Mark Douglas's Trading Rules
From "Trading in the Zone" - Essential principles for developing a winning trader's mindset.
The Five Fundamental Truths
- Anything can happen
- You don't need to know what is going to happen next in order to make money
- There is a random distribution between wins and losses for any given set of variables that define an edge
- An edge is nothing more than an indication of a higher probability of one thing happening over another
- Every moment in the market is unique
The Seven Principles of Consistency
- I objectively identify my edges
- I predefine the risk of every trade
- I completely accept the risk or I am willing to let go of the trade
- I act on my edges without reservation or hesitation
- I pay myself as the market makes money available to me
- I continually monitor my susceptibility for making errors
- I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them
Trading Rules from Mark Douglas
- Trade without fear or overconfidence - Stay balanced emotionally
- Accept losses as a cost of doing business - They are inevitable
- Think in probabilities - No single trade matters
- Focus on process, not outcomes - Execute your plan flawlessly
- Each trade is independent - Past trades don't affect future probabilities
- Detach from money - Think in terms of R (risk units)
- Never add to a losing position - Accept you were wrong
- The market doesn't owe you anything - No entitlement
- Your edge only works over a series of trades - Sample size matters
- Consistency comes from disciplined execution - Not from predicting
The Trader's Mindset - Key Quotes
"The best traders have developed attitudes that prevent them from getting reckless. They also have mental structures in place that virtually eliminate the fear of getting into a trade."
"Ninety-five percent of the trading errors you are likely to make will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table."
"The typical trader thinks that he must analyze, so that he can win. A skilled trader, in contrast, thinks in terms of probabilities. They trade in terms of an edge that puts the odds of success in his favor."
"The hard, cold reality of trading is that every trade has an uncertain outcome. Unless you learn to completely accept the possibility of an uncertain outcome, you will try to avoid it."