The Disciplined Trader

I recently read The Disciplined Trader by Mark Douglas. I’m interested in learning how to trade the market, and this seemed like a good choice. There are many books that point out trading strategies or give tips on how to find winning stocks. Douglas takes a different tack, his goal is to help the trader identify what’s holding him back. I’ll say up front that his writing style is sometimes hard to follow, but don’t let that get in the way of the message. Douglas is an experienced trader with years of practice. There were a number of times that I had to read a paragraph through a few times to understand its meaning, but I generally found the book worth the effort.

Douglas starts by pointing out some things about the market that aren’t immediately obvious. For example, trading in the stock market is not like gambling. With gambling, you place your bet, and if you take no further action you’ve only lost the amount of your bet. With a losing trade in the stock market, unless you’re trading with stops you will lose money until you take further action. To take no further action during a losing trade is to invite further losses. He also points out that the point of trading is to let your winners run and cut your losses. Most traders, believing that the market will come back and “make them right”, let their losers run and cut their winners as soon as they win a few points. I thought that in particular was insightful.

Another concept that I found revealing was that the market moves up and down every day. There are many opportunities for profit on a daily basis. As a trader, you earn from the market exactly what you think you’re worth. If you aren’t earning much, or worse, if you’re losing, then you probably need to spend some time study the market, AND determine what’s going on within you that prevents you from seeing the opportunities. In other words, you have exactly what you want to have. And if you want to change the outcome of your trading, then you need to change something about your trading habits. Introspection will help.

He then moves into explaining his view of psychology, showing his view of how past experiences reinforce some behaviors and discourage others. This is the section where he becomes hard to follow, but its useful for understanding the last section of the book.

Finally, the third section is the smallest, but I thought this was the best of the book. Douglas encourages new traders to begin with a small amount of money, and just expect to lose. Don’t focus on the amount of money in your margin account, focus on learning how to read the market. And document everything. If you win, write why you believe you were right. If you lose, analyze the signals you were looking at and determine if there was something that you overlooked or misinterpreted. Take the mystery out of the market by taking the time to learn.

In just about every endeavor you undertake, you set aside a time to learn. For some reason, when it comes to the stock market, many traders expect to earn money right away and yet become discouraged when they lose money. By taking a disciplined approach and taking the time to actually study the market, they can learn how to read the market and profit from it.

I’m not to the point of trading in the market. Between school and work I have my hands full, so now is not the time for me. But, I did enjoy this book, and I hope to put some of these concepts into practice in the months after my graduation. If you’re also interested in trading in the stock market, I recommend that you read this book.