"The Disciplined Trader" by Mark Douglas Book Review: Profile Traders
Updated: Nov 6, 2022
Several traders lose money in the stock markets because they believe that trading is a no-brainer job.
All of those are hit by the reality of the markets and their collective nature.
Some traders realize this early in their careers; for some, it is too late for the damage already done. Sadly, for some, a lifetime is not enough.
The characteristics of the psychology of successful market participants are unusually different. They are different from those of a successful person outside the world of markets.
The book ‘The Disciplined trader’ will serve as a step to step guide for a trader to adapt to this type of psychology. By the end of the book, you will be a transformed trader and can become a successful trader.
What Differentiates the Highly Successful Traders From the Rest?
Self-discipline and emotional control are among the most important virtues successful traders cultivate over time. At some point in their trading career, they have experienced various emotions that have caused pain. Every trader goes through these emotions that cause mental and financial distress. The ones who overcome these go on to be successful.
Mark explains you will need to achieve a great deal of self-realization and forced awareness. Successful traders have achieved this by going through a transition in their personal development. You have to understand the nature of fear and the characteristics of the environment a trader is working in. Trial and error methods prove to be too costly financially and emotionally.
It is entirely dependent on you to be a good trader or otherwise.
Why is a New Way of Thinking Required?
Mark realized that the social upbringing and beliefs one has learned as an individual do not work the same way in trading. He has identified through self-examination that certain emotions lead to poor trading decisions. These emotions may though be perfectly fine in a world out of the markets. Trading requires you to be a lot more disciplined and discard emotions from your trading.
The market does not control what you do or how you perceive a situation. You are in complete control of what you can make out of the situation presented to you. It is only a lack of trust within you to do what is required to be done that you are afraid of. You simply focus on what the market is trying to tell you rather than focus on what you want to do.
Mark sights an example of people who walked on a 20 feet red hot coal barefoot. They could accomplish this by getting rid of fear, fear of burning their feet in red hot coal. The fear of the implications is overwhelming, similar to what traders face.
They become overthinkers and have several questions before they initiate a trade.
Will my stop loss be hit?
Is it the right level for entry?
Is this the right position size for this trade?
The list can be never-ending. These questions are a result of previous experiences they are trying to compare. They are emotionally charged and cannot make split-second decisions like this. By the time they come to a conclusion, they miss the bus. There are several typical trading errors made caused by this methodology that is a result of fear. These errors are highlighted in the book, which every trader can relate to.
Mark calls out skills that such traders should acquire to excel in trading. These are the skills Mark has identified from his own trading experiences. He goes on to discuss the reasons why traders are not successful. These are broken down into three broad categories.
Lack of skills
Lack of discipline
The Psychological Perspective
Mark does not mince with words and rightly says that the market price is right. This is irrespective of your personal opinion unless you can trade with a volume that can move price. The market price now is a reflection of a consensus view of all traders of future expectancy. The market price has to be respected.
Markets provide infinite opportunities to gain or lose. Traders who have a clear idea of their odds of winning are the ones who give them all to the traders who know far less. As prices are in perpetual motion, traders who draw limits and know the odds can favor either way are the ones who succeed. Others with a lack of limits end up in wishful thinking and disregard the market price.
He distinctively talks about the question ‘How much is enough in a way that a trader is left with no other option but to decide. He has to take a call and trade with only the money he can afford to lose. This helps drastically reduce the emotional imbalance that is created by open positions if the money at stake is relatively unimportant to you.
Defining rules to guide your behavior in an unstructured market environment is essential and critical. This leaves you with no other option but to create a structured approach for yourself. You can trade effectively if you hold yourself accountable for every trading decision you make.
Most traders don’t know why they did what they did because they didn’t have a plan to trade. They just behave like a herd and try to move together. They are usually impulsive and are then confronted by another heard that has another view.
Build a Framework to Understand Yourself
The first step to building a framework is to recognize the need to adapt to an ever-changing market environment. He describes in length how to identify what changes you need to make to function successfully. These also include how to effect necessary mental changes.
The framework will let you neutralize commonly held cultural beliefs about success. These come in the way of looking at the markets without any kind of distortion. He stresses the need to undo any psychological injury caused by previous trading activities. Memories of previous trading activity that come with emotions are the ones that don’t allow you to see what the market is presenting to you now.
The Inside World of the Mental Environment
The world of the mental environment has been meticulously categorized by Mark that matter the most. They may not be limited to the list mentioned below, though. These tend to be influenced subconsciously by you and simply react to presumed emotions that are a result of previous life occurrences and memories.
The mental environment also reacts to what you experience in the outside environment through your senses. You have to make a conscious effort not to let these inside forces interfere with the environment outside. The mental environment consists of the following.
Positively charged emotions
Negatively charged emotions
Memories, associations, and beliefs translate into energy that can be positive or negative, depending on how you perceive them. They tend to link similar environments that we experience through our senses to memories and events.
Beliefs tend to control information that is being sent to the mental environment. Instead, the mental environment processes this information based on past experiences and perception that is thought right.
Our fears distort this information that does not want to receive it as it is. Fear helps avoid every new occurrence if it is perceived to be similar to a previous painful experience. Every new occurrence does not necessarily have to replicate the experience.
The ability to receive and accept every new occurrence as it is, not associating it with any other occurrence, makes change possible.
How to Adapt to Change?
Mark has provided some ways you can make change happen. To do this, you will need to change your emotions and beliefs. Here’s how you can bring the change:
Desire change – To change, there has to be a strong desire to change.
Belief exercise – Identify your beliefs by interrogating yourself.
Write it down – Writing helps you focus on your ideas and reshape them as needed.
Exercise self-discipline – Do things you don’t like to do otherwise.
Practice self-hypnosis – It helps you get around barriers that block change.
Affirm yourself – Repeat saying all that is positive about yourself. It helps to change the way you think about yourself.
You have to create milestones for yourself to achieve trading success. These could be ones, to name a few.
Focus on learning.
Define loss tolerance as your stop loss and take. It cannot remain in mind.
Develop and attempt to master one market pattern. Trader within the conditions you understand.
Trade systematically and practice objectively.
Think in terms of probabilities.
Continuously assess your performance and state of mind.