Trading in the Zone™ - Exercise

Explanation about the 20-Trade Exercise

There has been some confusion about the 20-trade exercise beginning on page 189 in our book “Trading in the Zone™.” I continue to get numerous telephone calls and e-mails regarding this exercise, because most traders do not really read the section, or at least not thoroughly, because quite a few traders are eager to get started trading. With that said to be clear – the way the exercise is written is misleading.

When we published “Trading in the Zone™” we were hosting live workshops at least every four weeks or so, and within the context of the workshops, this exercise was explained in more depth. I extend my apologies for any confusion! On page 197, we write: “I have found that a sample size of at least 20 trades fulfills both of those requirements.” What the text should probably read is “…a sample size of at least 20 sets of 20 trades…” for today’s traders. This is more important, considering my current live workshops are limited to 5 or fewer traders due to ongoing current events.

I understand how traders may not fully comprehend this exercise, because it was not written for on-line trading per se (on-line trading was just starting to become accessible to the average trader when the book was published), and all traders are eager to get started trading and begin to make money! And that is the only reason anyone gets into trading, is to make money, and/or more money than they have previously in any other profession. For those traders who have convinced themselves they are not trading to make more money, I suggest you revisit that conflicting belief before you continue with your trading because that kind of thinking is counter-productive to growing your equity.

You may ask, why don’t you just ask the publisher to make that change in the exercise? I have requested our publisher for years, to make this change to the book, among a few other edits to bring it more current, but they absolutely flat-out refuse to do so. So, to bring this exercise into more focus for traders, I am going to explain in more detail here what the purpose of the exercise is for.

“The object of this exercise is to convince yourself that trading is just a simple game of probabilities (numbers), not much different from pulling the handle of a slot machine.”

This presents the trader with a challenge if they perceive gambling as negative, bad, or addiction-type behavior, they would not indulge in or participate themselves. Many traders have a belief that gambling is bad, and the act of gambling may even go against their religious, morals, values or other personal beliefs. This creates a set of conflicting beliefs if the trader equates trading as gambling, which in essence makes them a gambler. This is especially damaging, if the trader thinks any form of gambling (which includes games where real or fake money are used with card games such as Euchre, board games such as Monopoly, whether in person or on-line, etc.) as bad or evil. Also, the trader themselves may not believe that trading is gambling, but they may have friends or family members that believe trading is gambling, and their negative beliefs may intrude upon the trader’s ability to perceive their career as a trader as a positive endeavor…which leads to ‘boom & bust’ cycles among other problems.

The average person does not necessarily equate card games and board games as gambling, considering most people grew up playing these types of games as a fun and possibly family activity. However, when you get right down to it, Monopoly can be considered a type of gambling because each player is involved in buying/selling real estate, and outbidding the other players to “win” the game. Card games such as Hearts or Euchre also involved “playing” the game effectively to “win” the kitty or pot of money. Now, with Monopoly, the money is play money with no real value – but you still play to win and beat the other players. With Euchre and other card games, the winning player(s) win actual money, no matter how large or small the betting is.

• For instance: Do you think that playing card games or board games is a form of gambling? Now, it doesn’t matter if you think they are a form of gambling, unless you have a negative belief about gambling in itself. Ask yourself, “What is my definition of gambling?” Write down your answers on a pad of paper. Be specific and honest. Do this before you begin the 20 sets of 20-trade exercise to find out what you believe about gambling.
• Let’s talk a bit about “pick a market,” because there seems to be some misunderstanding about this. We write, “Choose one actively traded stock or future contract to trade. It doesn’t matter what it is, as long as it’s liquid and you can afford the margin requirements for trading at least three hundred shares or three futures contracts (originally meaning full size versus mini-contracts) per trade.”
• This doesn’t mean for you to pick a new market for the exercise if you are already actively trading a market that you are comfortable with!
• For instance, if you are already actively trading E-minis, stock indices, precious metals, Forex, or any other market – then use the market you are currently trading. But! If you are trading in more than one market, you have to choose only one market to do the exercise with. Once you complete the numerous sets of trades for one market and learn that one market well, only then should you choose to do the exercise with another market, and so on. At least at the beginning, “less” is better. You can always add to your markets and contract size once you know your market well and have gained consistency. Why? Because there are “always” opportunities in the markets to make money! So, if you take some time to learn one market well and build that mental foundation of consistency and self-trust, that will transfer over into learning another market well, which is what you want to do.
• “Choose a set of market variables that define an edge.” You can see from this statement that in order to do the exercise correctly, you can only do the exercise with one market at a time. And not do the exercise with other markets simultaneously.Meaning, as written above, use one market for the exercise, and learn that market well. And as we write in “Trading in the Zone™,” you can use whatever trading system you want and/or any trading methodology you like. That is left up to you to choose because trading is an entrepreneurial business endeavor of learning your own unique approach, and you can only do that through your personal and unique thought processes. This is accomplished by learning to truly think in probabilities and believing that trading is a game of probabilities with a probable outcome to grow your equity through the way you choose to trade.
• “To find out what variables work, how well they work, and what doesn’t work, we need a systematic approach, one that doesn’t take any random variables into consideration.”Hence you not doing the minimum of 20 sets of 20-trades in different markets simultaneously. What this exercise is providing you as a trader is the understanding that you need to expand your definition of success and failure, from any limited ‘trade-by-trade’ perspective. This is what the typical trader does is to make qualitative opinions about whether they are a failure at trading by basing that opinion on a trade-by-trade basis. So, for this exercise, you will need to:
  
  • Pick one market
  • Learn that market well
  • Choose your market variables to define your edge
  • Trade that market using your methodology for a MINIMUM of 10 – 20-trade sets. Not just one 20-trade trade set. One set of 20 trades will not afford you enough of the type of data you need to know if you are thinking and viewing the markets with an objective and probabilistic mindset. But 10 or more sets of 20 trades will begin to do just that for you to explore further.

If you still have questions, feel free to call my office or send an e-mail, of course!
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