Mark Douglas Trading Psychology 4/7 Probabilities

Summary

The 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

00:00

🎯 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.

05:06

📊 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.

10:06

💡 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.

15:08

🔄 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.

20:09

🎲 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.

25:11

📈 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.

30:12

🔄 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.

35:12

💡 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.

40:14

🌪️ 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.

Keywords

💡Probabilities

Probabilities refer to the likelihood of a given outcome occurring. In the context of the video, it is used to discuss the unpredictability of individual trades and the importance of understanding that while patterns may repeat, each trade's outcome is not guaranteed. This concept is crucial for traders to manage their expectations and to execute trades without being emotionally attached to the outcome.

💡Edge

In trading, an 'edge' refers to a trader's perceived advantage or strategy that they believe will lead to profitable outcomes over time. The video emphasizes that having an edge is about having a tested, repeatable pattern that gives a statistical advantage, but it does not guarantee success on each individual trade.

💡Risk Management

Risk management in trading involves the process of identifying, analyzing, and accepting risks associated with trading decisions. It is about using strategies to minimize and control potential losses while maximizing gains. The video underscores the importance of not only managing risk through technical analysis but also accepting the inherent risks in trading at a psychological level.

💡Collective Behavior

Collective behavior refers to the actions and patterns that emerge from the aggregate of individual traders' decisions in the market. In the video, this concept is used to explain how market patterns are formed by the cumulative orders of all participants, which can be identified and quantified but are still subject to the randomness of individual trading decisions.

💡Emotional Attachment

Emotional attachment in the context of trading refers to the psychological connection traders may have to the outcome of their trades. The video emphasizes the need to detach emotionally from each trade to avoid being influenced by fear or the desire for winning, which can lead to poor decision-making.

💡Execution

Execution in trading is the act of carrying out a trade according to a predefined plan or strategy. The video stresses that understanding and believing in a probabilistic approach to trading is different from being able to execute trades flawlessly, which is essential for realizing the profit potential of an edge.

💡Sample Size

Sample size in the context of the video refers to the number of trades considered for evaluating the success of a trading strategy or edge. By looking at a series of trades rather than individual outcomes, traders can better assess the effectiveness of their strategies and make adjustments as needed.

💡Discretionary Trading

Discretionary trading involves making decisions based on the trader's judgment and interpretation of market conditions, rather than following a strict, rules-based system. The video highlights the challenges of discretionary trading, including the potential for emotional interference and the need for sophisticated mental skills to achieve consistent results.

💡Systematic Trading

Systematic trading is a method of trading that follows a set of predefined rules or a mechanical system, removing the element of human emotion and subjective judgment. The video promotes systematic trading as a way to execute trades consistently and to learn from the results without being influenced by random variables.

💡Belief Systems

Belief systems are the set of principles and convictions that individuals hold about various aspects of life, including trading. The video discusses how belief systems can conflict with the probabilistic nature of trading and how these conflicts can hinder a trader's ability to execute trades as per their defined edge.

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