Class on The Disciplined Trader by Mark Douglas Chapter 16

Buffy_04364: Today's discussion is on Mark Douglas's book The Disciplined Traders (New York: New York Institute of Finance, 1990)

Buffy_04364: While there are many many good chapters in this book like Chapter 15 on The Psychology of Price Movement, we are going to focus on Chapter 16 - Steps to Success

Buffy_04364: Douglas states that self-discipline is simply a mental technique to stay focused on what you need to learn or do to accomplish your goals

Buffy_04364: In order to do this many will have to adapt by changing the way they interact with the environment which usually

Buffy_04364: also involves changing your perspective which involves changing the mental components that effect your perception of the environment.

Buffy_04364:  He also states that since you can't control what the market does, you can only learn to control you perception of the market

Buffy_04364: Trading is completely mental. It isn't you against the markets, it is just you against you

Buffy_04364: The market doesn't not tell you when to put on a trade

google_2: me against me

google_2: :-)

Buffy_04364: how long to stay in, when to exit, and how many contracts you buy/sell is the traders choice not the markets.  You and you alone are responsible for putting money in your pocket or giving it away

Buffy_04364: anyone have anything they would like to add to that?

google_2: control the "knowns"   which is "risk" aka "stop loss"

google_2: I know how much I'll lose not how much I'll win

Buffy_04364: Douglas also states that to be a successful trader you need to trade without fear.

Buffy_04364: Also once you trust yourself to always do what needs to be done there will be nothing to fear because you will trust yourself to respond to what the market is saying.

pd123: He tells how to do it?

 Buffy_04364: yes he does through various steps that we will cover

Buffy_04364: Douglas has the following in italics stressing its importance

Buffy_04364: As a trader it is more important to know that you will always follow your rules than it is to make money because whatever money you make you will inevitably lose back to the market if you can't follow your rules.

Buffy_04364: These rules will change as you realize that what you set out to learn is now second nature.

scorp: brach, that is part of it, you need to have confidence in your method

Buffy_04364: this covers the over view of the chapter

Buffy_04364: any additional comments before we start the steps?

scorp: you need to know that your method works

Buffy_04364: true scorp

elroch: I find it's easy to lose confidence in methods

scorp: exactly elroch

Buffy_04364: he does say to set aside "educational" money for learning this

Buffy_04364: His first step is Staying Focused on What you Need to Learn

Vic_927: Buffy , Douglas book one ,, or two , Trading in the ZONE ??/

Buffy_04364: this is all in his The Disciplined Trader Chapter 16

Buffy_04364: maybe you or others could add comments from his second book

Buffy_04364: Thank you Scorp for the great graphics to go with this

Buffy_04364: all this means is not to focus on the money which makes you focus on what the markets

elroch: Thoroughly agree with this one

Buffy_04364: are giving or taking away from you but on mastering the steps needed to become a successful trader

Buffy_04364: the end result will take care of itself once you accept the fact that mistakes don't exist

Buffy_04364: it is easier to focus on the market and what it is telling you

brach: "mistakes don't exist"?  that not a fact in my experience

elroch: I see you mean not to focus on what the market is giving or taking

Buffy_04364: mistakes have to be looked at as educational and not from the I goofed" point of view

Buffy_04364: one is negative and can do harm psychologically

Buffy_04364: the other is constructive

Buffy_04364: that is what he means

Mill_brook: I could be an agnostic, but I would like to know the rest of what you are going to delineate here before I comment. What you are saying sounds solid in my experience (since 1987).

elroch: I never cease to find new mistakes to learn from

Mill_brook: elroch......me too

Mill_brook: elroch.......but Buffy is saying don't say, "I goofed"

Buffy_04364: google has talked about this in the past during these discussions

elroch: I agree

Buffy_04364: and given great tips on how to transfer the focus from money to trading

google_2: there's a difference between a mistake and a normal setup that didn't work

google_2: failed setups can't be considered mistakes since that's just part of the market function

Buffy_04364: those tips are in the two trading plan discussions posted at the website under the trading discussion link

Buffy_04364: true google

scorp: part of the discipline point system?

google_2: let's give an example

google_2: if someone is trading 2 humps as their pattern

google_2: then market reverses and stop loss is triggered

Buffy_04364: yes scorp for one

google_2: that can't be considered a mistake -  just a failed setup

elroch: The trouble is when you're trying to develop your system and bad results make you change things you shouldn't

google_2: elroch that's why testing "real-time" for an extended period is very important

google_2: backtesting can give one a nice base to start from but the mind needs to be conditioned to accept it over an extended period of time and that only comes from "papertrading"/simulation, etc.

google_2: and not for a couple of weeks  -  we're talking months - unfortunately, most are impatient, including me, when I started out

Mill_brook: And if you use as your pattern that the buy and hold will work because it has worked if you leave it in our lifetime, and it does the same thing it did in 1929 and takes 25 years to get back to where you bought it at...........it is just a failed setup..........don't take it personally.

Polytimi: do you mean months for every new system?

google_2: yes

Buffy_04364: I think with the ability to use playback it helps the learning curve if done correctly

Buffy_04364: what do you think google

google_2: sounds like a prolonged process but that's what it takes

Vic_927: I read " Zone " this week end , what hit home for me was that , if your trading plan is based on 60% w,30% loss/10% b.e. , that this plan was based on taking entries at the proper time , if you let losses cause you to hesitate entering a trade ( pain ) , then you are not working your plan

google_2: yes for sure buffy

google_2: that's why most preach by taking one single setup and just focus on it for a period of time

elroch: Good thing about daytrading is learning and testing is accelerated

google_2: and shun everything else

Vic_927: so you must eliminate ( PAIN ,,,,,,,,,FEAR ,,, he devotes 5 chapters to that

google_2: daytrading is the most difficult

google_2: the mind needs to process information much faster so that takes time to develop

google_2: imagine when starting out, trying to make a decision every few minutes!!

elroch: But if you have unambiguous rules, there's no problem

google_2: that's why if one focuses on 1 setup, they give themselves time to digest and recognize it

Mill_brook: google........that's akin to the caution to not optimize a system............lots of back data going way back.........

Buffy_04364: it should also be considered when choosing your comfort zone time frame to trade in IMO

elroch: Funny thing was, I did google, and had some success

google_2: I measure "success" by "consistency"

scorp: that is discussed in Step Three, focusing on just one market behavior

pmtrader: consistency in results or execution??

google_2: "process"

google_2: results will take care of themselves

Buffy_04364: one setup or behavior

Mill_brook: google.......yes..........that's why I look at the daytrading........lots of data flowing by fast......

google_2: mill, precisely, and it's impossible for someone to trade it all

google_2: take 1 wave and ride it

scorp: so we really shouldn't judge our "success" based on outcome; but base our success on how we execute the process?

google_2: I can tell you how much in $ one can make per year just trading 2 humps

Buffy_04364: or find some other market behavior to start out with that you already understand

Buffy_04364: to use while learning to make execution a habit

Mill_brook: google.........and "consistency" is not the same thing as "accuracy".........lol. I can be consistently wrong.

elroch: I've played chess quite seriously, which involves making calculated decisions in from a few minutes down to a couple of seconds - can't be that much more difficult to trade!

scorp: elroch, what about the emotion of lost or gained money?

elroch: Mind you many years of experience are useful

Mill_brook: google.........."consistency" is a measure of the validity of your system, seems to be what you imply

google_2: well elroch, then your decision making is above the average trader

Buffy_04364: the difference is in the next step elroch

google_2: yes mil validate first, then trade it "consistently"

elroch: One game can seem like life and death

google_2: no second guessing

Mill_brook: oh, I see, you mean how consistently you trade it, whatever your system

Buffy_04364: Douglas's second step is Dealing with Losses

Buffy_04364: most traders need to change their attitude of a loss

Buffy_04364: not take them personally

Buffy_04364: you must believe that also!

Buffy_04364: and exit the trade the minute your predefined exit is reached without any hesitation!!

Buffy_04364: this removes the threat of a big disaster when you can trust yourself to do so

Buffy_04364: This is all just a summary of what The Disciplined Trader by Mark Douglas

Buffy_04364: has to say and if you either buy the book or get it through your library

Buffy_04364: you will find what is being discussed here generally is discussed much deeper in the book

Buffy_04364: losses can create a lot of fear for the next trade sometimes making it impossible to take no matter how good the setup

scorp: I have learned that knowing where my target and stop loss are, predefined, I am much more at ease with the market

Buffy_04364: that is what he is saying scorp

pd123: This is me Buffy lol

Buffy:  You and many others pd

Buffy_04364: the fear created can be hard to overcome also

google_2: that's from his personal experience too - thanks scorp

scorp: yes

elroch: I've noticed that the trade you skip after a bad trade often seems to be a good one!

scorp: right!

scorp: elroch, that happens all too often

Buffy_04364: the next step is to help you do that

scorp: part of that is bias, and also fear to jump back in

Buffy_04364: Step 3 Becoming an expert at just one market behavior

scorp: this step has been important in my development

Buffy_04364: great graphics scorp again thanks

Mill_brook: Buffy........I remember sitting in a thousand dollar seminar one weekend in Orlando in 1987, and the most critical thing I have ever heard was said by Jake Bernstein........"What I want more than anything else out of a system is high accuracy, not profitability, not low drawdown, but high accuracy, because it helps your discipline". And he was right. This is what I have the most trouble with.........losing and then trading again.

Buffy_04364: there is scorps chart on one of them

ispec_rickm: good ol' Jake

Buffy_04364: thanks mill for adding that

Buffy_04364: Another one could be made of flags and shelves

scorp: by focusing on just one setup - and not looking at anything else - I am able to focus on the important stuff

scorp: like execution

google_2: I'm a 50%-65% trader  -  is that accurate?

Buffy_04364: Another one on LH is an uptrend and HL in a downtrend

Buffy_04364: There are many different market behaviors that you could choose from

Buffy_04364: If you happen to recognize other opportunities than what you

scorp: when I get bogged down with extraneous information, that is when I hesitate, think, question, and often miss the move of the day

Buffy_04364: have picked to focus on at this time

Buffy_04364: look at them as you pass them by as they will be there later also

Buffy_04364: the goal on this step is to develop good trading habits and not do damage that has to be undone before you can be a successful trader

scorp: and a thorough understanding of your system/method/setup

Buffy_04364: perception and execution are separate skills

Mill_brook: google.........I think Jake Bernstein wanted eighty percent plus accuracy..........I want more than that for my sorry discipline, lol.

Buffy_04364: they can and do work together if there  are no mental blocks making execution difficult if not impossible

Buffy_04364: pausing for comments here

Mill_brook: well.......Gann traded with 92 percent plus accuracy........so it IS possible

google_2: sorry to disagree re gann anyway, back to topic

snicksb1: why did he die broke Mill if he was that accurate

tradethewave: accurate is not the important thing

Mill_brook: Yes.......I have programmed every oscillator there is into tradestation, (several years ago), and backtested on months of data. Too much information........need to simplify.

tradethewave: you can have many small winners and few large loser

redtoptrader: you can't spend your win/loss percentage....only points per contract...

snicksb1: I read where Gann's son said he was broke at his death

elroch: I think size of wins and loss has to be looked at the same time. You can easily improve your win ratio by using loose stops, and reduce profits

Mill_brook: My comment is you can easily get bogged down with the looking at too many markets and too many methods  It's easy to do

snicksb1: agree for sure on that Mill

elroch: 1 market, 1 method should be enough

Mill_brook: I think sometimes you need to look back over your shoulder and see if you want to keep doing what you have been doing.......

Buffy_04364: google would you mind adding some other behavior here that could be the beginning focus?

elroch: Most indicators are about identifying trends and ranging markets As early as possible

google_2: market behavior?

google_2: I'm a humps girl

google_2: the thing with humps is the following

Mill_brook: A quote from Einstein......."It's not that I am so smart, ......It's just that I stay with a problem longer"............get one method, one market, and wring it out

elroch: ;-)

google_2: humps look alike to a certain extent but they give different objectives

tradethewave: google are you looking for humps on different TF, too?

tradethewave: or only constant TF?

snicksb1: the thing on a camels back mikey

google_2: so in the beginning, one would want to set a fixed target on these humps in terms of stop loss and profit

google_2: example on NQ 3min 3 pts. stop loss and 5 pts. profit

elroch: google - do you manage without indicators like MACD, stochastics?

google_2: no oscillators whatsoever

google_2: good riddance - in my case

google_2: anyway  going back to our example

google_2: the next step is once one confirms money can be made out of humps is to understand what t ype of day one is trading

google_2: and what are the important levels

google_2: the last 2 take time - once step 2 is mastered to a certain extent then one can project more accurate profit targets

google_2: so it's a combination of both

google_2: I'm a visual person -  I like to see bare bone price - tells me a lot

google_2: now going back to humps - I know someone who makes a very decent living just trading those suckers and when I decent I'm talking >100k/year

wesley35: google how do u define a hump?

google_2: scorp is posting nice charts wesley

wesley35: yep I see them

brach: what kind of hump?

google_2: comes from looking at charts, just plot a trendline below rising triangles or waves or pushes up (or down)

Mill_brook: yes.......and there are interesting prices..........you can select them in a ton of different ways...........let's see.......Murray and one eighth of the last swing, which is not really Murrey, but Gann on page 32 or so of "How to Make Profits in Commodities"

Mill_brook: or the ones in Jeannie Long's book, The Universal Clock...........those I like

wesley35: on scorps chart buffy just posted why is that 2nd high/hump not a hump to trade? thanks

google_2: if one trading nq

Mill_brook: lol....yes, and trendlines..........on the oscillator like Woodie.......or like Tom Demark with fib numbers

wesley35: on left side of chart

google_2: 3 min. is the best tf for trading those

google_2: mill, been there done that but we're looking for simplicity

google_2: so try to eye a chart with nothing except price for a while

Mill_brook: yes.........that's my point........don't fall for all of that

google_2: so, it goes back to the point of preparation

google_2: if someone can "afford" not to trade for few months - let's say 6 months

google_2: I can say with confidence that if they concentrate on "1" setup

google_2:   they'll be profitable and on the right footing

scorp: and that is the point Douglas puts forth with this step

Mill_brook: yes.......excellent idea.........just look at price, well, that's Gann again, if you look back at the swings, no matter what timeframe you are talking about.........anniversary dates as an example.

Buffy_04364: Step 4 - Learning how to execute a trading system flawlessly

Mill_brook: well..........Gann liked 50%............look at last Friday.......the time from the open to the first top at 10:47 was such and such, and half of that time again gave the next low.

p_8: indicators are very seductive, which is why it's difficult not to trade without it, especially in the beginning

Buffy_04364: This can be the most difficult to learn

Buffy_04364: we never really know if a setup is valid or not until it has completed itself

Buffy_04364: most people have problems acting on opportunities with a probably outcome

Buffy_04364: no one trades to lose

Buffy_04364: trading gives you all kinds of ways to beat yourself up for all the things you could of - should of done to create a better result

Buffy_04364: you need to think in terms of probabilities because all systems have losing trades

Buffy_04364: you must have the mental discipline to make flawless execution a habit

Buffy_04364: you need to determine your unique tolerance for taking a loss

Buffy_04364: you should be comfortable with the amount you are risking on a trade

Buffy_04364: when you fell uncomfortable you are not focused on the market but on your loss instead

Buffy_04364: thereby not allowing the market to talk to you and doing damage

Polytimi: how does a new trader cope with a system which in the hands of an expert has little or no losses

Buffy_04364: Google's system of giving yourself 1 pt for every setup you see and take

google_2: poly let me tell you from my own experience

Buffy_04364: subtract a pt for everyone that was there and you didn't take

Buffy_04364: subtract one pt for any rule not followed

google_2: I like to listen, but self-validate

Buffy_04364: this is an excellent way of giving yourself direct feedback

elroch: Are these in addition to profit points? Or a separate scale?

Buffy_04364: on the days performance

google_2: no system is profitable or worthy in my eyes unless I work it myself

Buffy_04364: poly I would suggest taking one setup in the system

google_2: systems are reflections of personalities

Buffy_04364: and practicing it until you know it inside and out then adding other ones

google_2: and one can't impersonate someone else's

Polytimi: good advise well taken

google_2: I and someone else trade 2 humps, and he gets 10 pts. while I get 3 - as an example

google_2: do humps work? sure  Same outcome? no

google_2: one takes a concept and tailors around their personality

google_2: and when I say personality - not be vague

google_2: is with time one will add their own twist to it

Mill_brook: Now you are hitting on my "accuracy" business.......I lost 6,500 dollars trying to trade through the crash of 1987........following good discipline, but a software package called "The Eurotrader".........and my discipline has not been the same since, lol.

google_2: in terms of stop loss management, profit targets, timeframe, etc.

willeo_1: I still don't see what a HUMP is and how you trade it HELP

brach: me neither

google_2: you know what a hill looks like

Buffy_04364: that is because of not knowing the system involving them

brach: could you please post a chart?

google_2: scorp got some charts posted

google_2: also I discussed in one of my previous sessions

google_2: there's a link to that on dacharts.com

scorp: http://www.dacharts.com/archives/Pattern_Recognition/google_presidentsday_session/rule_of_4.htm

Mill_brook: Is this the focus of the discussion, or are we getting sidetracked on a particular trading method?

scorp: that's the one I read; there are charts that go along with that discussion

brach: what's the diff. between a "hump" and a swing?

google_2: mill, I discuss whatever I want  lol

Mill_brook: What have we learned so far?

Buffy_04364: hope someone has gotten something out of this :-)

brach: have confidence and learn from your mistakes

google_2: yes buffy, that's for sure

Buffy_04364: that will be the last step discussed today

Neil040: I definitely believe in the point Douglas makes of attempting to become an expert in one simple trading system

Mill_brook: I want to be attentive to see if I am following good discipline.........so I .......focus

Buffy_04364: don't forget google will be talking next Tuesday on Exit Strategies

Buffy_04364: Then we will resume this discussion by discussing the rest of the steps.  Maybe some would be willing to contribute what they have done with suggestions from this discussion by then.

elroch: So all we need now is the system that works for us

hanksterr: a hump is a significant market swing low to high or reverse that becomes a part of a larger market swing low or high

elroch: A minor wave

brach: a corrective wave

google_2: brach, elroch, hank, yes

Mill_brook: I talked to a girl (33 year old) on the internet in a chat one morning. She was in France. She taught me more than you will ever know. She said that she had made $18,000 that morning in one hour and was going to go to the gym. She said that I was overcomplicating things.........(I am an Electrical Engineer)......so I like it very technical.......but she used only a nine period moving average

elroch: Not sure what the official terminology is - let's stick to humps

brach: she was lucky   she caught a trend and didn't get chopped

Buffy_04364: just like what some call a potential flag others only think of it as a retracement

elroch: On what time frame Mill_brook?

Buffy_04364: different names same thing

Mill_brook: brach.........no, she thought that she had a bad day..........she usually makes more than that.

brach: or stopped out (I wonder if she even used a stop)

Mill_brook: I can't remember......I think it was three or five minute

tsfan: what all did she teach you mill?

Mill_brook: she paid attention to time of day, though, as well..........well, her experience came into play, I am sure, but the message is still there..........it rings in my ears now.........."you are overcomplicating it"

elroch: I've found many indicators that tend to follow the price with less noise, but all of them have problems with chop or lag sometimes

tsfan: anything specific that really helped you mill?

elroch: I'd expect a well chosen stochastic to be better than any MA

hanksterr: thx buffy google scorp

brach: but the choice can vary

willeo_1: BYE and thanks much

google_2: I'll show you the exit next week :-)

nedam: thanks everyone

mmmax: gn

Polytimi: thank you all

zack_100: thanks everyone

Jack3: bye

olmikey: thanks google

anton_2001: thanks everyone

google_2: you're welcome everyone, and thanks

Buffy_04364: thanks to all for their comments

Mill_brook: Thank you Buffy and google for allowing me to post my thoughts

Neil040: good work google and buffy and all

brach: scorp, I looked at http://www.dacharts.com/~charts/2002-09-03/scorp_TheHumpReport and I still don't know you mean by "hump". it appears to before indistinguishable from an ordinary "swing"

google_2: brach it is - you're right

brach: good

google_2: just to help in visualization, that's all

brach: tks

google_2: term used is secondary

Mill_brook: google.........that's about all that will work for my sorry discipline, lol.

Buffy_04364: it is great to share mill and I thank you for doing so

Mill_brook: You're welcome, Buffy..........this discussion has been interesting

olmikey: that's true you never know what will speak to a person