‘The Disciplined Trader: Developing Winning Attitudes’ is an important book on trading written by Mark Douglas. The book focuses mainly on trading psychology which has a huge influence on whether the trader will be successful or not in the long run. It emphasizes on how to control the trading behavior in order to achieve greatest profit from the market.
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Here we have compiled some of the important insights from the book. Hope it is useful.
Important Excerpts From ‘The Disciplined Trader’
As a trader it is more important to know that you will always follow your rules than it is to make money, because whatever money you make, you will inevitably lose back to the market if you can’t follow your rules.
In the market environment you have to make the rules to the game and then have the discipline to abide by these rules, even though the market moves in ways that will constantly tempt you into believing you don’t need to follow your rules this time.
There are many traders who end up becoming expert market analysts but can’t make a dime as traders because of all the damage they did to themselves in the early part of their trading careers. What happens in these situations is a trader’s ‘past’ will generate so much fear that he won’t be able to execute his trades properly or not at all, regardless of how well he learned to predict what the market will do next. Nothing is more frustrating than to know what is going to happen next and not be able to do anything about it.
If you can’t control or manipulate the markets and the markets have absolutely no power or control over you, then the responsibility for what you perceive and for your resulting behavior resides only in you. The one thing you can control is yourself. As a trader, you have the power either to give yourself money or to give your money to other traders.
There is a tremendous difference between focusing on money and focusing on using your trading as an exercise to identify what you need to learn. The first will cause you to focus on what the markets are giving you or taking away from you. The second perspective causes you to focus on your ability to give yourself money. With the first perspective, you are placing some of the responsibility onto the markets to do something for you. With the second perspective, you assume all the responsibility.
The market is never wrong in what it does; it just is. Therefore, you as an individual trader interacting with the market- first as an observer to perceive opportunity, then as a participant executing a trade, contributing to the overall market behavior- have to confront an environment where only you can be wrong, and it’s never the other way around. As a trader, you have to decide what is more important- being right or making money-because the two are not always compatible or consistent with one another.
Regardless of how hard any of us may try to hide from others what is going on, we obviously can’t hide our results from ourselves. If the market’s behavior seems mysterious to you, it’s because your own behavior is mysterious and unmanageable. You can’t really determine what the market is likely to do next when you don’t even know what you will do next, regardless of what you may perceive or want.
The more sophisticated you become as a trader, the more you will realize that trading is completely mental. It isn’t you against the markets, it’s just you. All the other traders participating to make the market provide you with an opportunity to make money from their divergent beliefs about the future. So the markets just offer the individual trader opportunity. They don’t choose the data on which you focus your attention, and they certainly don’t interpret the data you perceive. Nor are the markets responsible for what you can’t perceive because of the distinctions you haven’t learned to make yet.
For years, many people in the academic community believed that the markets were random. This is a perfect example of their general lack of understanding of human nature. People act as a force on prices in perfectly logical ways, when you understand the logic of their fears.
The market will quite naturally make you face what is inside of you on a moment-to-moment basis. What is inside of you could be confidence or fear, a perception of opportunity or loss, restraint or uncontrollable greed, objectivity or illusion. The market just reflects these mental conditions. It does not create them.
When you attain some degree of control over yourself, you can then see how other traders are not in control of what happens to them, like blades of grass, all bending to the force of the prevailing wind and constantly being stepped on. You won’t be able to see this until you are no longer a blade of grass yourself by evolving beyond the group mentality.
There are only a few traders who have come to the realization that they alone are completely responsible for the outcome of their actions. Even fewer are those who have accepted the psychological implications of that realization and know what to do about it.