The Mental Strategies Of Top Traders PDF Free Download

Mark Douglas, one of the greatest authors of trading psychology literature of our time, sadly passed away earlier this year. I wanted to write a lesson dedicated to him that discusses some of his most important teachings on the all-important mental aspect of trading.

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What follows are short summaries of some of the most important points that Mark tried to stress to traders in order to help them achieve consistent profitability.

Whilst this lesson stands fine by itself and can be read in its own right, it will also form part of a new series that will go more in-depth on each of the points discussed below. We will discuss how, as traders, we can apply these points to real-world trading and leverage them when trading the price action strategies that I personally use and teach to my students.

Fill the “profit gap” with the right things…

In his books and seminars, Mark Douglas often refers to something he calls the “profit gap”. What he is talking about is basically the difference or “gap” between the potential profit you could achieve if you had just followed your trading method and what your actual bottom line results are.

Traders often begin trading a method with very high hopes. They want to produce an income they can rely on and get consistent results from their trading. However, this is only possible if you are trading an effective method with discipline and consistency, which most people simply do not do and as a result, they experience the profit gap that Mark refers to.

The key point that Mr. Douglas makes about this profit gap is that traders typically try to fill the gap by learning more about the market, changing methods, spending more time in front of their computers etc. However, what they really need to learn is more about themselves and how they interact with the market. Essentially, they need to acquire the “proper mental skills” to trade their method as they should and to get the most out of it, in order to properly fill the profit gap.

Winning and being a winning trader are two different things…

Anyone, and I literally mean anyone, even a 5-year-old child, can find themselves in a winning trade. It does not require any special skill to get lucky on any particular trade and hit a winner. All you have to do is open your trading platform and push a few buttons and if you get lucky, you can make a lot of money in a short amount of time.

As a result of the above, it’s natural for a trader who has not yet developed his or her trading skills to take the leap from “it’s easy to win” to “it can’t be that much harder to make a living from this”.

This is how many traders’ careers get started. Needless to say, it is also how they get on the path to losing a whole lot of money just as fast or even faster than they made it.

A winning trader has the mental skills to realize, understand and utilize the FACT that any particular trade he or she takes has basically a random outcome. That is to say, they cannot possibly know the outcome of that trade until it is over. The winning trader knows this and they also know that they must trade in-line with this belief over a large series of trades and ignore all the temptations and feelings that get kicked up on each trade they take. They are able to do this because they keep their eyes on the bigger picture. That bigger picture is the fact that IF they execute their method flawlessly, over and over, over a long enough period of time / series of trades, they will come out profitable.

Thus, do not mistake a winning trade for you being a winning trader, yet. A very easy trap to fall into.

Mental skills are the key to trading

A key point that Mark Douglas really seems to want to drive into people is: Even if your method is a high-probability method, it’s the proper execution of that method that you need proper mental skills for. If you don’t have those mental skills, even a winning strategy will lose.

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Mental skills are things like; staying focused on the process, on your method, and not worrying about the consequences if this trade goes wrong. If you don’t have the proper mental skills to stay positively focused on the process of trading; on doing exactly what you need to do when you need to do it without reservation, hesitation or fear, you will not make money in the market.

The Mental Strategies Of Top Traders PDF Free Download

It’s critical to remember that no matter how good your technical method is at generating wining trades, turning those winners into a consistent income takes the ability to do or not do some things that the method can’t help us with. The method can’t force us to pre-define our risk, or with making the mistake of moving our stop closer and stopping us out prematurely, it can’t stop us from hesitating and getting in too late or from over-trading or from getting out too soon and leaving money on the table. No matter how good the method, if you make mental errors you will lose.

If you really boil down what Mark is saying by his comments on “mental skills”, it basically comes down to having ice-cold ‘blood in your veins’ discipline. Mental skills like discipline essentially means the ability to control yourself and especially your behavior / actions in the market against the CONSTANT TEMPTATION the market gives us. Essentially, as a trader, you are fighting against yourself to see which part of your brain has more control; the older, emotional and more primitive part or the more advanced logic and planning parts.

Technical price patterns aren’t designed to tell us what ‘will’ happen next…

Technical methods of any kind, price action included, are not designed to tell us what a market will do next. As Douglas says, they are designed to help us put the ODDS of success in our favor over a SERIES of trades. There are some profound psychological implications that go along with this fact…

The outcome of any particular signal is unique and random. There’s no way to know in advance the outcome of any particular signal or the sequences of wins and losses or over a series of trades. In other words, the nature of trading is random.

Douglas goes onto to describe something that may be a little difficult to understand at first, but that is critical for you to grasp if you want to make consistent money trading:

By accepting the random nature of trading I can produce consistent results

Now, on the surface, it seems contradictory to say you can produce consistent results from something that is random in nature. However, let’s dig a little deeper…

Technical methods and patterns will give a trader the same advantage a casino has over any individual player. A casino has an “edge” for every game they offer. What a casino knows is that whilst any singular instance of someone playing their game might result in the player winning money or even hitting the “jack pot”, due to the edge they hold, over-time and over enough series of events, the casino will make a profit, and a large one at that. Remembering this point will help you make the transition from thinking in ‘certainties’ as I put it, to thinking in probabilities as Mark describes and as you should be thinking.

If you don’t integrate the randomness principle, you will find trading is the most frustrating endeavor you can undertake. You can only generate consistent returns by understanding that each trade is random and unique, and then taking that information and using it to control yourself after each trade. Do not get hung up on your last trade. Instead, focus on consistently trading your method over and over.

Frustration comes from expecting something our method can’t do. Technical methods find and identify patterns in collective human behavior, the problem is, the outcomes don’t always correspond with the pattern on a trade by trade basis. There doesn’t have to be a relationship with the outcome and pattern. There is no guarantee that this trade will be the exact same result as the last one, even if they look the same. Rather, the method only tells us that IF we use it consistently, then over a series of trades, we should be profitable.

Think in probabilities, not certainties…

Perhaps the point Mark Douglas is most famous for drilling into traders, is that you need to learn to think in probabilities.

We did discuss this a little earlier, but it’s critical to understand that there’s a random distribution of wins and losses over any sequence of trades. Traders who learn to think in probabilities do not experience the mental ‘trauma’ like those traders who haven’t learned to think in probabilities because they are not ‘expecting’ a winner on any given trade like those who don’t think in probabilities. Learning to think in probabilities releases your expectations from trades because you are focused on the results of the overall series of trades, not on the result of any given trade.

If you have a weighted coin that will be heads 70% of the time, you still don’t know the sequence of heads and tails, all you know is OVER TIME 70% of the flips will be heads.


Beware of the “electronic disconnect” …

Markets started as exchanges where people physically met to trade commodities, stocks, etc. Today, markets are basically entirely electronic and most traders trade from their laptops. This takes most of the personal, human connection out of what is actually a very person-driven profession.

All prices are people-generated events, everything happens because of what people believe…. this is a big point Mark talks about in his seminars.

The typical retail trader doesn’t understand or doesn’t think about the fact that there are bigger traders who can move the market – so every price movement is something people believe about the future and those price movements are what I call price action. You can find patterns (price action patterns) in collective human behavior by analyzing this price action. These patterns show us that there is a higher probability of one thing happening over another.

The problem is, the patterns repeat themselves on a random basis. Even though the criteria are correct (a trade pattern that looks good), we still cannot predict human behavior, an important point to remember. When you put on a trade, do you know who took the other side? There’s no way to know. So, when the pattern presents itself, we don’t have ANY idea about who is going to come into the market next to influence it. So there is no point in trying to ‘figure out’ if it will work or not for that trade.

Essentially, once you place a trade, you need other people (traders) to want to buy or sell a market at a worse price than you did in order for you to become profitable on that trade. So, if you buy a market at 10 for example, someone else has to want to buy it at 11 or 12, in order to make you a winner. Since you have no idea if that will happen or not, you cannot possibly predict the outcome of any given trade. Remember, all trades are people-driven and influenced events, you are not in control. Your trading strategy is only putting the odds in your favor over a series of trades, not guarantying you will win every trade.

My mind has to be free…

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To execute trades without making mental errors you have to be free of thinking that “this trade will be a winner”. The typical trader expects “this trade” to be a winner, or why would they take it, right? But, you can’t think this way if you want to make consistent money. Once you start expecting each trade to win, you become emotionally attached to it, when as you should know by now, it is not any ONE trade that matters, but the overall series of trades and your ability to remain disciplined over that series that matters.

I have to change the way I think about the market: think like a pro

A pro trader doesn’t think to themselves “Will this trade work?” when a potential trade is present, because they understand the human component that makes it basically random (as discussed above). What he or she does think about is the risk; “How far am I willing to let this trade go against me before I see if other traders are going to come in and make me a winner?”

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In a winning trade – traders start focusing on the retracements and end up exiting at a low-profit point rather than seeing that it will go back up.

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Stop thinking about the outcome of the trade and instead think about risk and where you will exit, not about IF the trade will be profitable.

It’s not about being right or wrong…

It’s not about being right or wrong, it’s about the odds. A trade signal doesn’t tell you if you will be right or wrong, it is simply a pattern that means the odds are in your favor. But you cannot start thinking you will be right or a whole host of problems will occur.

By not thinking about being right or wrong, you will eliminate the potential for the market to disappoint you. When you have a losing trade, all it means is that the majority of other traders didn’t share your belief about that market at that time. Just walk away. Don’t let being right or wrong get to you or affect your self-confidence.

If you think you are going to be right about a trade, as the market moves against you, you’re going to have a tendency that tells you you’re right and ignore the info that tells you its moving against you and that indeed you may be wrong on this one. When you need to be right, you see what you want in the market, not what’s actually happening. Don’t get blinded by needing to be right all the time. Don’t hang on to losers.

If you are susceptible to being disappointing, it will affect your perception of market information that would otherwise make you cut your losses.

Demo tradingcan show me how to think…

Have you been profitable on a demo account then immediately started losing money when you switched to a real account? If so, you are not alone, this happens to a lot of traders, it’s very common.

Traders don’t really care if they are right or wrong on a demo account because they know they cannot lose or make money on any given trade. So, they naturally become focused on the things that matter; trading their method properly and slowly but surely building their trading account OVER TIME.

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If you ever lose your way and get totally frustrated and blow out your account. Simply go back to a demo trading account for a while and make note of how you feel and how you are trading, etc. That is how you should trade a real account!

I need a good trading edge…

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As Mark Douglas says, one of the first things you need to learn as a trader is how to put the odds of success in your favor. In other words, you need a high-probability trading edge. But, remember, a trading edge is simply a higher probability of one thing happening over another, over a SERIES of trades. It is not a guarantee you will make money in the markets. You need to combine that trading edge with the proper mental skills…

One of the few trading books I recommend is Trading In The Zone by Mark Douglas, you can buy it under $30 on Amazon here. Mark’s books are more about the mental aspects of trading than the strategy. When you combine Mark’s mental trading principles with a high-probability trading strategy, you will be armed with a solid trading ‘arsenal’ and ready to walk out onto the ‘battle field’ (the market) and execute trades consistently like a seasoned pro.

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