I was looking for books and resources to learn to trade in the stock market. This was when someone recommended the book, Trading in the Zone.
I read the book completely, and every word of it was eye-opening for me. In this article, I will list and describe the major takeaways from the book. However, the summary obviously isn’t like reading the book yourself.
What the book is about
The book Trading in the Zone has nothing to do with buying or selling. It is not about any specific strategy to beat or outperform the market.
Rather, Trading in the Zone is about trading psychology.
A beginner will not understand this concept. He thinks that he has to discover, learn, and master the best strategy to accumulate boatloads of profits from the stock market.
However, this belief isn’t completely true. There is no right strategy. You have to choose your strategy based on the amount of money you have, your risk tolerance, and how frequently you want to get involved in the stock market.
Also, most people do not lose because of a strategy that doesn’t work. They lose because they just couldn’t control their emotions and mindset despite having a working strategy.
Trading in the Zone is about how to implement the best emotional practice and develop the right mindset to be a consistently profitable trader.
These are the major takeaways:
1) The market doesn’t want you to lose money.
Yes, the market does not want you to lose money.
But why do you lose in the stock market?
This is because the stock market sometimes does something you don’t want it to do.
Let us consider an example. Let’s say you buy the shares of a company at Rs. 700 per share. If the stock begins to lose immediately after you buy, you will surely experience pain.
This is because losing money is painful. It sucks.
But let us assume there is another stock which you haven’t bought yet. If its stock price goes down or up, will you feel anything? Nothing, right?
This is because the market always presents its information from a neutral stance. You become exuberant (happy and excited) if it does what you think. And you will be in pain if it goes the opposite way and you are in a loss.
According to the book Trading in the Zone, novice traders will think the market caused him to feel the pain by subjecting him to a loss. This is because, since our childhood, we saw that someone else was the cause of our suffering.
Unlike in the society where people help each other, the market does not want you to be in profit.
The stock market does not want you to lose and it does not want you to gain either. Once you learn this, you do not think that the market is your enemy. If you think the market is your enemy, you will try to beat the market, master it, and gain superiority.
However, overtrading leads to emotional trading. Emotional trading leads to revenge trading.
As a practical example, why is it difficult to accept a loss and get out before it is too late? If you are an emotional trader, you will be paralyzed when your trade is losing. This is because being wrong hurts your ego and you will hope the price will come back and soar higher. The rational option is to get out of a lossy trade with minimal losses and get back in once it shows reversal signals.
2) Do not predict the market.
I’m sure you’ll be surprised if I say that you do not need to predict the market to be profitable.
Logically, you think that the best players are those who can predict the future more accurately. If you think this way, I’m sure you also think that the best players use some sophisticated strategy or indicator or resources.
However, that belief isn’t entirely true.
To predict the market is to expect that certain things will happen in the future. However, expectation brings emotional pain. The greater the energy that is behind the expectation, the greater is the pain if it is unfulfilled.
Do not predict the market. Use all the information you have and buy your stocks. If the market starts to go the opposite way, use this additional information, and execute a new gameplan.
If you are hurt because the market did not go as predicted, you are prone to oversee the signals that tell the other way. As a result, your mind will ignore anything that goes against your prediction, and you will be in a state of illusion.
3) You do not lack a better strategy.
If you are learning to predict and conquer the market, you are learning a failing psychological mindset with you. It is better to have a systematic way of winning than to look for the best way to win that doesn’t exist.
This is what happens with most beginners: They start with a strategy they think will work. However, they do not understand that no strategy will work 100% of the time.
This is because, all our lives, we were taught in zeroes and ones, black and white. We were taught that something is either right or wrong.
In contrast, investing/trading in stocks is a game of probability. You do not need a perfect strategy. You need one that works just more than half of the time.
So, once the beginner loses all his money in the first phase, he will go looking for a better strategy. He will learn about indicators, RSI, Bollinger bands, support/resistance lines, etc.
Now, he has really mastered the market. Or so he thinks.
But this time too, he will lose. This is because the flaw isn’t in his strategy. The flaw is in how he approaches the stocks. The flaw is in how he controls his emotions.
4) Your history keeps you in an illusion.
Your own history works against you in the stock market.
In other words, a typical trader’s perception of the risk in any given trading situation is a function of the outcome of his most recent two or three trades.
For instance, if your past three stock picks were all profitable, you will go in a state of euphoria. Euphoria leads you to overconfidence.
As a result, you won’t see the risks that are present. Your mind thinks that the same winning streak will continue in the future. Thus, this might make you put a larger than usual position on a particular stock.
On the other hand, if you lost in your last three stock picks, you are in a state of self-sabotage. You begin to doubt your strategies, and sometimes, even yourself. As a result, you are fearful of the stock market. You see risks that are not present at all. Hence, you will be paralyzed and unable to place any trade.
Both the states of euphoria and self-sabotage are dangerous states for a trader.
5) Do not be a gambler. Be the casino.
Now that you know that the strategy isn’t the culprit, what can you improve to be a consistent trader?
The trick is to make your system mechanical and remove the gut feelings.
The stock market isn’t about gut feelings and emotions. If you want to do that, you are better doing poetry and romance. We are here to make cold-hard cash. And love and emotions never get the job done in the business of making money.
Have a concrete strategy with a checklist. Your stocks should fulfill a well-defined list of criteria for you to buy it.
Otherwise, if your investment decision is affected by what the market is saying or what your friend thinks is the right stock, you are doomed to failure.
And the next step is to stick with your strategy. Once you are confident that your strategy is profitable, stick to it like a leech sticks on the human flesh. Stay like that no matter how stormy, windy, cloudy, or sunny the weather is outside (in the stock market). Stick until you have sucked enough blood (profits) from your host (the market).
Why do you think a casino tries so hard to attract wealthy people to play? They offer free drinks, food, and fill the place with beautiful waiters and performers. Don’t they know that someone might win and take all their profits away?
The casino has a well-defined system. No matter what happens in an individual game of blackjack or poker, it knows that probability is in its favor for a large sample of individual events. Thus, the more number of players visit the casino, the greater is its probability of profit in the long run.
In the exact words in the book,
“It is the ability to believe in the unpredictability of the game at the micro-level and simultaneously believe in the predictability of the game at the macro level that makes the casino and a consistent trader effective and successful at what they do.”
What to do after being profitable
I have seen some people feel guilty after they sell their shares in a profit. They also feel like they are adding no value by investing in stocks.
However, the whole purpose of the stock market is to collect money from those who have it (investors) and give it to those who need it (businesses). By investing, you are contributing capital for the flourishment of the company, its employees, the nation, and humanity as a whole.
Remember that there is enough money everywhere. People are spending it on casinos, sports, art, and extravagances.
Your job is to be where the opportunity is, and say,
“Where is my share of the wealth?”
On that happy note, see you in the next article.