Douglas Notes

Page 3 - Fundamental analysis creates a reality gap between what 'should be' and 'what is.'
People expressing their beliefs and expectations about the future, make price move -
not models. The fact that a model makes a logical and reasonable projection based on
all the relevant variables is not much value if the traders who are responsible for most of
the trading volume are not aware of the model or don't believe in it. Technical analysis
focuses on what the market is doing now as opposed to focusing on what the market
should be doing based solely on what is logical and reasonable as determined by a
mathematical model.

Page 26 - Problem: The unwillingness to create rules. The very reason we are attracted
to trading in the first place - the unlimited freedom and creative expression - is the same
reason we feel a natural resistance to creating the kinds of rules and boundaries that
can appropriately guide our behaviour. It's as if we have found a Utopia in which there is
complete freedom, and then someone taps us on the shoulder and says "Hey, you have
to create rules, and not only that, you also have to have the discipline to abide by them."

Page 28 - Problem: Failure to take responsibility. The hard reality of trading is that, if
you want to create consistency, you have to start from the premise that no matter what
the outcome, you are completely responsible. When we act on our own ideas, we put
our own creative abilities on the line and we get instant feedback on how well our ideas
work. It's very difficult to rationalize any unsatisfactory results.

Page 30 - Problem: External versus Internal control. One of the principal reasons so
many successful people have failed miserably at trading is that their success is partly
attributable to their superior ability to manipulate and control the social environment, to
respond to what they want. To some degree, all of us have learned or developed
techniques to make the external environment conform to our mental (interior)
environment. The problem is that the market doesn't respond to control and
manipulation (unless you're a very large trader). However, we can control our perception

Douglas Notes 1
 and interpretation of market information, as well as our own behaviour. Instead of
controlling our surroundings so they conform to our idea of the way things should be, we
can learn to control ourselves.

Page 35 - Attitude produces better overall results than analysis or technique. The bottom
line is that successful traders have virtually eliminated fear and recklessness from their
trading. Excellent traders have learned that it is essential to have internal discipline or a
mental mechanism to counteract the negative effects of euphoria or the overconfidence
that comes from a string of winning trades. When you're feeling good, that causes the
most losses - not a lack of technique or market knowledge.

Page 54 - Our definition of a winning attitude: A positive expectation of your efforts with
an acceptance that whatever results you get are a perfect reflection of your level of
development and what you need to do to learn better. You are not responsible for what
the market does or doesn't do, but you are responsible for everything else that results
from your trading activities.

Page 60 - The threat of pain generates fear. Fear is the source of 95% of the errors you
are likely to make. Everything you attempt to do as a trader will feel like a struggle, and
it will seem as if you are struggling against the market or that the market is against you
personally. But, the reality is that it's all taking place inside your mind. The market
doesn't perceive the information it makes available; you do. If there's a struggle, it is you
who are struggling against your own internal resistance, conflicts and fears. The
solution is to learn to accept the risk, this means accepting the consequences of your
trades without emotional discomfort or fear.

Page 73 - We have an unlimited capacity to learn. If the memories, distinctions, and

beliefs we've acquired as a result of our encounters with the external environment
represent what we've learned about that environment and how it works; and if these
memories, distinctions, and beliefs exist in our mental environment as energy; and if
energy doesn't take up any space; then it could also be said that we have an unlimited
capacity for learning. The difference between what we are aware of now and what we

Douglas Notes 2
 can do as a result of this expanded awareness would boggle the mind of anyone living
100 years ago.

Page 79 - Risk is relative. If you can accept that the market doesn't generate
positively or negatively charged information as an inherent characteristic of the way it
expresses itself, then the only way information can take on a positive or negative charge
is in your mind. Our minds constantly associate what's outside of us (information) with
something that's already in our mind (what we know). If you're coming from three losses
you're likely to hesitate and perceive the next opportunity as overly risky. Whereas if
you're coming from three winners you will perceive the next opportunity as 'riskless'
which is equally as stupid. Becoming consciously aware of, and then learning how to
circumvent the mind's natural propensity to associate is a big part of achieving
consistency. You must perceive the market from a neutral perspective.

Page 87 - If there is such a thing as a secret to the nature of trading, this is it: At the
very core of one's ability 1) to trade without fear or overconfidence, 2) perceive what the
market is offering from its perspective, 3) stay completely focused in the "now moment
opportunity flow," and 4) spontaneously enter the "zone," it is a strong virtually
unshakeable belief in an uncertain outcome with an edge in your favour.

Page 99 - Anything can happen. Without this belief, the mind will automatically, and
usually without his conscious awareness, cause him to avoid, block, or rationalize away
any information that indicates the market may do something he hasn't accepted as
possible. If he believes that anything is possible, then there's nothing for his mind to
avoid, he will be training his mind to think in probabilities.

Page 119 - We have to be rigid in our rules and flexible in our expectations. If we expect
to be right, then 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, distorted, or diminished by our pain-
avoidance mechanisms. We need to be rigid in our rules so that we gain a sense of self-
trust that can, and will always, protect us in an environment that has few, if any,
boundaries. We need to be flexible in our expectations so we can perceive, with the

Douglas Notes 3
 greatest degree of clarity and objectivity, what the market is communicating to us from
its perspective.

Page 121 - A probabilistic mindset consists of five fundamental rules. Anything can
happen. You don't need to know what is going to happen next in order to make money.
There is a random distribution between wins and losses for any given set of variables
that define an edge. An edge is nothing more than an indication of a higher probability of
one thing happening over another. Every moment in the market is unique.

Douglas Notes 4