What does it mean to be “trading in the zone”?
I’m sure many of you have heard of a trading book called “Trading in The Zone” by Michael Douglas, which focuses on the psychological challenges that traders face.
If you’re keen on becoming a solid trader, reading this book is a must. It will highlight trading psychology and likely shorten your learning curve.
But in the meantime, let me give a brief over view to the topic of trading psychology.
“Trading in the zone” means that your psychological state is in a certain place, which allows you to allocate risk appropriately, recognize what the market is telling you and adapt accordingly.
All this is easier said than done of course.
Getting into “the zone” will come with experience, a solid understanding of your trading edge and understanding risk.
Don’t worry, this isn’t a specific point, as the name suggests, this is a “Zone”.
This means there is a range where your mindset can be considered to be in the right place.
Here are some markers which indicate when you’re “in the zone”:
You accept that losses are part of the business
I believe many of you have heard this before, but I just can’t drill it into you enough.
You may think you accept this fact, but likely you don’t.
Trading is probably one of the few professions where success is directly correlated to being able to admit you’re wrong, quickly and very frequently.
Make good losses, from good trades which make sense.
Don’t enter random trades on a gut feel, don’t exit randomly on a gut feel.
Have an objective reason to make an action in the market.
Only then, can you draw good market information from that loss.
This enables you to make the better decision in the next trade.
You accept that anything can happen.
This is why we are not able to correctly predict every single movement in advance.
However there is good news, you don’t need to know what will happen next to make money in the market.
Based on certain past events, we are able to predict the next movement with a probability of more than 50% accuracy in the long run.
This is your edge.
All you need to do now, is do that same type of trade enough times for your edge to show up in your PnL.
You realize that Market Analysis is often over rated.
Make no mistake, market analysis is important, but the focus is not on “predicting right”, it’s about “listening to the market right”.
Because as with point 2, you accept that anything can happen, so the price does not have to conform to your expectations.
Instead analysis helps tell you where you are in the market, be able to better interpret price and adapt to what it tells you.
It’s also beneficial to be able to keep things simple, so that at a quick glance, you’re able to identify opportunities.
Then perhaps a closer look to refine your key levels and produce your trading plan.
You can take full responsibility for your trading results because you understand…
It’s how you adapt to the prevailing market actions that determines how profitable you’ll be.
It’s not an “accurate prediction” of the market that makes you money.
It’s how you traded the market that makes you money.
Your analysis of the market direction could be totally wrong, but if you were able to recognize that you were wrong fast, and then quickly adjust yourself to trade according to what the market is actually doing, you’ll be able to make money overall from trading that move.
This is not gut feel trading, you still must have a set of rules to determine when and how you will do trades.
You understand that there is a random distribution between the wins and losses for any given set of variables that define an edge.
The market is always right.
There’s no debating with it or arguing with it.
There is only dealing with it.
So losses are going to be part of the numbers of a valid market edge.
I have an article here which describes why you shouldn’t be too bothered about losing streaks.
They are beyond your control.
To round up this article, let me just suggest a way to get into the Zone quicker, focus on the aspects of trading which you have control over.
Focus on trading your edge.
Take the trades which you should be taking, avoid trades which don’t have your edge.
Focus on managing your risk.
This does not mean just keeping your losses small.
It also means being able to allocate sufficient risk to opportunities.
I hope you’ve found this article useful.
Good trading to you all!