Mark Douglas is commonly credited for coining the term ‘the fearless state’ in his book Trading in the Zone. Lots of other people have probably talked about this state of mind. But what is it exactly? I explore but I disagree with some of what he has said – or the meanings put on what he has said. For the avoidance of doubt, I’ve written this not to win a point or score a point. This blog stands as a marker of my investigation of one aspect in the ‘psychology’ involved in trading. I may well change my mind in the future on anything said here – as I develop.
I know I am committing some sort of sacrilege in this post by disagreeing with Douglas – who is held in ‘guru status’ by the wide trading community. He never claimed such status. I do NOT intend to take down Douglas or his ideas. In fact I subscribe to them. What I do is to add a different whilst similar interpretation to what he said.
In his book the word ‘fearless’, appears just once! Douglas goes on to talk about this state of mind but not directly. He refers to fears in about 60 places in his book. He explores what he calls fear. He states, “To whatever degree you lack confidence, you will experience fear. The irony is you will be afraid of random inconsistent results, without realising that your random inconsistent approach is creating exactly what you are afraid of.” It cannot be right – that any degree of lack of confidence leads to ‘fear’ – else there would be queues of people lining up outside of psychologists or psychiatrists doors, on the day before, or morning before starting a new job. Similar queues would materialise for everybody about to take an examination, or a driver’s licence test.
I do not doubt the value of what Douglas has written. However, I distinguish fear from anxiety or lack of confidence. There are some who believe that anxiety and lack of confidence ‘are’ fear – and I really do not have the energy to argue with them. Their argument would be that anything that causes anxiety or lack of confidence, causes fear. I cannot accept that.
Anxiety is about feeling anxious. Lack of confidence is about emotions associated with uncertainty, risk, and danger – especially about new and unpredictable situations. Yes – fear can arise from those same situations. I may be anxious about crossing a new busy road, but that does not automatically mean I am in ‘fear’. I may be anxious about flying in an aeroplane – as I often am – but that does not mean I am in fear of flying when on an aircraft in flight. There are important degrees of difference.
Douglas goes on to describe the “carefree state of mind“. He says, “Carefree means confident but not euphoric. When you are in a carefree state of mind, you wont feel any fear, hesitation, or compulsion to do anything because you’ve effectively eliminated the potential to define and interpret marketing information as threatening. To remove the sense of threat, you have to accept risk completely. When you have accepted the risk, you will be at peace with any outcome. To be at peace you must reconcile anything in your mental environment that conflicts with the five fundamental truths about the market. What’s more you also have to integrate these truths into your mental system as core beliefs.”
In earlier parts of the book he describes aspects of the carefree state. The first is that of the novice trader. The second is that achieved through real competence and a genuine confidence in one’s skill. Of course, I am paraphrasing much of this so I’m bound to be not 100% accurate. The above quotation was relevant to the genuine seasoned trader’s ‘carefree state’.
However, I disagree with Douglas on ‘..you won’t feel any fear..‘. I think he was referring to anxiety. Fear is a very strange word in the English language. People may say, “I fear you are mistaken“, for example. Well – for sure they are not gripped by fear, when they say that sort of thing.
Douglas goes on to outline five fundamental truths (which I will not relist here). In the state of true acceptance of those truths he makes the case that there is nothing to cause pain-avoidance mechanisms to kick in. I have no argument with the five truths. I believe them. Both novice and seasoned (successful trader) may accept the truths genuinely. However, there is a big difference between the two: the novice does not have the wealth of evidence to substantiate his confidence, whilst the seasoned trader has it; having already suffered, tested his strategies and proven that they work. The seasoned trader can relax and embrace the five truths lovingly, while the novice may accept but embrace them only cautiously. Douglas has conflated pain-avoidance with pain management.
Of course, knowing how to set a stop-loss and ensuring it is appropriate to the position, is about knowing that one has the experience and knowledge based on a sound track record of performance. Until a new trader really has tested himself and has found confidence in his performance then he will remain uncertain of his abilities. Where there is uncertainty, there is doubt. And where there is doubt there will be anxiety – and quite possibly impaired performance, if it is unmanageable. So it is both about managing risk and managing anxiety.
Douglas is also wrong – not merely from an academic point of view – because the fact that a trader is making stop-losses, means that he is limiting loss. This can be framed in different ways by expert traders reaching for psychological defence mechanisms (I do not imply that all defence mechanisms are bad or immature). The one unappreciated by many is ‘intellectualisation’. So they may say, “Well, it’s not fear of loss, but simply limiting my risk.” And I would say, “Why limit risk at all if you have nothing to ‘fear’? (to use their language). Does risk represent a potential danger of loss?” And they might go, “Because the object of the overall ‘game’ is to limit loss and maximises overall profits.. nothing to do with fear at all“. This sort of debate can go on forever with serial bouts of rationalisations and intellectualisations. However, the point is that if you’re limiting a loss, you are protecting against a risk. If risks materialise, sequentially without stop-losses, the losses will be painful. I therefore find it illogical to deny that there is pain avoidance – the overall strategy of maximising profits and limiting loss is about pain avoidance. I have to conclude that intellectualisation of anxiety is certainly a way of coping with it. Reframing it is another. All that is very fine. I’m not here to say that it does not work or that it is a bad thing. But the human being cannot escape his own psychology. At some deeper level the thing that leads to the intellectualisation is still present – else there would be no need to do any rationalising or intellectualising at all.
Look – let me take this a step further. It is possible to take away anxiety and fear by giving a person certain kinds of medications or even illegal drugs (without altering other mental faculties). Yes – it is quite possible even if this is unbelievable. Alcohol in mild to moderate doses can significantly reduced anxiety without altering other mental capacities. Some people actually improve in performance with mild to moderate doses of alcohol. This is a well known thing among some stage performers and singers.
Even an artificial state of fearlessness (or anxiety freedom) can be equivalent to the near absence of anxiety by natural means. That does not mean that performance at trading will drastically improve consistently in such an artificial state. The reality is that there is robust psychological research that shows that the absence of anxiety actually reduces performance. I’m not here to present that evidence – it is right out there on Google. This is well described in the Yerkes-Dodson law. Many in trading circles do not and will not grasp that so-called anxiety is only a facet of arousal. The research in synopsis, shows that an optimal level of anxiety is important to optimal performance. Anxiety is a natural component of arousal. This may seem strange or even untrue to many new and seasoned traders who have simply accepted a received wisdom from among their community, that they need to become ‘fearless’ or ‘carefree’. Received wisdom and myth are some of the most difficult things to wrestle with. You can’t talk people out of this. No amount of evidence will suffice.
I’ll deviate – seemingly wildly – onto riding bicycles. I cannot recall exactly when I was learning to ride. However, I recall my anxiety and the numerous falls I had when learning to ride without balancers. The first couple years were painful – many bumps and bruises – sometimes deep ones. It was aweful. But I also recall that after many years, how confident I became. I could ride at much speed, take sharp corners without sliding onto the ground and do various stunts without falling off. Mounting pavements and leaping over wide spaces, became easy. Yes – I would still have had a few falls now and then. Overall though, I had command of the bicycle and of my own abilities. This is not to say that when I was approaching a large heap of sand at speed that I was in a fearless state. No – it meant that I could manage my anxieties and maintain control over my abilities. I recall on one occasion going over a heap of sand – and finding a set of bricks on the other side. It was painful. Lesson learned: ‘Do not launch onto the heap of sand without knowing what’s on the other side’. That one painful experience did not stop me from flying over sand heaps as a teenager on my bike. I simply learned to manage the risk and the hitherto unexpected, on the other side.
Now that’s anxiety or even fear provoking for many people who think about it. What about the expert neurosurgeon, doing the surgery? Should he be totally free of anxiety in his delicate operations. I’m sure there is some guru neurosurgeon somewhere who will say, “Sure – if you’re nervous about it your hands will shake and you’ll cause damage instead of fixing anything in there.” Have you ever done neurosurgery? Have you ever assisted in neurosurgery? I have. Tensions do rise in neurosurgery as in many other kinds of surgery. I know – I was there!! The skill is not just the mechanical doing of the surgery, but managing complex variables that arise and what’s going on in your head (not the patient’s head). I know the argument against this: “We’re talking about trading, which is an entirely different thing!”. Look – I never said brain surgery is equivalent to trading. What I am saying is that the pressures are there even for experts in surgery, as they are in trading. Long experience and training equips people to cope with the unexpected and novel situations that may appear in their field of work or endeavour. That experience may also train them to manage their emotions in such situations. The common factor remaining is the ‘human factor’. I’m afraid there is no way to turn a human into a robot – as yet. I refuse to accept that trading turns humans into robots. I also reject the sense of bravado by some expert traders who say, “You really have to become a robot!” It’s a lie and a myth.
Amusingly for me, when I referred to Demophobia, I came to realise that many people are so anxious and avoidant that they wouldn’t even risk demo money (on demo accounts or paper trading accounts, as they are called). But I suspect demophobia has more to do with so-called ‘fear of failure’- which is really anxiety about failure and self-image. Some may see these as ‘basically the same thing’ or ‘moot points’. That would be like a novice saying, “A Gartley pattern looks like a Bat – so what’s the big deal?” Well it is a big deal if one can discern the subtle but important differences.
But why is any of this important? It is about the concept of the ‘fearless state’. I do not think Douglas intended to say that one should be devoid of fear or anxiety. In parts of his book he did say, “…you won’t feel any fear”. Even so, I think he meant to convey how anxiety about performance and achievement can cripple many a trader. Performance anxiety is recognised psychological phenomenon and it does cripple certain people in other walks of life. Anxiety is not fear – though people who are in fear may feel anxiety. ‘Fearless’ is not ‘free of anxiety’. It is because lay people have conflated anxiety and fear that ‘fearless’ comes to mean ‘free of anxiety’ – to a majority of people. That is no more an ‘academic’ issue than the distinction between Garleys and Bat patterns.
1. Fear in the true meaning of the word, is distinct from anxiety, panic, or simple emotional discomfort. We know this because whilst anxiety is a component of phobias, it is wrong to say that a person who is anxious about something is suffering from a phobia. So when I referred to Demophobia it was truly tongue-in-cheek, and not meant to suggest that people are in fear of the type when you hang over the edge of cliff. I do not believe Douglas was referring to that sort of fear.
2. I assert that the ‘fearless state’ is not really a fear free state – in the way Douglas conceptualised ‘fear’ – or the way people misinterpret what he was saying. I conclude similarly about the carefree state.
3. I assert that the ‘fearless state’ is a state of confidence in one’s abilities to take command, to enjoy what’s happening, to know where one stands in relation to risk, and to clear up uncertainties – for the main part.
4. Once there is risk, there must be risk management. The markets are the ideal scenarios for this. Risk can induce fear or anxiety – it’s a matter of degree. Risk management is about risk control and accepting certain risks. If a risk is acceptable, manageable and controllable, then there is really nothing to be overly anxious about. Why? Because you know the worst case scenario and you have already catered for it. A stop-loss is exactly that instrument for managing risk.
5. Instead – I suggest that the ‘fearless state’ be replaced with ‘the psychologically managed state of mind’. This is where confidence in performance has been built through adequate training and experience, and where anxiety (often confused with fear by so-called internet gurus) are kept at healthy levels, to achieve optimal performance. [I intend to expand on the ‘psychologically managed state of mind’ in another post. It will include emotional management among other things.]
6. I suggest that what Douglas was trying to get across, was that in novel unpredictable situations people are very prone to degrees of anxiety or lack of confidence. If one accepts that, it is a phenomenon that occurs in many of life’s situations. Trading is particularly more anxiety provoking as one is risking something. Whether on a demo account or on a live account, there is the risk of losing a trade. On demo accounts the associated anxiety is about of losing something that is not real i.e. no real loss and no real money.
7. In essence therefore a new trader’s job is not just to learn about trading or to acquire competence, but to achieve a state of psychological balance and control. Just like riding a bicycle or driving a car: when you know how to control self and machine you can get to very far or high places. When you lack control of self and machine, you could end up in a ditch – or dead!