The Disciplined Trader: Developing Winning Attitudes - Quotes & Notes
Mark Douglas
Front Matter
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you may have a great system, one that you have tested and has performed well for a long period of time, yet
if the psychological control is not there, you will be the loser.
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The markets have absolutely no power or control over you, no expectation of your behavior, and no regard for
your welfare.
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The one thing you can control is yourself. As a trader, you have the power either to give yourself money or
to give your money to other traders. And the ways in which you choose to do this will be determined by a
number of psychological factors that have little or nothing to do with the markets.
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There are only a few traders who have come to the realization that they alone are completely responsible for
the outcome of their actions. Even fewer are those who have accepted the psychological implications of that
realization and know what to do about it.
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each trade has the possibility of fulfilling your wildest dreams of financial independence, and
simultaneously presents you with the risk of losing everything you own.
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You may not be able to control the markets, but you can control your perception of them in order to achieve
a higher degree of objectivity, resulting in a higher degree of shared reality with the markets.
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As you begin to understand the negative relationship between fear and perception, you might be surprised to
learn that in your attempts to avoid losses, you actually create them.
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Before anyone can become successful in an environment with the unstructured character of the trading
environment, one needs to develop a supreme sense of self-confidence and self-trust. I am defining
self-confidence as an absence of fear and self-trust: knowing what to do at the moment it needs to be done,
and then doing it without hesitation.
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If the market's behavior seems mysterious to you, it's because your own behavior is mysterious and
unmanageable.
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You can't really determine what the market is likely to do next when you don't even know what you will do
next, regardless of what you may perceive or want.
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The few successful traders who have, in some way, transcended these psychological obstacles have been
generous with their one-line gems of trading wisdom: "Learn to take a loss," "Go with the flow," "The trend
is your friend," "Cut your losses and let your profits run," "To know the markets you need to know
yourself," and on and on.
Chapter 1. Why I Wrote This Book
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the traders who can make money consistently on a weekly, monthly, and yearly basis approach trading from the
perspective of a mental discipline. When asked for their secrets of success, they categorically state that
they didn't achieve any measure of consistency in accumulating wealth from trading until they learned
self-discipline, emotional control, and the ability to change their minds to flow with the markets.
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Confidence and fear are states of mind that are similar in nature, only separated by degree. As a person's
level of confidence increases, his or her degree of confusion, anxiety, and fear dissipates proportionately.
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The more I followed my rules the more I trusted myself. The more I trusted myself the more I could focus my
attention on subtle relationships in the market's behavior to learn new things about the market helping me
become a better trader.
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The less I cared about whether or not I was wrong, the clearer things became, making it much easier to move
in and out of positions, cutting my losses short to make myself mentally available to take the next
opportunity.
Chapter 2. Why a New Thinking Methodology?
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The irony is, of course, that, on the surface, trading looks so simple, when in fact most people will find
it to be the most difficult endeavor they ever undertake. Success will always seem so close, and yet always
so elusive.
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The only difference between those who excel and those of mediocre achievement is that one group has learned
a thinking methodology that has not occurred to the other.
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The markets tease a trader with the very real possibility of fulfilling his grandest dreams of financial
independence and at the same time stand ready and willing to take away everything he owns—and more.
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Having the skills necessary to consciously manipulate one's psychological environment is essential for the
trader who recognizes how ineffectual a trading system can suddenly become whenever a tense situation
demands a split-second decision.
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Believing that trading is easy is the reason for the unrealistic expectations.
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The few individuals who have achieved astronomical success in trading at some point learned to stop trying
to conquer the markets or make them conform to their expectations or mental limitations.
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the intensity of your emotional discomfort and pain you experience as a trader is an excellent indication of
how much you will have to change to trade without fear and be consistently successful.
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The market behaves as it does because of the interactions of hundreds of thousands of people. And since all
these individuals are members of the human race, regardless of national origin, religious conviction, or
what have you, they will all have one thing in common—the psychological structure of the human mind."
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even though we all participate collectively, the market is not the same for all of us. Every move the market
makes has a different meaning and impact on each of us as individuals.
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As a trader you constantly have to define what is high and what is low relative to your beliefs about the
future. That is the only way you can make money: buy low and sell it back at a higher price (in the future)
or sell high and buy it back at a lower price (in the future).
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You create the game in your own mind based on your beliefs, intents, perceptions, and rules. It is your own
unique perspective and no one else's and the secret is, you can and do choose how you perceive events. Even
if you are not aware of exactly how to control and change your perception to make other choices available to
yourself, you are still choosing, even if it is out of ignorance.
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Until you learn the appropriate skills, your success as a trader will be determined by a number of
psychological factors that often have little or nothing to do with the markets.
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There are many market gurus who can predict market moves with uncanny accuracy but can't make money as a
trader. Either they don't know the nature of beliefs and how they affect and determine behavior, or they
don't want to confront the issues surrounding these beliefs.
Chapter 3. The Market Is Always Right
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What you believed about value and your reasons for believing it may be of highest quality, but if the market
doesn't share your belief, it doesn't really matter how "right" you are based on your superior reasoning
process or what you believe to be the quality of your information, because prices are going to go in the
direction of the greatest force.
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The point here is that right and wrong as you may traditionally think of them don't exist in the market
environment. Academic credentials, degrees, reputations, even a high I.Q. don't make you right in this
environment as they would in society.
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Movement creates opportunity to make money, and making money is what trading is all about. This is also true
for the hedger trading to protect the value of his assets.
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The market is never wrong in what it does; it just is.
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you as an individual trader interacting with the market—first as an observer to perceive opportunity, then
as a participant executing a trade, contributing to the overall market behavior—have to confront an
environment where only you can be wrong, and it's never the other way around.
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As a trader, you have to decide what is more important—being right or making money—because the two are not
always compatible or consistent with one another.
Chapter 5. Prices Are in Perpetual Motion with No Defined Beginning or Ending
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Considering the unlimited potential for profit, entering the market will be much easier for most traders
than will be getting out. This is because exiting the trade will require that you confront your beliefs
about greed, loss, and failure in relationship to the constant temptation of the possibility for unlimited
profits.
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what you have in the market environment is a deadly combination of the market forcing you to confront
difficult personal issues to survive, an event that produces information in a wide variety of forms that can
be used to support any illusion, distortion, or expectation, therefore, making it easy to avoid confronting
these potentially painful issues.
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Among many other factors, to become a consistently successful trader your objective has to be to learn how
to let the market tell you what it may do next and how much is enough.
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As a trader, however, you could easily lose far more than you intended to risk, based on your inability to
perceive the possible or your inability to execute a trade to get out of your position, or a combination of
both.
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The market can't take anything away from you that you don't allow; if you lost money or lost more than you
intended to risk, you gave your money to other traders. Ultimately, however, revenge creates an adversary
relationship with yourself.
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There is a direct correlation between your ability to let the market tell you what it is likely to do next
and the degree to which you have released yourself from the negative effects of any beliefs about losing,
being wrong, and revenge on the markets.
Chapter 6. The Market Is an Unstructured Environment
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Unlike structured social activities that have defined beginnings and endings and rigid rules to guide your
behavior, the market environment is more like a river constantly flowing, with no beginning or ending with
almost no structure. Once you jump in the river, it can change directions at any moment.
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In an unstructured and unlimited environment, it is essential that you establish rules to guide your
behavior. You will need to create definition and give yourself direction.
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Without these rules one of the most likely possibilities is that you will create devastating losses for
yourself.
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The degree to which you do assume responsibility is the same degree to which you can't shift it to the
market and be its victim.
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the only way to learn how to trade effectively is to make oneself accountable by creating structure; but,
with accountability comes responsibility
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When you plan your trades in advance, you are putting your vision of the future and creative abilities on
the line, so to speak, and making yourself accountable to yourself.
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Your plan either works or it doesn't; you either have the ability to execute your plan or you don't.
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In any case, it is your plan and your ability to follow it and, therefore, it is difficult to shift
responsibility and lay the blame somewhere else if things don't work out.
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when a trader doesn't understand market behavior well enough to know what he is going to do and under what
market conditions he is going to do it—but if at the same time, he is very attracted to the action and the
opportunities he knows exist and if he is also impatient with the learning process—his impatience and
attraction will make him feel compelled to do something, even if he doesn't know what he should do.
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When there is no leadership in the market, the prices usually drift back and forth in a small range until
someone who knows what he is doing comes into the market.
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Getting organized and creating structure is one obvious solution to the many psychological problems the
typical trader heaps on himself.
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In an unlimited environment, the less structure you create for yourself, the less accountable you are, the
more easily you will be swept along by the force of events, and the less control you seem to have over your
life.
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If you can't define your own behavior and that of the markets, you can't learn how to repeat your wins or
prevent your losses.
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Taking responsibility is a function of self-acceptance. You can measure this degree of self-acceptance by
how positively or negatively you think of yourself when you make what you perceive as a mistake.
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The more negatively you think of yourself, the greater your tendency to avoid taking responsibility, so you
can avoid the pain of your harsh thoughts, thus generating a fear of making mistakes.
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the greater the degree of self-acceptance you have for yourself, the more positive your thoughts will be and
the greater the degree of insight you will be able to extract from an experience, instead of generating
fear.
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The more self-accepting you are, the easier it is to learn because you are not trying to avoid certain
information.
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If people had a more accepting attitude about the outcome of their actions, they wouldn't have a need to
avoid taking responsibility.
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Understanding yourself is synonymous with understanding the markets because as a trader you are part of the
collective force that moves prices.
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When you attain some degree of control over yourself, you can then see how other traders are not in control
of what happens to them, like blades of grass, all bending to the force of the prevailing wind and
constantly being stepped on.
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You will understand the group, certainly, to no greater degree than you understand yourself.
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Creating definition and rules to make yourself accountable is but a first step on the road to lasting
success.
Chapter 7. In the Market Environment, Reasons Are Irrelevant
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Most traders don't know why they did what they did because most traders don't plan their trades, thus
eliminating any connection between themselves and the results of their trades.
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Most traders act spontaneously and impulsively and then ascribe the rationale for their behavior after the
fact. Most of these after-the fact reasons are either justifications for what traders did or excuses for
what traders didn't do.
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What is useful is understanding that traders typically act as a group, very similar to a school of fish or
herd of cattle.
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Everything we do in every moment is some form of the way we express ourselves. We express ourselves to
fulfill our needs, wants, desires, and goals. Today most individuals can channel their energies to fulfill
needs beyond the requirements of food and shelter, but to do so requires money.
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In psychological terms, the law of supply and demand is founded in human fear and greed.
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Both fear and greed will compel people to act or not act depending on their needs in relation to the
perceived external conditions.
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The price for goods and services will be determined by the individual's needs in relationship to their
belief in their ability to fulfill those needs.
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Greed is founded in a belief in scarcity and insecurity. Both beliefs generate fear. I am defining "greed"
as a belief that there will never be enough available to fulfill oneself in combination with a belief that
one always needs more to feel secure or satisfied.
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If two or more people have the same fears, they will typically compete among one another for the existing
supply.
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What is risk? Risk is the possibility of a net loss of personal resources (energy, money etc.) in the
exchange or pursuit of fulfilling a need.
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Keep in mind that the current price of anything is always a reflection of what someone is willing to pay and
what someone is willing to sell for in that moment.
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If you want to learn to predict price movement, you don't need to pay attention to reasons. What you need to
do is determine how the majority of traders perceive the external conditions in relationship to either their
fear of scarcity, or their fear of missing out, or both.
Chapter 8. The Three Stages to Becoming a Successful Trader
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In the market environment you have to make the rules to the game and then have the discipline to abide by
these rules, even though the market moves in ways that wilt constantly tempt you into believing you don't
need to follow your rules this time.
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If you believe trading is like gambling, it isn't. In any gambling game you have to actively participate to
lose and do nothing to stop losing.
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In the market environment, you have to actively participate to get into a trade and actively participate to
end your losses. If you do nothing, the potential exists to lose everything you own.
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YOU CREATE YOUR EXPERIENCE OF THE MARKET
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The market does not create the ways in which you perceive it; it merely reflects what is going on inside of
you in any given moment.
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The market neither chooses nor has any way of choosing the meaning you attach to any particular price change
or market condition.
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The unique way you define a loss {your beliefs about it) and what it means to you is a component part of
your psychological makeup.
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In the trading environment the outcome of your decisions is immediate, and you are powerless to change
anything except your mind.
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The power you have to create more fulfilling outcomes from your trading resides in your degree of mental
flexibility.
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You have to learn how to flow with the markets; you are either in harmony with them or you are not.
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You can't change what the market is doing. You can only change yourself in a way that allows you to perceive
what it may do next with increased clarity and objectivity.
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It is a complete contradiction in thought to want to know what is going to happen next in an event over
which you have no control and at the same time to maintain a rigid mental structure that allows for only a
very limited number of possibilities.
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When you put on the trade, you had to have some belief about the future. What you need to do is learn how to
release yourself from the demand your expectations be fulfilled exactly the way you expect them to be.
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Releasing yourself from the demand will allow you to shift your perspective to perceive whatever
opportunities exist in the market now, as if you didn't have a trade on at all.
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If you pick and choose market information on the basis of having to justify your beliefs, you are putting
yourself at an extreme disadvantage.
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even though you can't actually control the market's movement, you can learn how to control your perception
of the market's movement in a way that allows you the maximum objectivity.
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Learning to perceive objectively will increase your ability to let the market tell you when to get in and
when to get out.
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your trading results will be a function of the degree of skills you develop in three primary areas:
perception, or your ability to perceive opportunity; execution, or your ability to execute a trade; and
accumulation, or your ability to allow your account balance to grow over a period of time or series of
trades.
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The depth of your insight into the market's behavior is equivalent to the number of distinctions you can
make and the quality of these distinctions.
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To be able to make some kind of quality distinctions that will eventually develop into a "vision" of the
broader perspective, you will need to learn how to expand your time frame perspective of market activity.
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The market can't do anything to you if you trust yourself to act appropriately under any market condition.
Learning this is the key to gaining the level of confidence every trader needs to be successful.
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When you understand how fear operates in your trading and have conquered it, you will be able to see how
fear operates in the market as a whole and then be able to anticipate the group's reaction to certain kinds
of information.
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Learning how to release yourself from fear will also free you up to think of creative ways in which you can
respond to the new relationships you are perceiving in the market's behavior. As a result, you will be
increasing your confidence in your ability to respond appropriately to any given market situation.
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Your ability to execute your trades is a function of the amount of fear you generate or the lack of it.
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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.
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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.
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In the market environment you are free to act or not to act; the markets cannot do anything to you that you
don't allow, even if it is out of ignorance or a complete sense of powerlessness.
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If you can't execute your trades properly, even when you perceive the most perfect opportunity, it is
because you have not released yourself from the pain contained in the memories of past trading experiences
and because you still don't trust yourself to act appropriately in any given set of conditions. If you did,
there would be no fear or immobility.
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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.
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The market will quite naturally make you face what is inside of you on a moment-to-moment basis. What is
inside of you could be confidence or fear, a perception of opportunity or loss, restraint or uncontrollable
greed, objectivity or illusion. The market just reflects these mental conditions, it does not create them.
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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.
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yourself. 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.
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The most essential component in the process of transformation is learning how to recognize and then clear
out beliefs that argue for the status quo, beliefs that defend against the intrusion of environmental
information you refuse to consider, and learning how to read the environment in a way that will clearly
point to the most appropriate path to fulfilling yourself.
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Any psychological injury diminishes your capacity to execute your trades properly.
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It is essential that you learn how to monitor your relationship between the interior and exterior
environment because our goals, intents, expectations, needs, and wants are all component parts of our mental
environment that we project out into the physical environment for fulfillment in some future moment.
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By making the connection between what we believe and what we experience, it will be a lot easier to change
what we experience by learning how to manipulate our beliefs.
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The predominate underlying force behind most traders' actions causing prices to move is fear—the fear of
missing out (competing for the supply) and the fear of loss.
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If you really want to understand the market's behavior to anticipate what it will do next, then you will
first have to learn about and understand the underlying forces beneath your own behavior and how you process
and manage information.
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When you understand how any number of typical market-related fears operate in your life and learn to release
yourself from them, you will, in effect, be separating yourself from the "crowd."
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When you separate yourself from the "crowd" and expand what you know about the forces affecting your
behavior to encompass the group, it will be much easier to anticipate what the group will do because they
will merely represent a larger (collective) version of the way you used to be.
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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.
Chapter 9. Understanding the Nature of the Mental Environment
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mental energy, as it exists in its various, intangible forms as beliefs, feelings, emotions, and so on has
the potential to act as a force on our behavior and consequently as a force on the outside physical
environment corresponding to the way in which this energy is expressed.
Chapter 10. How Memories, Associations, and Beliefs Manage Environmental Information
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Positive energy is expansive. It promotes mental growth or learning by creating a sense of confidence, which
in turn results in an openness to explore and discover the unknown.
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Positive energy is expansive, compelling us to interact with the environment to create more experience for
ourselves.
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The more we experience the more we learn about the nature of the environment. The more we learn about the
nature of the environment, the better able we are to interact with it more effectively to fulfill our needs
and achieve our goals.
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In contrast to the feelings of confidence and well-being that result from positively charged experiences,
fear acts as a limiting or inhibiting force on both our behavior and our perception of environmental
information
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When we avoid experience, we cut ourselves off from the joy we feel when we are learning.
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As traders, it is essential that you be able to observe the market's behavior from an objective perspective.
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To observe objectively you will need to learn how to recognize a variety of subtle fears that will destroy
your ability to be objective without really knowing it.
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What we learn creates an energy loop between the inner and outer environment. We can call this energy loop
perception.
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"Perception" is recognizing—with our eyes, ears, nose, taste, and touch—in the physical environment what we
have already learned about it.
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Environmental objects give off information about themselves, but the information that is perceived already
exists inside of each individual, unless it is a first-time experience.
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Traders act as a force on the market to move prices. Since most traders don't plan their trades or want to
take responsibility for their outcomes they are highly susceptible to acting out of any number of fears.
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Traders who are motivated to act out of fear generally aren't aware that their fear drastically reduces the
choices they perceive as available, making their behavior very predictable to an objective observer (someone
not caught in the same cycles of fear).
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under certain market conditions large groups of traders will all be trying to do the same thing—because of
what they fear will or won't happen—upsetting the equilibrium, forcing prices to move in one direction.
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In any given moment there is a vast difference between what each of us perceives and what is actually
available in the way of possible distinctions from the environment's perspective.
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By learning to make more distinctions, we increase the depth of our level of understanding of the
cause-and-effect relationship between everything that exists.
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We experience the environment through our senses. At the most fundamental level the world gets transformed
into electrical impulses of energy, energy that carries information, as well as feelings and emotions
ranging from extreme happiness to rage, elation to despair, love to hate, and all the degrees of feelings
and emotions in between.
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What we experience as individuals will be a function of what we perceive, unless we are in a learning mode.
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what we are experiencing in any given moment is being shaped by what is already inside of us (memories,
distinctions, associations, and beliefs), and what is already inside of us may not be remotely close to what
the environment is offering in the way of experience.
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Our experiences shape our meanings and then the meanings shape our experiences of the future.
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Beliefs create definitions, make distinctions, and shape our perception of environmental information by
programming our senses to hear, see, and select information that corresponds with what we believe.
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Considering or accepting any new or conflicting information would open up choices that we ordinarily would
not have to consider. Too many choices too soon can cause confusion and mental overload.
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What we focus our attention on in the environment is what we will usually get.
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Remember that all fears act on our perception as a warning mechanism to help us avoid what we believe to be
threatening.
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Fear causes us to act without a perception of choice. When we are afraid to confront certain categories of
market information, it drastically limits the choices that we perceive as available.