Mark Douglas Trading Psychology 7/7 Retrain Your Brain
Summary
TLDRThe transcript discusses the psychological aspects of trading and personal transformation. It emphasizes the importance of challenging and altering deeply ingrained beliefs that affect our perceptions and behaviors. The speaker uses the analogy of a child's fear of dogs to explain how awareness and desire can lead to a shift in beliefs. The concept of 'active contradiction' is introduced, where exposure to experiences that contradict one's beliefs can gradually change one's perspective. The speaker then applies this concept to trading, highlighting the need for a mechanical trading system and the disciplined execution of trades to instill new beliefs and achieve consistent success in trading.
Takeaways
- 🌟 Beliefs and principles evolve over time, and our current beliefs may not align with those from our childhood.
- 🔄 The energy of beliefs can be drawn out, affecting our perception and behavior towards certain situations.
- 🐶 An example of a belief is the perception of dogs as dangerous due to a painful childhood experience.
- 🎯 Active contradictions occur when new experiences challenge our existing beliefs, potentially altering our behavior.
- 🌐 Personal transformation depends on intent and desire, not necessarily on a comprehensive understanding of belief dynamics.
- 🚀 With intense desire and clarity, changes in beliefs can happen instantaneously.
- 📈 To instill new trading principles, one must have a mechanical system with precise entry and exit rules.
- 📊 Backtesting and forward testing are essential to validate the viability of a trading edge.
- 💡 Executing a trading edge flawlessly in a simulated account helps draw energy out of conflicting beliefs.
- 🛠️ Starting with small position sizes in a live account allows for practicing new beliefs without significant risk.
- 🌱 As one becomes confident in executing trades, the desire to transition to subjective or discretionary trading may arise.
Q & A
How does the speaker suggest we can change our beliefs and their impact on our behavior?
-The speaker suggests that we can change our beliefs by drawing energy out of them, which happens when we learn something new that contradicts our existing beliefs. This process is referred to as an 'active contradiction'.
What is an example of an 'active contradiction' given in the transcript?
-An example of an 'active contradiction' given is a child who initially has a painful experience with a dog and develops a belief that all dogs are dangerous. This belief is later contradicted when the child sees other kids their age playing happily with dogs, which starts to chip away at the negative energy associated with the belief.
How does the speaker describe the process of personal transformation?
-The speaker describes personal transformation as a process that depends on one's intent and desire. It involves setting up a series of small, incremental steps to confront and eventually change a belief that is no longer useful or true.
What is the significance of the child's encounter with a friendly dog situation in the story?
-The child's encounter with a friendly dog situation is significant because it introduces a contradictory experience to the child's belief that all dogs are dangerous. This encounter starts the process of drawing energy out of the belief and building up positive energy towards a new belief that dogs can be friendly and fun.
How does the speaker relate the concept of 'active contradiction' to trading?
-The speaker relates 'active contradiction' to trading by explaining that traders often have an illusion of being risk-takers, which contradicts their actual behavior and beliefs. By recognizing this contradiction and adjusting their beliefs, traders can transform their approach to risk and gain more success in their trading.
What is the role of desire and clarity in the process of belief transformation?
-Desire and clarity play a crucial role in belief transformation. With intense desire and clear understanding of what one wants to achieve or become, change can happen more rapidly. Clarity helps in defining the target belief, while desire fuels the motivation to make the necessary changes.
What does the speaker mean by 'drawing energy out of a belief'?
-Drawing energy out of a belief refers to the process of weakening the influence or power that a belief has over one's perception and behavior. This is achieved by introducing experiences or information that contradict the belief, thereby reducing its impact on one's actions and decisions.
How does the speaker suggest one should deal with fears or resistance when trying to change beliefs?
-The speaker suggests that one should face the fears and resistance head-on by taking small, incremental steps towards the desired change. By consistently engaging in actions that contradict the fear-inducing belief, the individual can gradually build up positive energy and diminish the fear over time.
What is the importance of having a mechanical system in trading according to the speaker?
-Having a mechanical system in trading is important because it provides precise, rule-based criteria for entries and exits, eliminating the need for judgment calls. This helps traders to execute their trades flawlessly and consistently, which is essential for developing trust in the trading process and achieving success.
How does the speaker propose to help people find a mechanical trading system?
-The speaker proposes to help people find a mechanical trading system by making available a number of absolutely mechanical systems that fit the criteria of the exercise. These systems will be accessible through a web-based platform, allowing traders to choose and use them for their trading exercises.
What is the recommended approach for testing a trading edge?
-The recommended approach for testing a trading edge is to either back test or forward test it in a simulated account. The speaker suggests that a minimum of 25 to 50 trades are sufficient to determine whether the edge is viable, based on the win-loss ratio and profit-to-loss ratio.
Outlines
🌟 Energy Dynamics of Beliefs
This paragraph discusses the concept of energy dynamics within beliefs and how they influence our perception and behavior. It explores the idea that we evolve from childhood beliefs to new principles, often without realizing it. The speaker uses the analogy of a child's belief about dogs to illustrate how beliefs can be energized and later have their energy drawn out when contradicted by new experiences. The concept of 'active contradiction' is introduced, showing how exposure to contradictory evidence can lead to personal transformation by altering the energy within our beliefs.
🚀 Overcoming Fear and Contradiction
The speaker delves into the process of personal transformation, emphasizing the importance of intent and desire. Using the previous example of the child's fear of dogs, the paragraph explains how a shift in perspective can gradually change a belief. It outlines the hypothetical scenario of the child witnessing other children playing happily with dogs, which challenges his fear-based belief. The key is the child's desire to emulate this fun experience, leading to incremental steps towards overcoming fear. The paragraph highlights the role of 'active contradiction' in this process, where the child's awareness of the possibility of friendly dogs starts to chip away at the fear-based belief.
🎯 Establishing a Mechanical Trading System
The paragraph shifts focus to trading, discussing the need for a mechanical system with precise entry and exit rules to eliminate judgment and ensure consistency. It emphasizes the importance of having a well-defined stop-loss point and the necessity of backtesting or forward testing the system. The speaker also mentions the intention to provide resources for those who may struggle to develop their own systems, suggesting that understanding and applying these principles can lead to successful trading outcomes.
📊 Evaluating Trading Edges
This section discusses the evaluation of trading edges, which are specific criteria that define profitable trading opportunities. It explains that the viability of an edge is determined by its win-loss ratio and profit-to-loss ratio. The speaker advises that a sample size of at least 50 trades is needed to accurately assess the viability of an edge. The paragraph also touches on the personal aspect of trading, acknowledging that not everyone is comfortable with the level of risk involved. It suggests that understanding one's innate risk-taking ability is crucial for successful trading.
🛠️ Refining Execution Through Practice
The speaker shares a story of a client, Jerry, who struggled with executing trades despite having a viable trading edge. The paragraph details an exercise designed to help Jerry overcome his fear and inability to follow through with trades. By practicing with a very small position and focusing on executing trades flawlessly, Jerry eventually became a successful trader. The story illustrates the importance of practice, discipline, and facing one's fears to internalize new beliefs and improve trading skills.
🔄 Inoculating Psychological Skills
The paragraph emphasizes the psychological aspect of trading and the need to 'inoculate' oneself with the necessary psychological skills. It suggests that the exercise of executing trades flawlessly, as described in the previous paragraphs, is a way to develop these skills. The speaker explains that the goal is to reach a point where following the trading rules becomes second nature, and distracting thoughts no longer influence decision-making. The paragraph also addresses the transition from mechanical to discretionary trading, highlighting that one should only make this shift after mastering the psychological skills and being able to execute trades flawlessly at a comfortable position size.
🎯 Defining the Trader You Want to Be
In the final paragraph, the speaker addresses the question of how to define the kind of trader one wants to be. It acknowledges that this is a personal decision and that the trader one becomes may evolve through the process of practicing and mastering the psychological skills. The paragraph reinforces the idea that the exercise is not just about executing trades but about building confidence and trust in one's ability to trade without fear or pain. It concludes with a reminder that the goal is to achieve consistent, profitable trading results by internalizing the necessary psychological skills.
Mindmap
Keywords
💡Energy Dynamics
💡Active Contradiction
💡Personal Transformation
💡Belief System
💡Fear
💡Intent and Desire
💡Threshold Point
💡Mechanical System
💡Backtesting and Forward Testing
💡Risk Management
💡Psychological Skills
Highlights
The concept of drawing energy out of beliefs to change our perception and behavior.
The idea that our beliefs are shaped by experiences and can change over time.
The story of a child who develops a belief that all dogs are dangerous after a negative experience.
The process of active contradiction, where new experiences challenge our existing beliefs.
The importance of desire and clarity in personal transformation and changing beliefs.
The example of a child confronting a belief that dogs are dangerous by seeing other children play with them.
The concept of incremental steps in overcoming fears and changing beliefs.
The role of personal experiences in shaping our beliefs and how they affect our actions.
The idea that beliefs are not消失了 but their energy can be drawn out to the point of having no impact.
The application of the concept of belief transformation to trading and risk-taking.
The importance of a mechanical trading system with precise entry and exit rules.
The process of testing a trading edge through backtesting or forward testing.
The role of risk tolerance in determining the appropriate trading position size.
The story of a trader who overcame his fear and resistance by committing to a disciplined trading exercise.
The concept of trading in a simulated account to perfect the execution of a trading edge.
The transition from mechanical to discretionary trading and the readiness criteria for such a shift.
The importance of psychological skills in trading and their role in creating consistent results.
Transcripts
[Music]
thank you
is it possible to draw energy energy out
of a belief so that it doesn't have any
impact on the way we see the world and
how we behave we might not know the
underlying energy dynamics of how it
happens
but we can we definitely know that it
has to happen because we there's anybody
in this room that is operating out of
the same beliefs and principles they
operated out of as a child
then I mean in other words there's a lot
of principles and things that we knew or
thought we knew or believed as a child
that we don't want we no longer believe
because they're no longer useful
whatever those beliefs are whether we
remember them or not if we could do an
inventory of all the things that we
learn to believe at some point in our
lives
we will find that a lot of those beliefs
just the energy was inadvertently drawn
out of them
if the energy was not drawn out of them
and we've learned something new that
contradicts it it's what I'm going to
call an active contradiction and many of
us all of us actually can can have a
number of what I like to refer to as an
active contradiction
for an example in trading in the zone I
give this you know about the boy and the
dog the example of the very first
experience the child has with a dog is
very painful he's mauled pretty severely
and as a result every subsequent every
dog that he encounters you know
throughout his childhood regardless of
how friendly the dog is regardless of
the potential fun that the child can
have with playing with dogs his
perception of what dogs are is that they
are mean and dangerous
at some point in this child's life he
will most likely this is a hypothetical
but most likely develop a belief
a series of words that that he's going
to put together that have meaning in the
sense that they're energized as a as a
Living Concept
that all
dogs
are dangerous
okay this is a belief
all is an example of a belief it's
exists an example of a set of words that
we pull together into a concept that
becomes a life principle
that has energy
and that energy that's inside of him
will cause him to see the world in a way
that is completely consistent with these
words
so that every dog he encounters he will
perceive as being dangerous and avoid
regardless of what the potential is
regardless of what the alternatives are
it won't matter
this is something that can really
frustrate parents because they could
bring home the friendliest most playful
dog imaginable
and it won't make a difference and if
parents will get frustrated because they
think that you know somehow or another
the energy of their words is going to
counteract the energy of this Terror
because it's exactly what the child
experiences every time a dog comes into
his field of awareness and this can this
can go on like this for the rest of his
life
at some point he will most likely become
exposed to a friendly dog situation now
I set up a hypothetical situation in the
book where where he's just you know
walking with his parents he he feels
safe and and they walk around the corner
that you know he can't see what's going
on and all of a sudden he's confronted
with a with information that is
completely contradictory to what he
believes is true this is an absolute
truth to him
it's not true from the environment's
perspective of the environment's
perspective dogs have a range of
behavior they're they're fun they're
friendly and fun and some can be mean
and dangerous and everything in between
he walks around this corner with his
parents and all of a sudden he's
confronted with a scene where several
and I'm gonna say kids his age that's
important that that the kids his age
part become is a part of this dynamic
because he's going to relate to them
and he sees these kids playing with dogs
and just having a great time they're
laughing and they're running and they're
jumping and everyone's having fun
this is completely contradictory to what
he believes to be true were you gonna
say something maybe we're gonna say
something okay that to what he believes
to be true
this is Now setting up the the Dynamics
of what I'm going to call an active
contradiction
he has an awareness he has an awareness
that even though he might not relate to
it in terms of the actual words oh I
believe that all dogs are dangerous and
he might say it that way I mean you just
might you know have this concept
embedded in his brain with these words
but that but that what what's happening
is that his awareness that all dogs are
not all dangerous because he has a
personal direct experience to see that
they're not
we'll start to chip away at that energy
not enough for him to go approach a dog
not enough for him to play with a dog
but at least it'll chip away at it a
little bit now here's the important part
of this and this is the key element to
to any kind of personal transformation
it depends on what his intent and desire
is
now if this kid for whatever reason is
relating to these other kids so much
and he and he gets so attracted to the
fun that they're having he says to
himself I would like to be like these
kids I would like to be able to play
with a dog
not everyone's gonna have that not
everyone's going to have that attraction
but in this case let's say this
individual looks at this scene and says
you know what they're having a lot of
fun and he's thinking I want to be like
that
does that automatically mean he's gonna
be able to play with dogs
no
no this fear is just way too intense
so he's gonna have to set up a process
you might say okay set up a process like
small incremental steps to be able to
get to the point where you can actually
interact in close proximity with the dog
and just real quickly just just how the
fear uh fear you know attracts the
object you know the object of our our uh
causal focus on objective verification
trying to avoid like like this kid was
let's say so afraid of dogs that he
could even be walking out in onto his
front porch because some kids his
friends were in you know in the park
across the street or across the street
in some neighbor's kid's house and
they're playing he could hear a dog mark
down the street which under normal
circumstances he probably wouldn't be
aware of
and hearing the dog Michael cause him to
go back in laps he created The
Experience he wants to avoid dogs he
heard of dogs that he ordinarily
wouldn't be aware of created an
experience of Terror and walked back and
laughs
so so how does he get through this fear
to be able to express himself
how does he transcend his fear to be
able to express himself in a way that he
can play with dogs
it'll probably happen in slow
incremental steps in other words now
every time he encounters a dog he will
be seeing the dogs from a different
perspective because he's already seen
that it's possible to have fun he just
can't do it yet
and so every time he has a dog comes
into his field of awareness and it turns
out to be a friendly dog and nothing
negative happens he'll start building up
positive energy into a new belief system
that dogs can be friendly and fun
that dog would say dogs can be friendly
and fun that implies some
family and fun
two contradictory beliefs
every time he has a positive experience
he starts adding positive energy to this
belief to this concept and he's drawing
energy out of this one
little by little incremental step by
incremental step
eventually if he does this long enough
or it happens enough times eventually
he'll they'll reach a threshold point
a threshold point in which the negative
energy in this belief is probably equal
to or close to the positive energy of
this belief
and at that point he might have enough
desire to cross the threshold into
actually petting a dog into actually
touching a dog for the second let's say
for the first time in his life rather
than the first one we got Maul which you
know but but petting a dog and the point
at which he actually has physical
contact pets a dog without a being a
negative experience it'll start drawing
tons of energy out of this one right
here because then he knows for sure it's
not true
all dogs are not dangerous seriously all
it's the all part it's not true
so it's not like the belief itself
disappears do I still believe in Santa
Claus yeah it's a part of my it's a part
of my identity it did it didn't
disappear
once a belief exists we're going to have
it in our entire existence once we
formulate a belief we'll have it it's
just a matter of how much energy is
inside of it
that you can draw so much energy out of
the belief that for all intents and
purposes it might it will not exist
because it has no potential to act on
how we see the world and how we behave
so the whole time that he's going
through this process of drawing energy
out of this and putting energy into this
he was operating out of what I call an
act of contradiction
there's just like as Traders we have an
act of contradiction
most people believe that because they're
Traders they're Risk Takers when all
their beliefs are lined up in a way
that's complete completely contradicts
what they they think they believe
the idea that we're Risk Takers is an
illusion
that's just something we've yeah I'm a
traitor on my wrist I hate one if I'm a
Trader I must be a risk taker and yet if
I analyze everything I do and how I
think it would definitely indicate that
no I'm not taking any risks at all
otherwise it wouldn't be doing it
foreign
just like people who play slot machines
if if there was the same kind of
emotional risk
playing a slot machine as there are as
there is with people who trade do you
think that tens of millions of people
around the world will be playing slot
machines every day
come on do you think they would or not
absolutely not they're losing and
they're having fun
but because they're really not losing
they'll look at it that way they're
paying for their entertainment
they're paying for their entertainment
they're paying to be surprised and it's
all right they're not losers they're
paying to have fun
as Traders we have to pay expenses we
have overhead expenses
this had nothing to do with losing
get that firmly embrained at the core of
your personality and you will be free
so my friend over here says the truth
shall set you free and it will
are we getting the concept here
now does is this kid as he's going
through this process does he have to
have some sort of a comprehensive
understanding of the Dynamics as I've
outlined them to you
no
he just has to have what the desire
the key the transformation is desire
and Clarity Clarity first and desire you
have to know exactly who you want to
transform yourself into and why our
beliefs you know beliefs just don't you
know they can go all you can draw the
energy out of a belief instantaneously
if there's enough desire however you
have to be real real clear about what it
is that you know you have the desire of
it can happen instantaneously
with intense desire Clarity and intense
desire
it's like that
the degree to it you don't have Clarity
and desire it will take time
and so I'm giving you a technique that
takes time
there isn't anybody in this room
that hasn't had a situation or
experience in their life I'm assuming
there isn't I really doubt that there is
there's anybody in this room who hasn't
had the experience of making up their
mind
and things changed instantaneously
genuinely making up your mind that's in
essence exactly what I'm talking about
when you really make up your mind with a
Resolute Desire with no conflict about
what it is that you're making up your
mind about
things change now
anybody want to contradict that you're
gonna argue with that with me you can
no I'm serious if you do want to argue
I'll I'll engage in an argument with you
[Music]
am I talking about anything different
here with with you know this exercise
I'm about to give you if you want to if
you want to instill these Concepts that
I gave you earlier as trading principles
you'll do it
you'll find a way to do it if you don't
you won't and that's that simple
if you can make the connection you can
make a clear discernible connection
between these principles that I gave you
and the kind of outcomes you want to
experience as a Trader you will do it
if your desire is to be a consistently
successful Trader if your desire is to
get out of the boom and bus cycle
and the frustration
but keep in mind not everybody wants to
be out of the boom and bust not
everybody wants to be out of the
frustration there's other agendas that
can be you know another video be
asserting themselves I have an options
Trader in the options bit year years ago
that I work with I mean this guy had
John talks about hero complex I mean
this guy had a real hero complex he'd
set up the most convoluted option
strategies that were just so
unbelievable and yet and he did it for
the express purpose of just going
through the process of being the hero of
unwinding it in a way where you know he
managed to make everything all right in
other words at some point in these and
when you set these things up it looked
like it was going to be disaster and
then he'd find a way to work his way out
of it you know and and that's what he
enjoyed
he enjoyed the complexity of it
didn't help his Equity curve much
but that was a tell us that was a
secondary agenda okay it wasn't his
primary agenda
so you want to instill these beliefs
here's the way you can do it
the first thing you're going to need is
a truly
mechanical system
and what I mean by mechanical I mean
absolutely strictly mechanical no
judgmental wiggle room whatsoever
every entry and exit is absolutely
precise the market either conforms to
the criteria of your Edge or it doesn't
and there's nothing to decide it's
either it's either there or it's not
meaning that my entries are precise
that you don't have to make a judgment
well this is this you know is this
really an entry do I have you know I
have this this and this to consider
there's nothing to consider
this could be a pattern recognition
system it can be a mathematically based
system it doesn't matter as long as as
long as your entry the way you enter the
market either long or short is
absolutely based on precise rules
that you don't have to make any judgment
about
where are you
put your stop
or trade for a trade that doesn't work
has to be absolutely precise and in the
same place every time
in other words based on based on the the
you know based on your entry rules there
will be a most Optimum place to put a
stop that says that you know there isn't
much point in staying in this trade once
the market gets this far against my
original position that does not change
over the 20 trade sample size because
you're going to trade the sample sizes
we're going to be doing this in a 20 or
25 trade sample size so where you put
your stop has to be absolutely precise
and consistent meaning in the same place
every time in the same place in
relationship with your entry every time
not the same place on the chart every
time obviously
hahaha
proper objective same rule
precise no judgment
now how are you going to find this
system you can develop it you can buy it
you you know get it out of a chat room
uh you know I'm not saying that this is
necessarily an easy exercise easy in the
sense that finding a completely
mechanical system where you you know
that that has uh I mean they exist I
really do I mean you know one of the
things when I do book comes out one of
the one of the next projects going to be
to make available a number of absolutely
mechanical systems that fit the criteria
of this exercise that people can choose
to use to do the exercise
so in a number of different time frames
and and different styles of trading and
they've already got one I mean I I got
one I said the entries are really good I
just haven't haven't made the excess
precise in terms of stops and profits so
I am working on it
is that going to be in the book no
that'll that'll be web web-based
yeah yeah yeah the book yeah because
yeah because it's like you know it's
like there's no point in making these
Concepts available to people unless
you're gonna you know also help them
with the system itself I mean normally
If This Were 15 years ago I understand
you know what you know figure out a way
you know I mean it's like yeah you know
you you trade for because of business
for 30 something years you think that
you know it's like you don't have to do
everything but yet I realize now that
you know it's you're I'm really gonna
have to provide it or or give or or give
at least people a way to find it so it's
just you know because the reason why it
can be difficult it can
everybody is is in a let's say has the
personality makeup to be able to develop
their own mechanical systems it's just
that simple
so uh so yeah I'm gonna I'm definitely
gonna make make and not only that not
just me but I will also you know
investigate other people who have
already developed systems and you know
take the best ones and endorse them you
know just say hey you know go here go
here go here
so that you have this available just so
that you can get right into it so you
don't have to worry about even
developing it yourself that you can just
step right into the process of being
able to do this exercise so the next
part of the exercise is is to test in
other words which the only reason you're
going to have these variables is they're
going to be tested you have to you have
to back test or over a test so for
example if you have back testing
capability and you're proficient at it
then you can go ahead and back test if
you don't have back testing capability
and you're not proficient at it then you
have to forward test so what will I mean
before test is you forward test in a
simulated account meaning you want to
find out what what the results are going
to be over and I believe it or not
you're going to forward test it I don't
think you really have to forward test
and Beyond 50 trades all you need is
about 50 occurrences on your Edge to
determine whether or not it's viable you
don't need to go beyond 50. so even if
somebody is offering you a completely
mechanical Edge that you can buy in a
chat room or otherwise if they'll give
you at least you know at the very
minimum 25 but if they'll be generous
enough to give you a 50 trade sample
that that would tell you whether or not
you'd want to get into it you guys with
me on this yeah
so you test your Edge and you find out
what the results are is that simple
it's like how many winning trades how
many losing trades and what your what
your uh your profit and loss ratio is
because there are some edges you know
that that you can have uh they might
only win 35 to 40 of the time but you
know their profit to loss ratio is so
good that you're going to end up in that
winner
and there are edges where you're going
to win 90 of the time but your profit to
loss ratio meaning you have to risk a
lot to make a little where you might
let's say in the S PS you and I'm even
speaking of one particular in in
specifically that even that I know of
where you know they're they're risking
eight to nine s p points to only make
two or three but they're winning 90 of
the time
now this might see you know this is a
lot of people wouldn't like that you
know
that would be all right don't choose
that edge
the important thing is that you get Once
once you decide that once you've found
something that you think is that you
believe is viable based on your testing
then you're going to step into a process
of actually executing the edge now how
you step into this process is a lot to
do with with your own as a innate you
know risk-taking ability meaning that
there's a lot of people who are trading
who are not Natural Born Risk Takers
they're they're I I believe that there
are genetically uh people who are
genetically predisposed to take more
risk than others
and the ones that are predisposed that
take more risk generally will make
better Traders or easier for them to be
better Traders as long as they can
control themselves if they can't control
themselves they're they're going to be
the worst
in terms of their slings and up and down
but otherwise I also you know have
worked with people who are so risk
adverse that they can't even execute a
mechanical system in a simulated account
where there's nothing at risk and and
actually do what they need to do they
can't do it they literally can't do it
not even well there's no there's no
money there's no money at stake there's
nothing at stake and they still can't
follow the rules
and if that's the case then you know
it's going to be challenging okay it's
that simple it's going to be challenging
and so here's what you do
it's like if you can't do it with money
I mean if you can't do it in a simulated
account because the first thing you
really should do it in the simulator if
you can do that's what it does but
here's the rule the rule is that once
you decide on an edge trade at least one
sample size in a simulated account
if you can execute that edge perfectly
and what do I mean by perfectly
you take every signal
as is given without making any errors
it's that simple
you you you your entries are without
error and you actually to understand on
a profit and on the law side are without
air
in other words you can do exactly what
you need to do when you need to do it
the only thing that's going to stop you
from doing exactly what you need to do
and when you need to do it our
contradictory beliefs or beliefs that
would contradict what it means to think
in probabilities
if you don't have any beliefs or any
beliefs that have energy that
counterdict with the set of beliefs that
I gave you earlier then you will be able
to do this perfectly
and I would say the likelihood of that
is probably zero
and so you execute in a simulated
account until you can do it perfectly
now why are we doing this it's important
because you're going to think you know
what I'm going to take time away from
Trading to do you know yeah you're doing
this to develop the necessary belief
skills that you need to be a successful
Trader
you are going to be inadvertently well
not even inadvertently consciously
drawing energy out of any conflicting
beliefs and you don't have to know what
they are you do not have to identify
them you do not have to go into some
sort of personal inventory of your
beliefs you don't have to do that you
just have to be committed to do the
exercise
and it'll happen automatically
every time you do what you need to do
when you need to do it in spite of the
fact that it there's everything inside
of you is screaming something different
don't do this and you step through it
and do it anyway you will be drawing
energy out of whatever conflicting
beliefs we're saying not to do it or to
do it a different way and adding energy
to your new beliefs about probabilities
are you with me on this
in other words step
you know as best you can with with as
much desire as you can generate step
through the resistance
and just do the best you can and keep on
doing it until the resistance goes away
because it will
as an example there's an example in uh
just and I didn't elaborate on this
example in the discipline Trader where
there was a guy I worked with uh uh he
held a couple construction this is back
in the late 80s he under constructed a
couple of construction companies in
Dallas he was in his you know mid to
late 50s at the time a real kind of a
rough construction guy right you know he
owned two construction companies and uh
but he started trading bonds away from
the floor getting just getting his ass
kicked and uh so he said he's going to
come to Chicago and and and be in the
bomb pit he's going to be a bond Trader
so he policy and uh and uh you know he's
trading on the floor in the bond pit and
still getting his ass kicked and um
somehow uh I don't know if he read the
discipline Trader somehow he ended up
calling me and I started working with
him and uh you know one of the things
that became apparent immediately is that
he had no concept of how to identify an
edge and so at the time what I did was
uh is I taught him how to how to
identify intraday support and resistance
in in the bonds using point and figure
charts and um so we did that for a
couple of weeks and you know he went
down to the pit
and uh you know and and he had his you
know and it just so happened that well
and he had a support and resistance and
found that he couldn't he couldn't
execute I mean just he could not do it
literally just couldn't do it and that
you know of course that really bothered
him a lot because the kind of guy that
you know he tells do so tell someone to
do something expects him to do it no
mistakes right you know
anyway no mistakes and um so what I did
is I set this exercise up for him
and and the exercise now this has a
multi-millionaire okay and this exercise
was really simple and all he had to do
was you know we had we had support to
find at a particular price intraday we
had resistance about seven or eight
ticks up from support you know whatever
it just so happened the first day that
he had to do the exercise you know the
market opened up in between these two
support resistance levels now the whole
the exercise was that if the price if
the Market's price came down to his
support price all he had to do was buy
one contract
one contract in the bonds where where
you know a one incremental tick was
worth 31.25
and all I had to do was risk three ticks
in other words he's going to risk less
than a hundred dollars to see if this
trade is going to work
and if he didn't get stopped out then if
the market went up to resistance he had
to get out of the trade and reverse his
position and risk three ticks
in essence if whatever the market did
first is what he was supposed to do but
in any case all he had to do was risk
100 bucks
this guy's the kind of guy you take a
hundred dollar bill and let us car with
it seriously
he could do it
could not follow the rules
the market started coming down and he
gets so panicked got so panicked that
that uh uh it wasn't the market you know
that that uh
he got so panicked that uh that the
market wouldn't go down to his entry
point that he got in two ticks early and
then when the market went up one day he
got out with a one-tick profit okay
that's what the market did of course it
went down hit his price went went up and
rallied rallied up to you know seven
eight kicks up to his up to this price
here and he did the exact same thing he
got in two or three ticks early when the
market went picking his favor he blew on
the trade
yeah and so and so you know the next day
he you know he didn't really necessarily
want to be talking to me after not being
able to you know he was embarrassed and
you know that kind of thing next day he
does the same thing so I didn't hear
from him for quite a while
and then about oh two or three weeks
later he finally called and and what had
been happening is that he got really
good at identifying these support and
resistant levels these intradays support
resistance and and he was actually
making money but he was still only
hanging out for one tick
in other words he he he was only hanging
on for you know every time just just a
one big profit one tick profit and um
and so he was calling to tell me that
he's instead of learning how to hang on
to his winning trades he was going to
compensate by upping his size so instead
of being a one-lot Trader in the bond
trip he's going to be like he's going to
up a size to 25 or 30 Lots okay now the
problem with doing that in the trading
in the pit is that you're trading with a
whole different group of guys one lot
Traders are going to be trading with
other one lot Traders and some Deck
holders but when you get to these upper
levels you're going to be trading with
other other guys and that they don't
know you or they don't like you they can
make life real hard for you and I'm not
going to give them the Dynamics of the
pitch but it's not like you know what
people think but in any case that they
don't even exist anymore practically but
in any case so he um
he called back at the end and I and I
and I said to him you know he didn't he
he didn't ask me for my advice I did it
was unsolicited but yes you know his
name was Jerry and I said Jerry you know
this I don't really think this is a good
idea
oh
and he sort of grunted and hung up on me
so
anyway he 'd go back he called back at
the end of the day and and he was in
such a state of distress he not only had
he lost all his money that he made from
uh you know the previous two and a half
weeks I suspected that he lost
considering the level of distress that
he lost a lot more and so it was so much
he lost so much that he was at that
genuinely at that point where he was
saying
I'll do anything any matter
he was so frustrated that he said I'll
do anything and he really meant it and I
said Jerry if that's the case then
here's what you got to do
I want you to do exactly what you're
supposed to do
with one lot
and when you enter
and you get you know you hit support
resistance what I want you to do once
you're in the trade I want you to
actually
put your hands in your pocket and watch
the clock
and the market either hits your
objective
or you have to stay in the trade for 10
minutes whatever happens first in other
words I want you to put your hand
because intuitively with portrait you
trade with your hands I want you to put
your hands in your pocket and actually
watch the clock meaning I wanted him to
be with his discomfort
because as he watched those seconds to
buy as he would watch those seconds
those seconds would be like days and
weeks to him he wanted to get out of
those trades those he wanted to take his
profit so bad because he believed that
you know even though he could see he had
had perfect he just had indisputable
evidence that that that the market would
would rotate back to his you know
support and resistance points that his
his fear of the market taking his money
away was so intense
that you know he couldn't stay in that
beyond that one tick so I wanted to put
his hands in his pocket watch the clock
and stay with the discomfort
and after the first day he didn't think
he did very well but I thought he did
great because he did he did manage you
know to stay in the trade for three or
four minutes and considering that each
minute no you considering that each
minute was like an hour or two to him
that was a big deal it's like it wasn't
really three or four it wasn't three or
four minutes in real time in his mind it
was it was a couple hours okay really
and so but the thing is he did do it and
it was amazing how fast his fears
dissipated to the point where he kept on
doing it and he kept and there's also
his positive self-talk and other I told
him what to say to himself while he's
watching the clock in other words a
divert his divert his negative thoughts
and and and consciously think positive
thoughts about you know he knows why
He's doing this and it's going to be all
right he's gonna learn how to take his
profits and you know et cetera et cetera
okay and you know it wasn't really I
don't think I don't remember exactly how
long it took maybe about a week or so
and he he was fine he was done he turned
out to be a really really good Trader
not in the pit by the way he left the
pit just became an awful swing trainer
but he turned out to be a really good
Trader
drawing energy he didn't I I actually
I've never had the kind of in-depth
discussions with Jerry where I could
actually identify and put into words
exactly what beliefs he was operating
out of that caused him so much fear I I
you know I didn't I didn't I didn't need
to but you know all I'm saying is that I
I didn't you know he never really he
never really opened up to me in that way
where I could say I knew exactly I could
put words on whatever beliefs he was
operating out of but it didn't matter
I didn't have to and he didn't have to
know either all he had to all he had to
know was who he wanted to be he wanted
to be someone who could hang on to his
winning trades and he accomplished that
by stepping through his fear and staying
with the discomfort long enough to do
that knowing exactly why he was doing it
and so you want to instill these beliefs
you're going to do the same thing all
you're going to do is you're going to do
this exercise until you can do it
flawlessly
now if you can do it flawlessly in a
simulated account then you're going to
step into a live account
now how big of a live account are you
going to step into meaning how what your
size going to be I would say you keep
your size everyone's going to be
different but you keep your size at a
level where it is virtually meaningless
meaningless
when it was a simulated account it was
definitely meaningless now you've got
real money on the line and so if you're
thinking let's say you happen to tap
into a really good mechanical system and
you're thinking you know what uh you
know I did hey I did did my yeah I did
my testing uh and I did my simulated
okay now you know I'm going to trade a
thousand shares of whatever okay
uh and you know you're not you know and
what you don't know yet is that just
because you did it flawlessly in a
simulated account it doesn't mean that
you reconciled whatever money issues you
might have when you go to a real account
okay
so I would say for some people and and
there are people that I work with or
some people their risk issues were so
great that we had they couldn't even
Trade One Mini S P they had to go down
to one share of stock
one share of stock because what we're
doing here is this is that if we're
working in a 20 trade sample size
that doesn't matter
if I'm saying you know what I'm not just
going to take the next trade I'm taking
the next 25. see that's what I'm saying
I'm not taking the next trade I'm I'm
committing myself to take the next 25
trades no matter what no matter what
that means that in essence what that
implies
will be 20 others to 20 one two three
four five six seven eight nine 10 11 12
13 14 15 16 20. first of all I don't
have any idea what the sequence the wins
and losses are going to be I have
absolutely no idea what the distribution
or sequence the wins and losses is going
to be over the next 20 trades
but what I'm saying is that I'm taking
the next 20 no matter what I know
exactly how much I have to risk to take
all 20 trades
I've defined my risk parameters for all
20 trades because it's exactly the same
so whatever that aggregate amount is if
you add it up to all 20 trades if I'm
trading one share of stock for an
example and my my Edge dictates that I
have to that I have to risk two dollars
let's say I'm trading a 50 stock and I
have to risk two dollars to find out if
my Edge is going to work
then aggregate what am I risking on this
on this exercise
what
two dot two times twice 40 bucks
yeah 40 bucks plus commissions can we
handle that you think so
you'd be surprised you might not be able
to
so in other words what you're saying is
that I am willing to spend forty dollars
to see what's going to happen with the
next 20 trades
now if you're if you could if you your
risk tolerance is greater and you can
you know trade s PS or trade the dial or
trade the bonds or whatever whatever
that risk amount is add it up on an
aggregate basis and and assume that if I
had to take 20 losses in a row I'm
willing to spend that money this is
really important
if I the chances of you losing 20 trades
in a row is about as great as winning 20
trades in a row so in essence it most
likely is not going to happen but at
least you are ready to spend the money
if it does
that's really important
that you make that commitment
and once you can trade whatever level
you're trading at in terms of position
size
flawlessly
up your size
and until you can trade that position
size flawlessly up your size again
and how do you know if you've gone too
far
you start making mistakes you start
getting conflicting thoughts
you start getting Eternal arguments
so then you scale back
how do you know when you are ready if
you so choose to transition into the
subjective or discretionary mode of
trading where you don't have to follow
specific rules
how do you how would you know when
you're ready to do that
when
you could yeah when you can trade at a
position size that you normally would
want to trade at that your account that
your money management principles would
dictate and you can trade at least two
sample sizes flawlessly
two in a row flawlessly
and what do I mean by flawlessly I don't
mean that you're just executing
flawlessly I mean that it doesn't even
occur to you to do what you're not
supposed to do the thoughts don't even
handle your brain anymore
I'm really serious about this by the way
that the thoughts of doing something
other than what your rules call for it
doesn't even occur to you because you
because you've ingrained these
principles into your identity at such a
core level that distracting thoughts
just
they don't even come anymore
or if they do they're so irrelevant that
you just completely just immediately
dismiss them
and when you are having problems and
experiencing resistance as you're going
through the exercise what are you gonna
do focus on the beliefs that I just gave
you the ones you wrote down
these are the beliefs that you're
energizing these are the words that
you're making real inside your mental
environment so that you experience the
world in a way that corresponds with
these beliefs
is this making sense to everybody
is it important to do these over a
shorter time frame I I like intraday
trades versus something that might set
up once a week well let's put it this
way Dan it depends on how fast you want
to get through it you know it's like you
know it's like it's like you must have
been exercise on monthly charts you know
it's like and it takes you two years two
years to get 20 trades I mean that's
your preference okay it's like you know
remember this is an actual size okay
this is an exercise to instill beliefs
that I'm categorizing as skills these
beliefs that I gave you they are
actually fall into the category of a
trading skill no different than being
able to recognize patterns in the market
that's a skill
these are the psychological skills that
correspond with being able to recognize
those patterns in the market
any other questions
this is more of a comment but when you
said these are psychological skills
since 95 percent of trading is a
psychological
and never
this may be the only way to exercise
those skills
it just made the connection that because
this is such a psychological Endeavor
these are the skills you need to train
you need to learn them and gain them if
you want to be consistent yeah you want
to create consistent results you know it
doesn't none of these skills are
necessary if you just want to experience
winning traits
none of these skills are necessary if
you just want to experience winning
trades
they are absolutely necessary if you
want
a consistently Rising Equity curve
where the where the drawdowns are simply
a reflection of Trades that didn't work
edges that didn't work as opposed to
psychologically generated drawdowns
as a result of mistakes
see what this exercise does is it
instills in you a sense of trust
that you will be able to do what you
need to do when you need to do it act in
your own best interest without having to
experience pain first
yeah
pain is not is not having to experience
pain to do the right thing is not a good
way to trade
[Music]
okay I'll go back here first but
I think you sort of answered my question
in the last uh two sentences but uh you
know one of the things you mentioned
earlier was you've got to uh know or
have an idea of what kind of a Trader
you want to be and I was just wondering
if you could talk about
uh you know how do you get there but I
think you know you talked about sort of
how once you've gone through this
exercise of you know these 25 trades or
whatever however many
um you know you build confidence in your
ability to execute those trades the way
your system is supposed to give you the
signals Etc so I think uh and at the end
of that exercise you're much more
confident about uh you know your ability
to execute those traits correctly uh and
and also that you will not pull the
trigger at the wrong time out of some
other uh hidden hidden agenda that you
may have
keep in mind something this is difficult
to this is difficult to convey but
it's hard to know what decisions you're
going to make but what kind of trade are
you going to be when you're on the other
side of this
see if you're asking me you know how
should I decide what kind of Trader I'm
going to be I can't answer that question
because it'll be whatever you know
whatever resonates with you well and
it's hard to know even at this point
what that might be because you're going
to be a different person you're going to
be seeing and responding in different
ways and and you know it's hard to know
what might you might be attracted to and
what might resonate with you once those
Spirits are gone
did that make sense
so in this uh system this mechanical
system
is it fair to set the stop losses and
automatic trades to hinder and exit or
do you have to do it yourself
I mean I mean do it completely automated
yeah completely automate the entry next
no no no no this is going to help you to
automate it just do it yourself because
you want to you want to experience what
you're going to experience when you have
to do it
yeah that's right it's it's either or
there's no absolutely no judgment no
thinking wiggle room you shouldn't even
be thinking thinking is a trading error
all the thinking was done when you did
your testing and decided on what what
you know criteria defines your Edge once
once that's in place no thinking allowed
there's nothing to think about just do
it
yeah usually all this should all be in
the same Market you can say yeah can see
yeah the question was you should be in
the same Market yes whatever Edge you're
using if you're going to set up multiple
exercises in multiple markets for
whatever reason if you want to do it
that way do it but just keep it
consistent that edge as it applies to
that market
and time frame absent thank you and time
frame right
anything else
okay let's go have lunch
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