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Notes from The Disciplined Trader
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Notes from The Disciplined Trader

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Student of the Markets
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Notes from The Disciplined Trader

Notes from reading through The Disciplined Trader. I tried to pull all the important aspects so as to set this up as a reference vs. having to read through the full book again in the future. Kind of like my highlighter. In my opinion Mark Douglas' books offer some of the highest quality trading info from a psychological perspective.

The Disciplined Trader

Your ability to execute your trades is a function of the amount of fear you generate or the lack of it. Fear is always the result of your beliefs about the threatening nature of the environment. What could be threatening about the market? Nothing, if you had the confidence and completely trusted yourself to act appropriately under any given set of market conditions. Essentially, what you fear is not the markets but rather your inability to do what you need to do, when you need to do it, without hesitation.

Your ability to accumulate profits either in a single trade or cumulatively with several trades over a period of time is a function of your degree of self valuation. This sense of self-valuation is, in fact, the most important psychological component of success and will override all others in determining your results.

Your degree of self-valuation will regulate how much money you will give yourself (the market doesn't give you the money, you give it to yourself based on your ability to perceive opportunity and execute a trade) out of the maximum potential available or perceivable at any given moment or time frame perspective.

Regardless of the depth of understanding you have of market behavior or what you consciously intend, you will only "give" yourself the amount of money that corresponds to your level of self valuation.

This concept can be explained with a simple illustration. If you perceive an opportunity, based on your definition or what market conditions constitute an opportunity, and do not follow through by executing a trade, what stopped you? In my mind, there can be only two possible reasons. You were either immobilized by the fear of failure or you are struggling with a belief (value) system that says you don't deserve the money. Otherwise, you would have acted on your perception.

As you cultivate a stronger belief in self-acceptance, you will then realize how the market reflects back to you your level of skill development along with the information that will indicate what you need to work on to become ever more successful. Each moment will then become a perfect indication of your skills and your degree of self-valuation, giving you a solid base from which to improve and learn.

You will eventually understand at a very practical level how you are always doing the best you can because your outcomes will be the result of your depth of insight into the nature of the market environment and your ability to act on whatever you perceive.

If you won't acknowledge your true starting point, you cannot take the next most appropriate step in the development of any skill you intend to learn.

As you gain in your understanding of how beliefs interact with environmental information to control your perception and form your experience, along with learning how to distinguish between wishful thinking and what the market is indicating about itself, you will eventually be able to learn how to control your perception of the market activity in a way that allows you the greatest amount of mental flexibility, where you will be able to shift your perspective to flow with the markets and execute your trades without hesitation. If you can't change or control what the market is doing, then the only option you have left is to control yourself in a way that allows you to perceive what the market may do next with increased clarity and objectivity, requiring a thorough working knowledge of the nature of your inner environment in relationship to the outer physical environment.

It is only because there is an imbalance, a lack of harmony or correspondence, between the mental and physical that we ever experience any of these unpleasant, negative emotions. So it would stand to reason that any time we feel these negative emotions, it is because we either didn't know the most appropriate set of steps, resulting in frustration and disappointment, or we don't know what to do next, resulting in stress, anxiety, and confusion. In any case, our feelings will always tell us about the state of our relationship with the environment and point the way to what we need to learn to experience greater degrees of satisfaction.

The more we allow ourselves to learn, the better able we are at making assessments about the probabilities that exist in some future moment. The more we believe we know, the more we make the environment prove to us that what we know isn't particularly useful or effective.

Trading is a waiting game. You sit, you wait, and you make a lot of money all at once. Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between.

The good traders are the ones who can hold their ground the majority of the month and participate in that small handful of trades that are windfalls. The real skill is in not LOSING money!

The deeper the level of our understanding and insight, the more effectively we can interact with the environment to fulfill our needs and achieve our goals.

So it would stand to reason that any time we feel these negative emotions, it is because we either didn't know the most appropriate set of steps, resulting in frustration and disappointment, or we don't know what to do next, resulting in stress, anxiety, and confusion. In any case, our feelings will always tell us about the state of our relationship with the environment and point the way to what we need to learn to experience greater degrees of satisfaction.

These cycles of dissatisfaction will continue until we acknowledge there is something we need to learn and go about the task of learning it.


We don't question the usefulness or effectiveness of something we have already learned, simply because what each of us has learned we experienced in some way. Once an experience becomes a component part of our mental environment in the form of a memory, belief, or association, it becomes a part of what is commonly believed to be our identity and beyond question. However, we are open to learn practically anything the environment has to offer, if we haven't been previously exposed in some way. We will soak up first-time information like a sponge, regardless of what it is. However, once it is inside of us, we will either defend it or defend against it (hide from information in the environment that we don't want to acknowledge as a part of our mental environment), instead of making ourselves available to learn more of what the environment has to offer in the way of insight about itself or ourself as the case may be.

One of the biggest ironies of life is that everyone wants to be right. In other words, everyone assumes what they have experienced and learned about the nature of the way things exist to be the true and correct version.

A child has no way of conceptualizing how his experiences are forming beliefs about the nature of reality, concepts that would, in fact, be much different under different environmental conditions. He unquestioningly takes an experience as a fact of reality because the beliefs he is forming are founded in feelings and emotions. He does not reflect on his experiences to assess the quality of the beliefs he is forming. He has no way of determining how these beliefs will either act as resources or obstacles to self-expression in the future.

To stay in a constant state of learning we need to learn how to adapt. By consciously adapting, we are making ourselves available to learn how to fulfill our needs and achieve our goals in increasingly more satisfying ways. To adapt, we need to choose not to resist learning and change. This requires a willingness on our part to think outside of the limitations established by our beliefs, associations, and memories and a willingness to learn how to manage mental energy so we can release ourselves from the negative effects of our painful memories. When we change the quality of energy of a memory from negative to positive, we negate the memory's potential to generate fear, thereby allowing us to perceive all the other choices for experience available from the environment in the same moment.

The idea is to learn how to recognize what we need to know long before the conditions deteriorate to the levels of desperation. To do this requires that we incorporate into our mental system three very fundamental assumptions that will help us to maintain a healthy relationship with the environment and generate the energy behind the willingness that we will need to start such a process, after which experiencing the benefits will act as the driving force behind our willingness.

The first assumption is that we haven't learned everything there is to know.
The second assumption is that what we have learned to believe either by force—unwillingly thrust upon us, as an expression of the outside environment—or by choice—as an expression of inner forces that operate within us like our curiosity and attractions—may not be very useful with respect to fulfilling ourselves in some satisfying manner.
The third assumption is that what we have learned that is useful and works to our satisfaction is still subject to change because of the changing environmental conditions. In other words, what we may need to know to experience more satisfaction and happiness in our lives will often have to replace partially or invalidate completely what we have already learned. Refusing to change what we have already learned is virtually the same as saying that we already know everything there is to know and don't need to learn anything further.

Of course, we could easily know if we didn't need to adapt because we would be in a perpetual state of satisfaction. Anything less than a feeling of satisfaction from our interaction with the environment is an indication that we need to learn something.

If you operate out of the foregoing assumptions, you will begin to recognize how every moment becomes a perfect indication of your state of development and what you need to do to improve yourself.

How we express ourselves to fulfill the need will be function of (1) our perceptions, (2) the steps that we choose as a result of those perceptions, and (3) the skills we have developed minus any conflicting beliefs, memories, and associations, making each moment that we interact with the environment a perfect indication of what we know and how well we can act on what we know. When we refuse to acknowledge or accept the perfection of each moment in our lives, we deny ourselves access to the information that we need to expand ourselves.

Every "should have," "could have," "would have," or "if only" is an indication of the degree of illusion in which we are indulging ourselves. If we could have, we would have, meaning that at each moment we are doing the best we can when taking into account all the components—both conscious and subconscious—that affect what we perceive and do. We have to be willing to confront the truth about ourselves so that we can confront the truth outside of ourselves. The less illusion we indulge ourselves in, the more our perceptions of the outside environment will reflect the actual conditions, because we won't be blocking so much available information. By available information I mean information we are capable of perceiving.

What better form of goal achievement could there be than to confront conditions as they exist, identify what we need to learn to operate most effectively, and then go about the task of learning it, making our adjustments along the way?

Traders put on trades and then take them off when they choose. That decision making process is the result of the sum total of all the mental components interacting with one another. In any given trade, there are a number of possibilities to take profits or cut losses. What we decide to do in each instance with respect to each possibility will be the result of our perceptions and all the internal components affecting those perceptions.

As individual traders if we want to give ourselves more and more money out of the markets, we have to learn how to value ourselves more and more so that we believe we deserve what we want or deserve what we get. The first step in the process of valuing ourselves more is to accept our true starting point; that is, we have to take complete responsibility for what we end up with as being a reflection of what we need learn about the markets, about ourselves, or both.

Keep in mind that you can't physically control what the markets do; you can only learn to control your perception of the markets to share the highest degree of reality (the least amount of distortion) with everyone else who is participating or has the potential to participate. The more sophisticated you become as a trader, the more you will realize that trading is completely mental.

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. You need to stay focused on mastering the steps to achieving your goal and not the end result, knowing that the end result, money, will be a by-product of what you know and how well you can act on what you know.

You can't learn anything new about the nature of the market's behavior if you are afraid of what you may do or can't do that is not in your best interests. By pre defining and cutting your losses short, you are making yourself available to learn the best possible way to let your profits grow.

The big psychological problem here is that people have difficulty acting on opportunities with probable outcomes. Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make them feel as if the outcome had been in doubt.

You need to understand that technical trading systems are not designed to be outguessed. What I mean is, they aren't designed to give you isolated signals of an opportunity to be taken when it seems right. What they do is mathematically define, quantify, and categorize past relationships in collective human behavior to give you a statistically probable outcome of the future.

You form your expectations about the future with information technical systems don't take into consideration. Consequently, this sets up a conflict between what your intellect says should be happening and the purely mathematical means of predicting human behavior afforded by your technical system. This is precisely why technical systems are so difficult to relate to and execute. People aren't taught to think in terms of probabilities—and we certainly don't grow up constructing a conceptual framework that correlates a prediction of mass human behavior in statistical odds by means of a mathematical formula.

To be able to execute your trading systems properly, you will need to incorporate two concepts into your mental framework—thinking in terms of probabilities and correlating the numbers or the mechanics of your system to the behavior. Unfortunately, the only way you can really learn these things is actually to experience them by executing your system. The problem is that rarely will the typical trader stay with his system beyond two or three losses in a row, and taking two or three losses in a row is a very common occurrence for most trading systems. This creates something of a paradox or Catch 22. How do you do it if you don't believe it, and you won't learn to believe it unless you do it long enough for it to become a part of your mental framework? This is where you employ mental discipline to make flawless execution a habit.

Your objectives are to (1) learn the skill of flawless execution by learning that you can follow the rules you set forth for yourself (I am defining "flawless execution" as executing a trade immediately upon perception of an opportunity; inclusive within opportunity is the opportunity to exit a losing trade.) and (2) to incorporate a belief into your mental system about the nature of probable outcomes so that you believe that you can make money in the long run with your trading system, if, of course, you can execute it properly.

What's possible? Stay focused on what you need to learn, do the work that is necessary, and your belief in what is possible will naturally expand as a function of your willingness to adapt.

The bottom line is this – if you don’t maintain a level of consistency in what you do, you will never be able to make the progress and achieve the results you desire. This is why so many successful traders talk about the importance of consistency in approach as that has often made all the difference between their success and failure.
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