Mark Douglas Trading Psychology 7/7 Retrain Your Brain

Summary

The 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

00:00

🌟 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.

05:00

🚀 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.

10:01

🎯 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.

15:01

📊 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.

20:02

🛠️ 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.

25:03

🔄 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.

30:03

🎯 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.

Keywords

💡Energy Dynamics

The concept of 'Energy Dynamics' in the script refers to the underlying forces or energies that drive our beliefs and behaviors. It suggests that our perceptions and actions are influenced by the energy associated with our beliefs, which can either empower or limit us. The speaker discusses how we can draw energy out of limiting beliefs to change our perspective and behavior, as exemplified by the story of a child who overcomes his fear of dogs.

💡Active Contradiction

An 'Active Contradiction' is a term used in the script to describe a situation where an individual's current belief is directly challenged by an experience or information that contradicts it. This contradiction can lead to a shift in beliefs as the individual is exposed to new evidence that conflicts with their existing understanding.

💡Personal Transformation

Personal transformation, as discussed in the script, is the process of changing one's beliefs, behaviors, and perceptions to align with a desired self-image or goal. This transformation is driven by a strong desire and clarity of purpose, and it often involves challenging and redefining one's core beliefs through experiences and intentional actions.

💡Belief System

A 'Belief System' refers to the collection of beliefs that an individual holds about the world, which shapes their reality and influences their actions. In the context of the script, the speaker discusses how beliefs can be energized and how drawing energy out of them can change the way one perceives and interacts with the world.

💡Fear

In the script, 'Fear' is depicted as a powerful emotion that can control an individual's actions and perceptions, particularly in the context of the child's belief about dogs. It is also discussed as something that can be overcome through exposure to contradictory experiences and the development of new beliefs.

💡Intent and Desire

The terms 'Intent' and 'Desire' are used in the script to describe the motivational factors that drive personal transformation. Intent refers to the specific goal or direction one wishes to move towards, while desire is the emotional longing or passion to achieve that intent. Both are crucial for initiating and sustaining the process of change.

💡Threshold Point

A 'Threshold Point' in the context of the script is the critical juncture at which the energy associated with a belief becomes equal or close enough to the energy of a contradictory belief that it loses its power to influence behavior. This point marks a significant shift in the individual's belief system and can lead to a fundamental change in their actions.

💡Mechanical System

A 'Mechanical System' in trading, as mentioned in the script, refers to a set of precise, rule-based guidelines for entering and exiting trades. This system eliminates the need for subjective judgment and allows traders to follow a strict protocol, which is essential for testing and implementing trading strategies.

💡Backtesting and Forward Testing

Backtesting and Forward Testing are methods used to evaluate the performance of a trading strategy. Backtesting involves applying the strategy to historical market data to see how it would have performed in the past. Forward testing, also known as paper trading, involves applying the strategy to real-time market data without actual monetary risk, to see how it performs in a live environment.

💡Risk Management

Risk management in trading refers to the strategies and practices employed to minimize and control the potential losses in financial trading. It involves setting parameters for risk exposure, such as stop losses, and determining position size to ensure that the trader can handle the financial impact of adverse trades.

💡Psychological Skills

Psychological skills in the context of trading refer to the mental strengths and strategies that traders develop to manage their emotions, maintain discipline, and consistently execute their trading plans. These skills are critical for dealing with the心理压力 and emotional challenges inherent in trading.

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