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Trading In The Zone by Mark Douglas is widely regarded as a classic in trading literature.

I myself have read it many times throughout my trading career, always managing to learn something new from it with each successive read.

Excerpts:

“Ninety-five percent of the trading errors you are likely to make—causing the money to just evaporate before your eyes—will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.”

“If you perceive the endless stream of opportunities to enter and exit trades without self-criticism and regret, then you will be in the best frame of mind to act in your own best interest and learn from your experiences.”

“People see what they’ve learned to see, and everything else is invisible until they learn how to counteract the energy that blocks their awareness of whatever is unlearned and waiting to be discovered.”

“To operate effectively in the trading environment, we need rules and boundaries to guide our behavior.  It is a simple fact of trading that the potential exists to do enormous damage to ourselves damage that can be way out of proportion to what we may think is possible.”

“There is a random distribution between wins and losses for any given set of variables that define an edge. In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 12 will be winners and 8 will be losers. What you don’t know is the sequence of wins and losses or how much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game. When you really believe that trading is simply a probability game, concepts like ‘right’ and ‘wrong’ or ‘win’ and ‘lose’ no longer have the same significance.”

What Mark is talking about here is very important.

Probability is one of the least understood aspects of the markets, having a firm understanding of probability and how it relates to you and your trading strategy will allow you to keep your expectations inline with the reality of the markets.

If you have tested your trading strategy over a sample size of trades ( lets say a thousand for example’s sake) you’ll know how many of the trades out of the thousand you have won and lost on, additionally you’ll also know what the highest streak of winners and losers you have had in a row.

Knowing this information allows you to trade from a standpoint of probability rather than chance, if you know out of 1000 trades your going to win on 500 of them then what purpose does it serve to be scared of losing money ?

We are blessed to of had someone as smart as Mark Douglas to shed an incredible amount of light on the psychological aspects of trading, if were not for him many of the techniques used to control and understand what a trader is thinking when trading would of forever been lost.

“In 1923, seven men who had made it to the top of the financial success pyramid met together at the Edgewater Hotel in Chicago. Collectively, they controlled more wealth than the entire United States Treasury, and for years the media had held them up as examples of success.

Who were they? Charles M. Schwab, president of the world’s largest steel company; Arthur Cutten, the greatest wheat speculator of his day; Richard Whitney, president of the New York Stock Exchange; Albert Fall, a member of the President’s Cabinet; Jesse Livermore, the greatest bear on Wall Street; Leon Fraser, president of the International Bank of Settlement; and Ivar Kreuger, the head of the world’s largest monopoly.

What happened to them? Schwab and Cutten both died broke; Whitney spent years of his life in Sing Sing penitentiary; Fall also spent years in prison, but was released so he could die at home; and the others? Livermore, Fraser, and Kreuger, committed suicide.”

—Donald McCullogh, Walking From The American Dream