I have been saying for a few months now that I believe that most of my struggles with trading are due to my own mental shortcomings. While I believe that I have the intelligence to trade successfully, there is something in my emotional makeup that is holding me back from being able to execute trades correctly. The front cover of Mark Douglas’s Trading In The Zone says “Master The Market With Confidence, Discipline And A Winning Attitude.” I am not sure that I have enough confidence or discipline to develop that winning attitude. With that said, I am going to work my way through this book, documenting my progress here with detailed and honest notes.
Douglas begins his first chapter by discussing the reasons for shifting from purely fundamental to technical analysis. His argument is that even if a fundamental analyst is able to correctly predict where a stock price is going to be in the future, he will still not be able to tell what path the stock will take to get there. This will result in volatility that will make trading this strategy impossible. He goes on to explain that technical analysis is a way of analyzing the behavior patterns of groups of investors.
“individuals develop behavior patterns, and a group of individuals, interacting with one another on a consistent bases, form collective behavior patterns. These behavior patterns are observable and quantifiable, and they repeat themselves with statistical reliability.” – Douglas
This view on technical vs fundamental analysis is nothing new for me as I have been studying very similar views for years. At this point, my strategy has been to combine technical and fundamental analysis much like Nicholas Darvis did. If fundamental analysis aims to determine what a stock should do, and technical analysis represents what a stock is actually doing, then my plan has been to combine the two. I use technical analysis to locate patterns similar to what Douglas is describing and then use fundamental analysis to confirm that a stock should be heading higher.
Using this techno-fundamental strategy over the past few years has allowed me to identify leading stocks with great charts and accelerating earnings growth. My issue has consistently been in the timing of my buying and selling of these stocks. According to Douglas, this is because I lack a third type of analysis, Mental Analysis. He argues that it is not difficult to identify stocks that are going to move in a certain direction, but it is extremely difficult to actually take money out of these movements.
“The defining characteristic that separates the consistent winners from everyone else is this: The winners have attained a mind-set – a unique set of attitudes – that allows them to remain disciplined, focused, and, above-all, confident in spite of the adverse conditions.” – Douglas
It is interesting to note that the characteristics Douglas describes are also highlighted in most of the Market Wizards interviews. I certainly wouldn’t say that I am completely disciplined or focused, I have quite a bit of work to do in those departments, but I think my biggest weakness is being confident in any conditions. Towards the end of 2012, I found myself buying stocks and actually saying out loud that I hoped they went up so that I could put an end to my losing streak. Most anyone who has studied trading could tell you that this way of thinking made failure almost certain.
Douglas goes on to discuss how most traders begin trading with very little education, knowledge, or guidance. This was not the case for me. I had been studying the markets for years before I ever placed a trade. I had some outstanding guidance and was led to read all of the books that most successful traders consider essential. Douglas also explains that while most traders think of themselves as risk-takers, they actually fear taking losses or admitting that they are wrong. This also is not the case for me. I believe that one of my strongest trading traits is my ability to admit that I am wrong and immediately change my outlook on a position.
“When you learn the trading skill of risk acceptance, the market will not be able to generate information that you define or interpret as painful.” – Douglas
Hold the phone. This is where I fall short. While I don’t really have a problem taking a loss, those losses are still very painful for me. According to Douglas, I should feel completely indifferent when taking a loss. This changes everything. How can I remove all emotion from my trading? Why do I have such strong emotions when it comes to trading?
For me it has never been about the money. It has always been about proving that I could do it. That’s my weakness. I have been viewing each and every trade as a report card on my success as a person. I apparently view stock trading as my way of proving to others that I am successful. While I would never actually say that because I realize how ridiculous it sounds, that is what I now believe is the reason I am subconsciously sabotaging my trading.
“Ninety-five percent of the trading errors you are likely to make – causing the money to just evaporate before you eyes – will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table.” – Douglas
The first time I read this chapter, I just glazed over it thinking that I had the right attitude about all four of those topics because I have been studying this stuff for so long that I know what I am supposed to think and say about each of those topics. Reading it again, I am realizing that while I do have the correct attitude about those topics on the surface, there are some issues hidden below the surface. If I am viewing trading as a means to prove my self-worth, then every loss I take and every big move I miss leaves me feeling worthless. When I look at it from this angle, Douglas is describing my exact problem, and he is saying that ninety-five percent of my trading mistakes are due to this problem. That’s heavy.
“Many of the thinking patterns that adversely affect our trading are a function of the natural ways in which we were brought up to think and see the world. These thinking patterns are so deeply ingrained that it rarely occurs to us that the source of our trading difficulties is internal, derived from our state of mind.” – Douglas
I’m starting to think this dude is a psychic. After breaking me down and forcing me to look at the root of my trading issues, Douglas is now pushing forward and telling me that this problem isn’t new. It has been present for years. Without getting too personal, I can absolutely see how this issue of connecting trading success to a feeling of self-worth can date way back into my childhood. On my About Page, I talk about how I can remember being a kid and check out library books on the stock market. Perhaps even back then I saw the stock market as a means to prove my value to the world. I am also beginning to see how this self-esteem issue has come out in other aspects of my life as well.
“When you eliminate the potential to define market information in painful ways, you also eliminate the tendency to rationalize, hesitate, jump the gun, hope that the market will give you money, or hope that the market will save you from your inability to cut your losses.” – Douglas
So basically, Douglas is saying that if I can figure out how to break my connection between trading success and self-worth, then I will be able to avoid all of the pitfalls I continually catch myself falling into. That sounds fantastic in theory, but also seems incredibly overwhelming to actually accomplish. Where would I even start?
The part about rationalizing made me think of my trading in early September 2012. I had bought KORS as it broke out, but then they announced a secondary offering that held down the stock price. I was so frustrated that I rationalized that I should just buy a few more leading stocks regardless of where they were relative to bases or buy points and just hope one went up so that I would have something to hang my hat on. Well, all three stocks went down and I sold out of all three with big red losses. That was when it first occurred to me that I was the root of the problem.
“The irony is that, when you have the appropriate attitude, when you have acquired a ‘trader’s mindset’ and can remain confident in the face of constant uncertainty, trading will be as easy and simple as you probably thought it was when you first started out.” – Douglas
Obviously, I didn’t have the right attitude in place in September of 2012. However, at the beginning of that year I did have the right attitude. I was coming off of a big profit in ALXN and then scored two more big winners with BEAV and PCLN. It is amazing to look back on that now and think about how easy that felt at the time. Since then, loss after loss has pushed me further and further down to a point where I’m not sure I know which way is up. So where do I go from here?
Douglas suggests that I need to adjust my beliefs so that I can get to a place where I can trade without any fear of being wrong. To be honest, I can’t imagine that right now because I am so far down in the hole of being wrong that I think another bad trade might completely break me. That is a big part of the reason I have not made a single trade in 2013. The thought of continuing my losing streak is devastating. I have no idea how Douglas is going to help me break these limiting beliefs that I am finding, but he has me on board with recognizing that they exist.
I guess the first step is admitting that you have a problem.