 Welcome back to the Trade Hacker Mindset. We're going to be continuing with our discussion points from the book Trading in the Zone by Mark Douglas. In this episode, we're going to talk about managing your expectations. Trading the markets can be difficult to master and seemingly just out of reach. Professional traders have a secret. Trading requires total mental and emotional control. It requires the Trade Hacker Mindset. Alright, so let's jump into our discussion of managing expectations. So this is one of my favorite topics and if you can really grasp this concept and internalize this concept in your trading, it is going to exponentially propel you into a better trader. So when we're talking about managing expectations, think about this. The potential damage caused by holding unrealistic expectations comes from how it affects the way that we perceive information. The expectations that we have, they're basically mental representations of what some future event will look like or sound like or taste like or smell like or feel like. Expectations come from what we know. And of course, that makes sense because we can't expect something that we have no knowledge about or no awareness of. What we know is the same as what we have learned to believe in the way that our external environment can express itself. And what we believe is basically, it's our own personal vision. It's our own personal version of the absolute truth. So when we expect something, we are projecting out into the future what we believe to be true. Think about this. We are expecting the outside environment, our daily lives every minute, every hour, every day, every week, every month. From now to be the way that we have it represented in our minds. But remember, you've got to be careful about what you project out in the future because nothing else has the potential to create more unhappiness or emotional distress than an unfulfilled expectation. Think about a time when you've had an expectation of what's going to happen and it played out exactly like you expected it to. How did you feel? Your response was probably pretty good, right? I mean, you had maybe happiness or joy or satisfaction or some greater sense of wellbeing. On the flip side of that, how did you feel when you've had a certain expectation and that expectation was not fulfilled? Typically the universal response is some type of emotional pain, right? Typically we experience some type of anger or resentment, despair, regret, disappointment, some type of dissatisfaction when the outside environment doesn't turn out to be exactly what we expected it to be. And this is where we run into issues because from our expectations, from what we know is what we decide or believe that we know, we naturally expect that to be right. That's our egos talking. At that point, we're no longer in a neutral or open state of mind and it's not difficult to understand why. If we relate this to trading, if you feel great if the market does what you expected to or you feel terrible if it doesn't, then we're not exactly neutral or open-minded, are we? In fact, it's quite the opposite. The force of the belief behind your expectation will cause us to perceive that the market information in a way that confirms what we expect and naturally we feel good and our pain avoidance mechanisms kick in and will shield us from information that doesn't confirm what we expect. And this helps us from feeling bad, right? Naturally, our minds are designed to help us avoid pain. This is both physical and emotional. These pain avoidance mechanisms exist both at the conscious and subconscious levels. For example, if somebody throws something towards your head and you react instinctively to get out of the way, you know, if you're ducking that object so you're avoiding pain, you're trying to get out of the way, this is done, it's not required to have a conscious decision-making process, right? You do that subconsciously. On the other hand, if somebody's throwing it from far away and you have a lot of time to react and actually a lot of time to process what's happening, you may not just duck, you might actually just sit there and catch that object before it hits you in the head, right? And so that's an example of how you might protect yourself from physical pain. Now, protecting yourself from emotional or mental pain works in the same way, except now we're protecting ourselves from information. For example, the market expresses information about itself and its potential to move in a particular direction. If there's a difference between what we want or expect and what the market is offering or making available, then our pain avoidance mechanisms kick in to compensate for these differences. And just like the example of somebody throwing something in our head, just like with physical pain, these mechanisms operate both at a conscious and a subconscious level. So if you think about this from a conscious level to protect ourselves at the conscious level, we rationalize or we might justify or make excuses or go out and gather information to neutralize the significance of this conflicting information. We might get angry to ward off this conflicting information or we just might plain lie to ourselves to get through it. But at the subconscious level, the pain avoidance process, it's a little bit more subtle. It's a little more mysterious. And at this level, our minds may block our ability to see other alternatives, even though in other circumstances, we'd be able to perceive them. Think about looking at a price chart when you have a large position on versus looking at a price chart if you have no position on. Think about how you're feeling. Think about how you're perceiving. Think about how you're interpreting that information in those two different situations. If you have a large position on and that position keeps going against you, you might subconsciously or consciously start to rationalize why you have that position on, even though it continues to go against you. Whereas if you didn't have a position on at all, you might look at that price chart and think it's very clear that the market is absolutely trending in this one direction. And if you didn't have a position on, you might even be thinking about getting in the opposite direction. And sometimes at this subconscious level, our minds may block our ability to see other alternatives, even though in other circumstances, it would be very, very clear. So now, because they're in conflict with what we expect, we have these pain avoidance mechanisms that kick in and it makes these things disappear as if they didn't exist to begin with. Sometimes when we're trading, we have a position on the ability to see clearly, the ability to see that the trade is clearly trending against us and we should probably be getting out. Sometimes it's just completely invisible to us. And as soon as you close that trade and you're taking a look at the charts again, boom, it hits you in the forehead like a ton of bricks and it's just clear as day, right? We had this discussion in our live day trading room the other day where one of our traders, he was in a little bit of a drawdown. So he decided to take a break from trading and he was still attending the live streams and still watching the markets, but he didn't have any positions on whatsoever. And I asked him that question. I said, how do you tell us about how you're feeling as you're watching some of these setups happen but you're not even putting any positions on? And exactly what I was just saying before, it was so clear to him. He could clearly see exactly the right spots to get in, exactly the right spots to get out. And it's just a totally different thing when you don't have that emotional tie of the money which creates that emotional, whether it's conscious or subconscious perceptions in our mind that you've got to get to a point where you can make trades with the same emotional rationalization of when you have a position on or if you don't have a position on. That's what the most successful traders do. So these pain avoidance mechanisms are really, they're just protecting us from information that would indicate our expectations do not correspond with what's available from the environment's perspective. This is where our pain avoidance mechanisms do us a disservice, especially as traders. To understand this, ask yourself, what exactly about the market information is threatening? Is it threatening because the market actually expresses negatively charged information towards you? Of course not. That sounds ridiculous, right? But I'll see traders say, sure enough, it went against me. No matter what I do, the market is against me. No matter what I do, I can't get the market to do what I want it to do. And just those words, just hearing those words should make you understand that you're perceiving the market information negatively when the market information is just neutral. It's your perception of that market information that's causing the issue. But we've all been there, right? There's times when it seems that way. It seems like when the market is out to get us, it goes right to the point where we call uncle, we get out and immediately reverses and goes in the direction that we knew it should. But remember, at the most fundamental level what the market gives us is neutral. It's simply up ticks and down ticks. It's up bars and down bars. And these up and down bars and patterns represent edges. But none of these ticks, none of these patterns are from negatively charged energies, not negatively charged information. Because think about this, if any of this information actually had negative charged information as an inherent characteristic of the way it exists, then wouldn't everyone exposed to it experience emotional pain? Why is it just you experiencing emotional pain? Why are you losing when somebody else might be winning at the exact same time? For example, if both you and I get hit in the head with an object, there probably wouldn't be much difference in how we feel, right? We're both in pain. Any part of our bodies coming into contact with a solid object with a certain degree of force is gonna cause anyone with a normal nervous system to experience pain. We share this experience of pain because all of our bodies are constructed basically in the same way. The pain's an automatic psychological response to the impact of something striking us, right? Information in the form of words or gestures expressed by the outside environment or patterns in the market or ups and down ticks or up and down bars can be just as painful as getting hit in the head. But there's an important difference between information and physical objects. The information is not tangible. Information doesn't consist of atoms and molecules. To experience the potential effects of information, whether negative or positive, it requires an interpretation by us individually. And the interpretations that we make are functions of our own personal unique mental frameworks. Everyone's mental framework is unique for two fundamental reasons. Number one, all of us were born with different genetic codes, right? Behaviors, personality characteristics that cause us to have different needs from one another, right? You have different needs than me. I have different needs from you and how positively or negatively and to what degree the environment responds to these needs creates experiences unique to each individual. Number two, everyone is exposed to a variety of environmental forces. Some of these forces are similar from one individual to the next, but none are exactly the same. If you consider the number of possible combinations of genetically encoded personality traits, personality characteristics that we can be born with, it's almost an infinite number. And these can contribute to this construction of our mental framework. It's not difficult to see why there's no universal mental framework common to every single person or every single trader. So unlike our bodies, which do have a common molecular structure, we all kind of experienced the similar type physical pain, there's no universal mindset to assure us that we will share the potential negative or positive effects of information in the same way. For example, someone could start projecting insults at you, right? They're sending to cause you to feel emotional pain, but from the environment's perspective, this is negatively charged information. And the question is, will you experience the intended negative effects? Not necessarily, right? You have to be able to interpret the information as negative to experience it as negative. What if this person's yelling at you? What if they're insulting you in a language that you don't even understand? Or they're using words that you don't really know what they mean. Would you feel that pain? Probably not until you've built a framework to define and understand the words in a derogatory way. But even then, we can't assume that you're gonna have this negative feeling or correspond to the intent behind the insulting words because you might have a framework to perceive the negative intent, but instead of feeling pain, you might actually experience some type of pleasure. It might make you laugh when somebody does that. We've all met people who, simply for their own amusement, they like to get people all fired up. They like to get people getting their emotions all negatively charged, all fired up and angry. Some people get enjoyment out of that. And if they happen to get insulted in the process, they actually kind of creates a sense of joy because they know how successful they have been about making you angry. A person expressing genuine love is projecting positively charged information into the environment. Let's say the intent behind the expression of somebody with these positive feelings is to convey affection or endearment and friendship. Is there any assurance that the person or persons this positively charged information is being projected towards will interpret and experience that in exactly that way? No, no, there's no guarantee because a person with, think about this, someone with low self-esteem or somebody who's experienced a great deal of hurt or disappointment in relationships, oftentimes they'll misinterpret that. This expression of love is something completely different. You've always seen those people who can't take a compliment. No matter what you say to them, no matter how much you compliment them, they always have kind of a negative reaction to what you're saying. So everybody perceives things a little bit differently. So bringing it back to trading, consider this. When you're trading, the market offers us something to perceive at each moment. In a sense, you could say that the market is communicating with us. So if you can start with the premise that the market does not generate negatively charged information as kind of an inherent characteristic of the way it exists, then we can ask and answer the question, what causes this information to take on a negative quality? In other words, where exactly does the threat of this pain come from? Because if it's not coming from the market, then it has to be coming from the way that we interpret this information. Defining and interpreting information is a function of what we assume we know or what we believe to be true. If what we know or what we believe is in fact true and we wouldn't believe it if it weren't, right, then when we project our beliefs out into some future moment as an expectation, we naturally expect to be right. When we expect to be right, any information that doesn't confirm our version of the truth automatically becomes threatening. Any information that has the potential to be threatening also has the potential to be blocked or distorted or diminished in significance using our pain avoidance mechanisms that we've been talking about. So it's this particular characteristic of the way our minds function that can really do us a disservice. As traders, we can't afford to let our pain avoidance mechanisms, these natural internal mechanisms, we can't let them cut us off from what the market is trying to communicate to us about what is available. If the market is presenting to us a pattern that we know we have an edge in that we know repeats itself over and over and over, you can't let these internal avoidance mechanisms cut that out or distort it or distract you from that. For example, let's just say, let's say you always trade stocks. And for whatever reason, you decide to go watch a chart of a futures contract or Bitcoin or a cryptocurrency or something like that, something that you have never traded and you don't have any intent of trading, you're just going to look at that chart and kinda watch it move. So when you're watching this market with no intention of doing anything, do any of the up or down ticks cause you to feel angry or disappointed or frustrated or disillusioned in any way? No, of course not. And the reason is is there's nothing at stake. You're simply observing the information that tells you where the market is at this very moment. And if the up and down ticks, if the up and down bars that you're watching form into some sort of behavioral pattern that you've learned to identify, you readily recognize and acknowledge this pattern. For the same reason, there's nothing at stake. And the reason there's nothing at stake is because there's no expectation. You haven't projected what you believe or assume or think you know about that market into some future moment. As a result, there's nothing to be either right or wrong about. So the information has no potential to take on a threatening or a negatively charged quality. And with no particular expectation of that market, you haven't placed any boundaries on how the market can express itself. Without any mental boundaries, you'll be making yourself available to perceive everything you've learned about the nature of the way in which the market moves. There's nothing for your pain avoidance mechanisms to exclude or distort or distract your awareness in order to protect you because there is no threat. So let me ask you a question. Now I'm gonna ask this question and as soon as I ask the question, pause the audio and answer and then come back on to listen to the answer to see if you got it right. All right, so here's the question. The question is, in what way do you as a trader have to learn to be rigid and flexible at the same time? Again, in what way do you as a trader have to learn to be rigid and flexible at the same time? So pause the audio, answer it, write it down and then turn the audio back on, unpause it and we'll come back and answer it. Okay, so what's your answer? So here's what the answer is. We have to be rigid in our rules and flexible in our expectations. Okay, let me say that again. We have to be rigid in our rules but flexible in our expectations. We need to be rigid in the rules so that we have a sense of self-trust. It actually builds confidence and protects us from this trading environment that doesn't have any boundaries. But we need to be flexible in our expectations so that we can perceive with the greatest degree of clarity and objectivity what the market is communicating to us from its perspective. So think about your own trading. I would say the majority of traders do the exact opposite. They're flexible with their rules but they're very rigid with their expectations. They have very specific expectations of what they know or think or want or think the market should do at specific times but they are flexible with their rules and they get a little loose on what they know they should be doing from a rules perspective. What's interesting about this is that the more rigid you are with the expectations, the more you have to either bend or violate or break your rules in order to accommodate this unwillingness to give up what you want in favor of what the market is offering. This is such a powerful lesson so I hope you write this down. Be rigid with your rules but flexible with your expectations. The majority of traders do the opposite and if you can continue to build towards a place where you're being extremely rigid with your rules but flexible with your expectations this is gonna propel you into becoming a better trader very quickly. We've all dealt with the emotional pain at some point of trading or the emotional risk that you perceive of trading. To be able to neutralize this you have to be able to eliminate this emotional risk of trading you have to be able to neutralize your expectations about what the market will or will not do at any given moment or in any given situation. You can do this by being willing to think from the market's perspective. Remember the market is always communicating in probabilities. At the collective level your edge may look perfect in every respect but at the individual level every trader who has the potential to act as a force of price movement can negate the positive outcome of that particular edge on an individual trade basis. To think in probabilities you have to create a mental framework or a mindset that is consistent with the underlying principles of a probabilistic environment. And remember we've talked about in past episodes this probabilistic mindset pertaining to trading consists of those five fundamental truths that we've talked about before and so let's review those. The five fundamental truths. Number one, anything can happen at any time. Number two, you don't need to know what's going to happen next in order to make money. Number three, there's a random distribution between wins and losses for any given set of variables that define an edge. Number four, an edge is nothing more than an indication of a higher probability of one thing happening over another and number five, every moment in the market is unique. So keep in mind that your potential to experience emotional pain comes from the way that you define and interpret the information that you're exposed to. I have these five fundamental truths written down and they sit by my trading computer every single day because when you adopt these five truths your expectations will always be in line with psychological realities of the market environment that you're trading in with the appropriate expectations you're gonna eliminate your potential to define and interpret market information as either painful or threatening and by doing so you effectively neutralize this emotional risk of trading. The idea is to create this carefree state of mind that completely accepts the fact that there are always unknown forces operating in the market. When you make these truths when you internalize these five fundamental truths as a fully functional part of your belief system the rational part of your mind will defend these truths in the same way that it defends other beliefs that you hold about the nature of trading. So at least at the rational level of your mind your mind is going to automatically defend against the idea or assumptions that you can know for sure what's gonna happen next. It's a contradiction to believe that each trade is unique with an uncertain and outcome and random in relationship to any other trade made in the past but at the same time believe you know for sure what will happen next and expect to be right. So if you really believe in an uncertain outcome then you also have to expect that virtually anything can happen. Otherwise the moment you let your mind hold on to the notion that you know that you think you know what's gonna happen you stop taking all of the unknown variables into consideration. Your mind won't let you have it both ways. If you believe you know something the moment is no longer unique and that doesn't exist. Because if this moment isn't unique if the given moment that you're in that you're trading if it's not unique then everything is known or knowable. And that is there's nothing not to know. However the moment you stop factoring in what you don't or can't know about the situation instead of being available to perceive what the market is offering you make yourself susceptible to all of the typical trading errors that you've probably made in the past. For example if you really believed in an uncertain outcome would you ever consider putting on a trade without defining your risk in advance? Would you ever hesitate to cut a loss if you really believed you didn't know? What about trading errors like getting into early? How could you anticipate a signal that hasn't yet manifested itself in the market? If you weren't convinced that you were you're going to miss out why would you ever let a winning trade turn into a loser or not have a systematic way of taking profits? Why would you hesitate to take a trade or not put on a trade at all unless you were convinced that it was a loser when the market was at your original entry point? Why would you break your money management rules by trading too large of a position relative to your account size or risk tolerance if you weren't positive that it was a sure thing? So when I ask you all these questions when I say all these things it sounds a little bit probably ridiculous to you as you hear them but these are the errors that we as traders make every single day when we're actually trading in the markets. If you really believe in a random distribution between wins and losses could you ever feel like negatively betrayed by the market? You know, if you flip the coin and guess right you wouldn't necessarily expect to be right on the next flip just because you were right on the last one nor would you expect to be wrong on the next flip if you were wrong on the last one because you have a belief in random distribution between the sequence of heads and tails of a coin your expectations would be perfectly aligned with the reality of the situation. You would certainly like to be right and if you were that would be great but if you were wrong then you wouldn't feel betrayed by the flip you wouldn't start getting mad at the coin because you know and accept that there are unknown variables at work that affect the outcome. As a trader when you're expecting a random outcome you will always be at least a little surprised at whatever the market does even if it conforms to exactly to your definition of your edge and you end up with a winning trade. However, expecting a random outcome doesn't mean that you can't use your full reasoning and analytic abilities to project an outcome or that you can't guess what's going to happen next or have a hunch or feeling about it because you can furthermore you can be right in each of these instances. The difference is you can't expect to be right and if you are right you can't expect that whatever you did that worked the last time is going to work again or every time in the future. Even if the situation looks and sounds and feels exactly the same anything that you are perceiving now in the market will never be exactly the same as a previous experience that exists in your mental environment. Now that doesn't mean that your mind won't try to make the two identical there's always going to be similarities between now exactly now in the now moment when you're trading and something that you know from the past but those similarities only give you something to work with by putting the odds of success in your favor. This only gives you an opportunity to place a trade but you've got to place that trade without expectations. If you approach trading from a perspective that you don't know what will happen next then you're going to circumvent your mind's natural inclination to make this now moment identical to some earlier experience. So even as an experienced trader that's been trading for over 20 years I still find myself from time to time having this recency bias. I'll make decisions differently based on the recent past trades based on the outcome of those. So if they were losing trades if my last few trades were losing trades especially with day trading I may be hesitant or scale my position size down for future trades whereas if my last few trades have been winners I might be much quicker to jump in those trades or even increase my position size and that's that recency bias that we really, really have to get away from. As unnatural as it seems to do so you can't let some previous experience either negative or positive dictate your state of mind. If you do it will be very difficult if not impossible to perceive what the market is communicating to us from its perspective. When you put on a trade all you should expect is that something will happen. Regardless of how good you think your edge is you expect nothing more than the market to move or to express itself in some way. Now there are some things that we know for sure. We know that based on the market's past behavior the odds of it moving in the direction of your trade are good or acceptable if you have a good strategy or good edge like we do at least in relationship to how much you're willing to spend to fill out if it does. I know before getting into a trade how much I'm willing to let the market move against my position. There's always a point at which the odds of success are greatly diminished in relation to the potential profit and at that point it's just not worth spending any more money to find out if the trade is going to work. If the market reaches that point I know without any doubt or hesitation or internal conflict that I'll exit the trade and that's how you have to approach each and every trade. Remember when you have a losing trade losing trades do not create emotional damage because you shouldn't interpret the experience negatively. To me losses are simply the cost of doing business or the amount of money I need to spend to make myself available for those winning trades. Let me say that again losses are simply the cost of doing business or the amount of money I need to spend to make myself available for those winning trades. If on the other hand the trade turns out to be a winner in most cases I know for sure that at what point I'm going to take my profits. You've got to have these predefined profit targets to take profits and there should be no stress because there's nothing at risk other than the amount of money that you're willing to spend on a trade. Take the approach you're not trying to be right or you're not trying to avoid being wrong neither trying to prove anything. If and when the market tells you that your edge isn't working or that it's time to take profits you're managed to do nothing to block this information. You should completely accept what the market is offering you and then wait for your next edge to appear. And that concludes this episode. I hope this was helpful. If you'd like to become part of a community of like-minded traders just go to community.navigationtrading.com we've got hundreds of traders interacting on a daily basis not only about the mindset stuff that we talk about here but also sharing trade ideas with the sole purpose of helping each other become better traders. That's community.navigationtrading.com Look forward to seeing you on the inside and we'll see you in the next episode.