes.
The psychological impact of winning trades on the trader's mindset and the potential for money management errors.
The concept of disconnecting emotionally from the outcome of each trade to maintain a probabilistic approach.
The importance of not letting past outcomes influence future trading decisions.
The idea that the reasons behind correct predictions in trading are often unknown, emphasizing the role of probability.
The strategy of embracing the unknown and executing trades based on one's edge, regardless of recent results.
The concept of the 'Oracle' and the unpredictability of market orders, highlighting the randomness in trading.
The necessity of being reconciled to the financial risk inherent in trading, as determined by one's edge.
The statement that each trade is an independent event with no discernible relationship to previous or future trades.
The role of self-talk in reinforcing the principles of trading psychology and managing expectations.
The example of a real-time event affecting the market, such as an earnings announcement, and its impact on trading decisions.
The importance of having a good system or edge in trading to increase the potential for profitability.
The process of internalizing trading principles by writing them down and reflecting on them before executing trades.
The analogy of belief systems as structured energy influencing perception and behavior.
The transition from childhood beliefs, like in Santa Claus, to the adoption of knowledge and rational thinking.
Transcripts
[Music]
thank you
so you guys can write this down
couple ballistic principles
these are some of the things that the
exercise that I give you in a moment
these are some of the things that you
can say to yourself in other words these
are look that's just that's just these
are actually core beliefs like for an
example uh uh in trading in the zone and
and something that that uh John put up
yesterday like you know a core trading
belief that promotes consistent uh
consistent results as anything can
happen every moment is unique now you
know we all understand that anything can
happen and we understand that you know
every moment is unique but actually
believing it at a functional level is
another manner
and and these beliefs so when you can
operate out of every moment as unique
it's like you're sitting at a slot
machine you know every moment's unique
you know that every single outcome is
going to be unique that has absolutely
no relationship with the previous
outcome
as Traders when we're looking at a
sequence of Trades
we also have to believe that every
outcome is unique and those outcomes
have absolutely no relationship with the
previous outcome
we have to consciously disconnect
so if I get three winning trades in a
row
it's gonna feel like if I'm not
operating out of a genuinely
probabilistic perspective if I'm not
operating out of that kind of
perspective it is going to feel like the
next trade will be a winner
it's just the way our minds are wired to
think
if I get three winning trades in a row
and I think I had in my analysis my
analysis you know other than being a
guess
caused me to have those it did make the
correct prediction but the reasons why
those predictions are correct are
unknown so there's no relationship
it's going to feel like the next one is
going to be a sure thing
and as a result we're going to be
susceptible to a money management error
meaning that I'm going to put on a
higher position on a larger position
than what my account size would normally
dictate
or even be resistant to determining the
risk putting in stops moving stops
making any kind any number of those kind
of trading errors
we have to make we have to we have to
learn how to disconnect that each and
every trade regardless of the fact that
the trade came from the same pattern
that sets itself up over and over and
over again that each individual trade is
just that the outcome is a unique event
so if I get three losers in a row
and I get I get my next signal what's it
going to feel like
it's gonna feel like it's gonna be a
loser right but the reality is what
no slice idea
the reality is we don't know
if I'm doing the coin the coin flip
catcher size
and I get you know and I'm betting on
Tails every time and I happen to get
three heads in a row am I going to stop
doing it
no
the the probabilities might not end up
being 70 30. it might only be 50 50 or
60 40. but the point is is like I know
I've got the odds in my favor so I'm
going to take the next flip I'm going to
bet a thousand dollars
we can't let our minds make these
associations
there is no relationship from the
outcome from one trade to the next
absolutely no relationship
and the reason why we know that for a
fact why do we know that for a fact I've
told you that this morning why do we
know that for a fact
right now yeah
we don't know what the Oracle is going
to be
we don't know who's ready to put we
don't know who intends to send orders to
The Exchange we don't know the size and
we know what type orders are going to be
so it says no way to know
so these are the beliefs we're going for
and and statements we can use in terms
of like a self-talk okay like I'm
completely reconciled
to spend the amount of money
my Edge says it's necessary
to find out if this next trade
turns out to be a winner
the next one
the outcome to each individual Edge
in a series is a unique event
that has no discernible relationship
with any outcome with the outcome let's
say with the outcome of any previous or
future outcomes
okay
that has no discernible relationship
with the outcome
of any previous or future outcomes
this is gonna be a long one
the diversity of the intentions
of other Traders
who are about to submit
buy and sell orders to the flow
it can cause anything to happen
since I don't know what that anything
might be
I'm going to execute the signal
my Edge calls for
and make myself available
to either win
and collect my profits
or pay my expenses
either way I'm fine
the diversity of the intentions
of other Traders
who are about to submit buy and sellers
to the flow
can cause anything to happen
since I don't know what that anything
might be comma
I'm going to execute the signal my Edge
calls for
and make myself available
to either win
and collect my profits
or pay my expenses
the very first one I'm completely
reconciled to spend the amount of money
my Edge says is necessary to find out if
this next trade turned out to be winner
in the last sentence of that was either
way I'm fine
the next one the risk of an edge not
working always exists
the risk of an edge not working always
exists
you could always in capital letters
involved
each prediction next one each prediction
that results from my analysis is always
a guess
[Music]
each prediction that results from my
analysis is always a guess
the next one
capturing the favorable odds built into
my Edge
over a series of Trades
capturing the favorable odds built into
my Edge over a series of Trades
has nothing to do with being right or
wrong
capturing the favorable odds built into
my Edge
over a series of Trades
has nothing to do with being right or
wrong
how we're going to make those real
interesting example to what you've been
discussing
today somebody just announced that
they've missed their earnings instead of
doing it at the end of the market
okay so I have
a trade on
and I'm losing right now a chunk of
change but I hadn't I was not what could
I do I don't know anything
but why'd you put straight on because of
burnings or yeah yeah yeah
but I mean my point is that something
happened that was beyond mine right my
call I you know I was doing what
intellectually I thought was a good idea
okay
and I'm just now just got a tweet saying
that they've just dropped the bomb in
instead of waiting till after the market
so you're not ready to buy a pick at the
Reel no no no no
no you have to get myself
it's just so frustrating because
I'm listening to you and I think I'm
feeling a little better what can I say
I'm glad to hear it we got another one
back here
I think what it says it's just great but
the only concern is you better have a
good system or a good Edge
yeah if you're going to trade
mechanically uh as opposed to discretion
this is the subjectively yeah you have
to develop good Edge absolutely that's a
given
the better your Edge the more money
you're going to make if you can execute
flawlessly
and there are a lot of good edges out
there they really are
whether you develop one on your own or
buy one or go into a chat room there's
they're out there they really are
anybody else before we go all those big
microphones
young lady that bought the Twitter
bye
and to be fair to you
even though Twitter shares dropped we
don't know what's going to happen it
could go up or it could go down or it
could you know
it can it can go up you're you might
have made the right trade we'll know
tomorrow
nobody knows
[Music]
okay how are we going to make this real
everybody
anybody got any ideas how we're going to
make it real
huh oh very good very good very good we
have to act on it and so we have to set
something up right right yeah
I guess the way to act on it is to put
it down in writing
and you all I want to do more than that
yeah yeah we're going to do more than
that so
[Music]
go ahead I would think that it would be
to have these posted near your training
desk and to actually go through it
before you execute any trade until it
becomes natural where you don't have
these other thoughts that are creeping
in you automatically think about the
risk of you know an edge not working
always exists for example yeah the other
thoughts will probably creep in no
matter what you can't stop this possible
but what you can do is be aware of them
and and divert your thoughts to what you
want to think in other words think
thoughts that are consistent with who
you want to be yeah
does that make sense
[Music]
and what
a quarter yeah yeah
I mean like to remind you the
probabilities yeah okay sure
wait I'm gonna get more specific though
okay I'm gonna get real specific on how
to do this because because what we're
dealing with here is is we're dealing
with some pretty powerful entrenched
beliefs have a lot of energy
and so basically what we're going to do
is we're going to step into a process
where we're going to draw the energy out
of
whatever beliefs are inconsistent with
these other principles and ideas that I
just gave you
draw the energy out
and instill energy into these words to
make them real inside of us
they'll give you an idea what I'm
talking about it's like it's like in
trading in the zone I gave an example of
um
a very common belief that that a lot of
people go up with where they believe in
Santa Claus
so as as a five-year-old that belief I
believe that Santa Claus has a very
energized belief
energized in the sense that if if I was
uh you know in my bedroom and uh
somebody knocked on the front of the
door and my mom or dad said hey Santa
Claus is at the front door that that
those words would have kept me into the
energy of what Santa Claus meant to me
all this positive you know does this
positively charged energy that would
have compelled me to go over any
obstacle to get to the front door
right
that belief that Santa Claus exists and
what it meant in terms of in terms of
positive happy energy would have
dictated my behavior
and and it would have been very
difficult to stop if not impossible
you with me
if someone those doors were closed and
some knocked out the door and they
peeked and they said hey Mark Santa
Claus is at the door what am I going to
do
nothing that's probably some some weirdo
or whatever I I you know I was like you
know
I I think it'd be yeah it's Vegas highly
unusual but I don't care one way or the
other where did the energy go why am I
why am I not why am I not behaving in a
way as as I did as a fine girl
well I'm not semantics is important here
I'm not going to disagree with you but
but what's that
oh I have more knowledge okay
the truth Set Me Free did it
[Laughter]
but what I'm looking for is energy I'm
looking for energy Dynamics beliefs
exist as energy
they're intangible intangible in the
sense that they don't you know it's like
it's like out of all the all the things
that that scientists have done in terms
of mapping our brains and and uh you
know even at the cellular or molecular
or Atomic level we still haven't
actually found a belief we know they
exist
but they're not they're not tangible in
that sense I mean not you know they're
not made of atoms and molecules
at least the way I think of it anyway
energy is not atoms and molecules and so
I don't believe that police are out of
the molecules I believe I look at them
as being structured energy
energy that's structured in a particular
way that causes us to see the world in a
way that's consistent with what we
believe and behave in a way with what we
perceive
we're going to take climate
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