10 Market Insights from Mark Douglas

1. The four trading fears

95% 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 four trading fears

2. The proverbial empathy gap

You may already have some awareness of much of what you need to know to be a consistently successful trader. But being aware of something doesn’t automatically make it a functional part of who you are. Awareness is not necessarily a belief. You can’t assume that learning about something new and agreeing with it is the same as believing it at a level where you can act on it.

3. The market doesn’t generate happy or painful information

From the markets perspective, it’s all simply information. It may seem as if the market is causing you to feel the way you do at any given moment, but that’s not the case. It’s your own mental framework that determines how you perceive the information, how you feel, and, as a result, whether or not you are in the most conducive state of mind to spontaneously enter the flow and take advantage of whatever the market is offering.

4. The flaws of fundamental analysis

Fundamental analysis creates what I call a “reality gap” between “what should be” and “what is.” The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct.

5. A good trader is a confident trader

I’ve worked with countless traders who would spend hours doing market analysis and planning trades for the next day Then, instead of putting on the trades they planned, they did something else. The trades they did put on were usually ideas from friends or tips from brokers. I probably don’t have to tell you that the trades they originally planned, but didn’t act on, were usually the big winners of the day. This is a classic example of how we become susceptible to unstructured, random trading—because we want to avoid responsibility.

6. Anything could happen

The best traders have evolved to the point where they believe, without a shred of doubt or internal conflict, that “anything can happen.” They don’t just suspect that anything can happen or give lip service to the idea. Their belief in uncertainty is so powerful that it actually prevents their minds from associating the “now moment” situation and circumstance with the outcomes of their most recent trades.

They have learned, usually quite painfully, that they don’t know in advance which edges are going to work and which ones aren’t. They have stopped trying to predict outcomes. They have found that by taking every edge, they correspondingly increase their sample size of trades, which in turn gives whatever edge they use ample opportunity to play itself out in their favor, just like the casinos.

7. Most people are obsessed with being right

Why do you think unsuccessful traders are obsessed with market analysis.They crave the sense of certainty that analysis appears to give them. Although few would admit it, the truth is that the typical trader wants to be right on every single trade. He is desperately trying to create certainty where it just doesn’t exist.

The typical trader won’t predefine the risk of getting into a trade because he doesn’t believe it’s necessary. The only way he could believe “it isn’t necessary” is if he believes he knows what’s going to happen next. The reason he believes he knows what’s going to happen next is because he won’t get into a trade until he is convinced that he’s right. At the point where he’s convinced the trade will be a winner, it’s no longer necessary to define the risk (because if he’s right, there is no risk). Typical traders go through the exercise of convincing themselves that they’re right before they get into a trade, because the alternative (being wrong) is simply unacceptable.

If he exposed himself to conflicting information, it would surely create some degree of doubt about the viability of the trade. If he allows himself to experience doubt, it’s very unlikely he will participate. If he doesn’t put the trade on and it turns out to be a winner, he will be in extreme agony. For some people, nothing hurts more than an opportunity recognized but missed because of self-doubt. For the typical trader, the only way out of this psychological dilemma is to ignore the risk and remain convinced that the trade is right.

8. Trading has nothing to do with being right or wrong on any individual trade

For the traders who have learned to think in probabilities, there is no dilemma. Predefining the risk doesn’t pose a problem for these traders because they don’t trade from a right or wrong perspective. They have learned that trading doesn’t have anything to do with being right or wrong on any individual trade. As a result, they don’t perceive the risks of trading in the same way the typical trader does.

9. We have to be rigid in our rules and flexible in our expectations

We need to be rigid in our rules so that we gain a sense of self-trust that can, and will always, protect us in an environment that has few, if any, boundaries. We need to be flexible in our expectations so we can perceive, with the greatest degree of clarity and objectivity, what the market is communicating to us from its perspective.

10. Market losses are simply the cost of doing business

When I put on a trade, all I expect is that something will happen. Regardless of how good I think my edge is, I expect nothing more than for the market to move or to express itself in some way. However, there are some things that I do know for sure. I know that based on the markets past behavior, the odds of it moving in the direction of my trade are good or acceptable, at least in relationship to how much I am willing to spend to find out if it does. I also know before getting into a trade how much I am willing to let the market move against my position. There is always a point at which the odds of success are greatly diminished in relation to the profit potential. At that point, it’s not worth spending any more money to find out if the trade is going to work. If the market reaches that point, I know without any doubt, hesitation, or internal conflict that I will exit the trade.

The loss doesn’t create any emotional damage, because I don’t interpret the experience negatively. To me, losses are simply the cost of doing business or the amount of money I need to spend to make myself available for the winning trades. If, on the other hand, the trade turns out to be a winner, in most cases I know for sure at what point I am going to take my profits. (If I don’t know for sure, I certainly have a very good idea.) The best traders are in the “now moment” because there’s no stress. There’s no stress because there’s nothing at risk other than the amount of money they are willing to spend on a trade. They are not trying to be right or trying to avoid being wrong; neither are they trying to prove anything. If and when the market tells them that their edges aren’t working or that it’s time to take profits, their minds do nothing to block this information. They completely accept what the market is offering them, and they wait for the next edge.

Source: “Trading in the zone”

You Don’t Need To Know The Future

I am being asked all the time, what do I think about this and that stock. I don’t have an opinion about every stock. I might have the occasional insight into the merits of one business or another, but I never let my subjective perspective dictate my buy and sell decisions. Not in public markets, where liquidity and momentum have created their own world; where perception is the reality.

When conviction and biases trump discipline, nothing good happens in the financial world and if does, it is due to non-repeatable luck and not a skill. (apparently if you are a value investor, this doesn’t apply to you – you have a different market philosophy and that is ok; there is room for everyone)

If you honestly believe that you don’t know what will happen next when you open a new position, then:

1. You will find a method that has positive expectancy in the current market environment. After years of adding and cutting, complicating and refining, the basics of my approach could be summed up to: buying breakouts near 52-week highs from proper technical bases in healthy markets. It is not the perfect approach for every market environment, but it is consistently profitable.

2. You would never venture to use a method you don’t understand and just buy random stocks based on tips or rumors. There will be no fear of missing out, because you realize that you don’t have an edge outside of your market approach.

3. You will not hesitate to take your signals – because you don’t know which ones will be successful

4. You will always have a predefined stop – because you could be and occasionally, you will be wrong. It is Ok to be wrong. It is not Ok to stay wrong.

5. You will risk equal percentage of your capital on each signal (idea), because there is no way to know in advance which ones will be the big winners. They are obvious only in hindsight.

6. You will have an exit plan – rules to protect profits and keep you in a position until a trend persists

Everything you need to know about successful trading and investing is on the web, gratis. There are no secrets. The rules of the game are known for each of the major market approaches – momentum, value and statistical arbitrage. Most people simply lack the discipline to follow the rules. There is a huge empathy gap between knowing something and actually applying it. It is just like the difference between knowing how to get in shape and doing it. It takes strong will and a desire to make it; it takes discipline.

Other than using a market method with proven positive expectancy, the only edge I have is discipline and it is more than enough. Diligently doing my homework and following my rules.

The Consumer Is Far from Dead

We just had the most successful Cyber Monday in history with sales up 30%. Mobile sales were up the astonishing 70%. And all of this, on top of very strong Black Friday. What does it mean:

1) Online shopping – the future is here. People feel more comfortable doing it and this trend will only accelerate across the world. 5 years ago, people used to say that if you have online presence, the whole world is your potential customer. Today, if you don’t have an online presence, you basically don’t exist. $AMZN and $EBAY have been the biggest beneficiaries of this trend as they simply are mind share leaders in this category. It is their battle to lose. Brick and mortar shops are so far behind.

2) The U.S. consumer is alive and well and as we all know, its spending drives not only the U.S., but also the world economy. Some might opine that more people taking advantage of one-time deals means that the consumer is trapped and desperately looking for savings. At the end of the day, the mere fact that more people are spending more is indicative of improving consumer confidence. Maybe all that news about housing recovery is actually creating the so called “wealth effect” – when people feel good about their future, they tend to spend more.