Table Of ContentThe
Disciplined Trader
Developing Winning Attitudes
Mark Douglas
NEW YORK INSTITUTE OF FINANCE
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Library of Congress Cataloging-in-Publication Data
Douglas, Mark.
The disciplined trader: developing winning attitudes / by Mark Douglas.
p. cm.
ISBN 0 13-215757-8
1. Stockbrokers—Attitudes. 2. Stock-exchange. I. Title.
HG4621.D68 1990
332.64—dc20 90-30237
CIP
This publication is designed to provide accurate and authoritative information in regard to the
subject matter covered. It is sold with the understanding that the publisher is not engaged in
rendering legal, accounting, or other professional service. If legal advice or other expert
assistance is required, the services of a competent professional person should be sought
From a Declaration of Principles Jointly Adopted
by a Committee of the American Bar Association
and a Committee of Publishers and Associations
© 1990 by Mark Douglas
All rights reserved No part of this book may
be reproduced in any form or by any means without
permission in writing from the publisher
Printed in the United States of America
10 9 8
New York Institute of Finance
A division of Simon & Schuster. Inc.
2 Broadway
New York. NY 10004-2207
2
To Paula Webb for her love, understanding and being
there throughout the process of writing this book.
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Contents
Foreword 6
Preface 8
Acknowledgments 13
Part I Introduction 1
1 Why I Wrote This Book 15
2 Why a New Thinking Methodology? 24
Part II The Nature of the Trading Environment
from a Psychological Perspective 37
3 The Market Is Always Right 39
4 There Is Unlimited Potential for Profit
and Loss 41
5 Prices Are in Perpetual Motion with No
Defined Beginning or Ending 43
6 The Market Is an Unstructured Environment 49
7 In the Market Environment, Reasons
Are Irrelevant 56
8 The Three Stages to Becoming a Successful
Trader 61
Part III Building a Framework for
Understanding Ourselves 72
9 Understanding the Nature of the Mental
Environment 76
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10 How Memories, Associations, and Beliefs
Manage Environmental Information 88
11 Why We Need to Learn How to Adapt 105
12 The Dynamics of Goal Achievement 119
13 Managing Mental Energy 132
14 Techniques for Effecting Change 141
Part IV How to Become a
Disciplined Trader 151
15 The Psychology of Price Movement 152
16 The Steps to Success 166
17 A Final Note 184
Index 185
5
Foreword
My unique position in the financial community has allowed me the rare
opportunity to talk to and question thousands of traders, brokers, and trading
advisors since 1979. I am not a broker or a letter writer. I am the chief executive
officer of CompuTrac, a company that supplies technical analysis to stock and
futures traders. I perceive my position as being neutral, one that allows people
to open up and talk to me freely. I started trading for my own account in 1960
and very quickly became aware of the underlying psychological blocks to good
trading and money management. This realization has been confirmed by all who
have counseled with me.
As a result, I sincerely feel that success in trading is 80 percent psychological
and 20 percent one's methodology, be it fundamental or technical. For example,
you can have a mediocre knowledge of fundamental and technical information,
and if you are in psychological control, you can make money. Conversely, you
may have a great system, one that you have tested and has performed well for a
long period of time, yet if the psychological control is not there, you will be the
loser.
A good trader knows from experience that over a period of time he may
engage in more losing trades than winning ones. But money management,
and a careful assay of the risks protected by realistic stops, will keep the
trader out of trouble and ensure that on the "big" moves, he will profit.
Money management is composed of two essential elements: psychological
management and risk management. Risk management stems from the
psychological factors being truly understood by the trader and "in place"
before risk is even considered.
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I would especially caution new traders and market participants that
reading and passively analyzing your motivations are certainly a necessity,
but the acid test comes with active trading under pressure. Start slowly.
Question every trade. What motivated it? How was the trade managed? Was
it successful? Why? Did you lose? Why? Write down your assessment and
refer to your comments before making your next trade.
At all major CompuTrac seminars I try to have a workshop leader address
the attendees on the psychological aspects of trading. The grim reaper who
kills off "your equity" and disappears with your profits is not the
mysterious and ubiquitous "they" but a simple misguided "you." Medea
said just before she murdered her children, "I know what evil I'm about to
do, but my irrational self is stronger than my resolution." If this sentiment
reflects your mind set when you trade, then The Disciplined Trader is
definitely the type of book you should be reading.
What a pleasure to read this book. My own education cost me a lot "the
hard way." I can read myself into the pages - that's me, that's me! Mark
has carefully fashioned his book into a comprehensive logical dialogue. It
reads as if you are at his side and he is explaining it as a friend, which I
know you will enjoy. You are fortunate because you are taking the time
now, before you have made a serious mistake, I hope, to learn about
yourself and to study your craft. The traders who take the time to reflect and
practice will survive and possibly prosper.
TIMOTHY SLATER
President
CompuTrac Software, Inc.
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Preface
The Disciplined Trader is a comprehensive guide to understanding the
psychology of self-discipline and personal transformation needed to become
a successful stock or futures trader. This book will serve as a step-by-step
guide to adapting successfully to the unusual psychological characteristics of
the trading world.
I say "adapting" because most people venturing into the trading
environment don't recognize it as being vastly different from the cultural
environment in which they were brought up. Not recognizing these
differences, they would have no way of knowing that many of the beliefs
they acquired to enable them to function effectively in society will act as
psychological barriers in the trading environment, making their success as
traders extremely difficult to achieve. Reaching the level of success they
desire as traders will require them to make at least some, if not many,
changes in the ways they perceive market action.
Unlike other social environments, the trading arena has many
characteristics requiring a very high degree of self-control and self-trust
from the trader who intends to function successfully within it. However,
many of us lack this self-control because as children we learned to function
in a structured environment where our behavior was controlled by someone
more powerful than ourselves, whose purpose was to manipulate our behavior
to conform to society's expectations.
Thus, we were forced by external forces to behave in certain ways through
a system of rewards and punishments. As a reward, we would be given the
freedom to express ourselves in some desired manner. As a punishment, we
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would either be prevented from getting what we wanted, causing emotional
pain, or we were inflicted with various forms of corporal punishment,
causing physical pain. As a result, the only form of behavior control that we
typically learned for ourselves was based on the threat of pain - either
emotional or physical - from someone or something we perceived as having
more power than ourselves. And since we were forced to relinquish our
personal power to other people, we naturally developed many of our
traditional resources for success (the particular ways in which we learned to
get what we want) from the same mental framework. Accordingly, we
learned that acquiring power to manipulate and force changes upon things
outside of us was the only way to get what we wanted.
One thing you will learn as a trader is that the mental resources you use
to get what you want in your everyday life will not work in the trading
environment. The power and control that are necessary to manipulate the
markets (make them do what you want them to do) are beyond all but a
handful of individuals. And the external constraints that exist in society to
control your behavior don't exist in the market environment. The markets
have absolutely no power or control over you, no expectation of your
behavior, and no regard for your welfare.
If, in fact, 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. And
the ways in which you choose to do this will be determined by a number of
psychological factors that have little or nothing to do with the markets.
And this will be so until you acquire some new skills and also learn how to
adapt yourself to suit conditions as they exist in the market environment.
To operate successfully in this environment you will need to learn how to
control yourself in ways that may be completely alien to you.
You will also have to learn how to grant yourself the mental freedom to
shift your perspective to notice alternative possibilities to getting what you
want in the trading arena, regardless of your expectations of how you are
going to get it. 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.
Rarely do any of us grow up learning how to operate in an arena that
allows for complete freedom of creative expression, with no external
structure to restrict it in any way. In the trading environment, you will
have to make up your own rules and then have the discipline to abide by
them. The problem is, price movement is fluid, always in motion, quite
unlike the highly structured events that most of us are accustomed to. In
the market environment, the decisions that confront you are as endless as
the price movements you intend to take advantage of. You don't just have
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