What do you believe?

Your Trading Edge, August—September 2002, Page 28

Your beliefs and values filter the information that you receive and powerfully shape what you accept as real. What you believe regarding a particular subject directly influences your thinking and your actions regarding that subject.

If you want to trade like a super trader then you must think like a super trader.

Unfortunately some of the values and beliefs that you have learnt in the past may be detrimental to your trading career. To think like a super trader, you have to replace some of your negative beliefs with beliefs held by successful traders. I’m not suggesting that you blindly surrender all your values just to make money from trading. However, many or your beliefs and values have been communicated to you by others. Influences include your parents, the education system, industry expectations, and other people's expectations. For example, we are taught that it is important to be right. But in trading you don't know whether your predictions are right or wrong until the market move that interested you is over. You can't make money from past trading opportunities. Knowing what to do if you were wrong, and then doing it, are key traits to develop; coupled with acceptance that you were right, or wrong, once the event you predicted is past.

Trading is a profession and, as in other professions with high-income potential, to succeed you have to do what the majority of traders are not prepared to do.

The first step is to identify what beliefs or values are holding you back and how they influence your trading. You can then compare such beliefs with the beliefs that successful traders hold. Secondly, you can analyse the beliefs of successful traders and see if those beliefs would be helpful for your trading. If so, you should replace your old beliefs with the new ones, provided that they are ethical and they support your trading. This may appear to be a lot of trouble to go to when learning to trade. Many traders just look for another indicator to fix their trading — the perfect indicator. By doing this they transfer responsibility for their trading success to something else (e.g. a computer program) instead of taking responsibility for their trading results. While many people possess the technical information to trade with, few achieve their goals of trading successfully.

He who controls others may be powerful,
But he who has mastered himself is mightier still.
Lao-Tso

You can control your thoughts and actions as a conscious level, but when you encounter any stress or emotional pressure from trading, your subconscious takes over and influences your thought processes.You revert to the activities that support your existing beliefs and values. If trading success is your objective, then you have to start working on your beliefs and values so that your subconscious mind will support the thought processes that assist your trading. Just as important as trading success is your ability to enjoy your trading, so that your trading business will provide the income and lifestyle you desire. Here are some of the beliefs and values of the successful trader that, if adopted, may help you become a profitable trader and reduce stress and emotional pressure.

Trading does not have to be unpleasant and stressful.

If you intend to make trading a part of your business life and want to keep trading for years to come, then you have to enjoy it. Trading tends to become unpleasant when we are not in control of the trading process. You cannot control the markets, but you can control what you do in the markets. By having a trading process you stop all the 'what if?' questions that make trading stressful. While your trading process can be whatever supports your personality and trading requirements, it should be a precise road map to follow, from the opening of a trade or investment until you exit with a small loss or a good profit. The 'map' will reduce the stress caused by uncertainty. You should then enjoy your trading. The more you enjoy it the better you will become at it.

A trading system does not have to be complicated.

The old belief that the more complicated a process is, the better its accuracy, is disastrous when it comes to trading. From my experience working with traders, it’s the over-complication of their trading system or the endless search for the perfect system, that causes most of their problems. Technology and computers have given us a huge choice of variables when designing a trading system. If you take time to analyse how all the indicators all work, you will find that they can be broken into a relatively few main types, within which similar results are obtained. I have found that most complicated systems either have too many similar indicators or they try to blend conflicting indicators. A simple trading strategy based on practical, robust indicators with clear and precise trading signals will be easy to follow and will give consistent results.

You don't need all the information.

The need for maximum information before making a decision has been instilled in us all our lives. The belief that the more information we have about a situation the better the decision we will make, may work in some jobs, but it will cost the trader dearly. You can't have all information available before you make your trade, nor do you need it. By time you have all the information, so do all the other traders. If the information indicates a bullish market and everyone knows it and they have bought, then there is no one left to keep buying and push prices up further. When buying pressure 'dries up' selling pressure will take over and start pushing prices down. That is why traders who avoid risk and wait for all the information lose money in the markets. Your trading strategy should identify a probable trade with the least information that creates an acceptable risk.

Trading is a probability game and nothing is certain.

To be successful you must realise that any trade is just a probability. It does not matter how many indicators confirm your trading decision, it is still only a probability and there is a risk of loss. It's your management of these losses, rather than trying to find a perfect system, which will determine your results. We use risk management and money management to protect us from having too large a loss when the probabilities go against us. The stress that arises from the uncertainty of trading can be reduced by accepting that all trades are just probabilities - and by using effective risk and money management strategies. Stress can affect your decision-making in the next trade and cause you to make foolish mistakes. You should only risk to your predetermined level and not to the extent that you jeopardise your financial future if your trade selection is wrong.

Being right or wrong does not determine your trading success.

Being right or wrong is not the important thing in trading. What separates the successful trader from the analyst is knowing what to do if right or wrong and having the discipline to do it. You cannot control the market or know for sure what it will do — all you can control is what you do in the market. Prices will go where they may, with or without you. Many trading failures are caused by unwillingness to accept that trading decisions are wrong. The more quickly you can accept that a trading position is wrong and take the loss, the better your trading skills will become. It's the attitude towards losses, not profits, that distinguishes the successful trader from the dreamer who hopes that things will turn back in the right direction.

Be open-minded.

Start your trading session without preconceived ideas about market direction. Trade what you see not what you think. Your job is not to predict what may happen, but to correctly read the data to determine the probable trend of the market. Once you have identified a trade, you must act without hesitation on the information available.

Trading is simple, but not easy.

Most successful trading plans are simple. We tend to make them complicated and let our ego and emotions get in the way of implementing them. Successful traders realise that the battle to become a profitable trader does not lie in finding some exotic indicator. The battle is within them. To reduce any emotional influence, the focus should be on developing a robust trading strategy that requires very little discretionary input from the trader.

The majority are wrong.

It is human to feel comfortable with other people who think the same as we do. For example, by being in clubs and associations we can discuss topics and make decisions that are supported by other people. In investing or trading you sometimes need to have a contrary point of view. This does not mean that you have to disagree with everyone, but you need to be able to act before the majority are willing to act.

Losses are just a business expense.

Trading is a serious business that requires commitment and discipline. Like any other business it has income and expenses. Your income comes from profitable trades and your expenses are brokers' fees, data costs and our losing trades. In trading you must accept losses as part of your business expenses. As in any business, if your income (trading profits) is greater than your expenses (brokerage, data cost and trading loses), then you will have a successful business. Trading is about consistently following your business (trading) plan. Trading is not gambling or a few lucky trades with uncontrolled losses.

Question your old work ethic.

In your previous career, your income was probably influenced by the amount of time and effort spent on the job. Your ability to control and direct the working environment added to your success. When you are trading you can't control the market and it doesn't matter how much time you spend analysing your charts or researching your trades, you just have to wait until the market is ready to move and fulfil your trading requirements before you can act. Doing more work won't move the market. It will only lead to impatience and increase your chances of taking low probability trades. You can only observe what is happening in the market and act when the markets are ready. It is true that when you are learning to trade and develop your trading system, there is a great deal of time required. When you have designed your strategy, then spend your time on improving your trading skills and enjoying your trading.

A great deal of satisfaction — and profit — can be obtained from analysing your beliefs and values and then adapting and adjusting them to suit your career as a trader.