Some Examples of Trading Beliefs
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You do not trade the markets. You can only trade your beliefs about the markets.
Van K. Tharp
[/vc_message][vc_column_text]What does it mean to say we only trade our beliefs about the markets? Let’s look at some statements and see what you believe about them:
- The market is a dangerous place to invest. (You are right.)
- The market is a safe place to invest. (You are right.)
- Wall Street controls the markets and it’s hard for the little guy. (You are right.)
- You can easily make money in the markets. (You are right.)
- It’s hard to make money in the markets. (You are right.)
- You need to have lots of information before you can trade profitably. (You are right.)
Do you see the theme? Your opinion about each one of these statements is correct, whatever it happens to be. There is no real right or wrong answer. Some people will have the same beliefs as you and others won’t, but that’s not important. What is important is that your beliefs about the markets will direct your thinking and your subsequent actions.
Consider just the first two examples. If you held the belief that the market is dangerous, it might make you less likely to take trading-related risks than if you thought the market was safe. But would taking less risk make you more successful? It is less important to evaluate the objective truth of these beliefs than it is to understand what effect these beliefs have on your own trading. When you understand how your beliefs guide your trading actions, then you can begin to control your trading by reprogramming your beliefs.[/vc_column_text][vc_separator el_width=”50″][vc_custom_heading text=”Exercise: Evaluate a trading belief” font_container=”tag:h2|text_align:left|color:%23000000″ use_theme_fonts=”yes”][vc_column_text]
Consider one of your trading beliefs. Follow this belief through and imagine what connections it might have to your behavior. You can choose one of the following beliefs that are common among many traders and investors, or you can choose one of your own.
If I am making money, then my trading is working.
If I am winning more trades then I am losing, my trading system is probably working.
Buying and holding (for at least a year) those stocks which are priced at an exceptional value and are also likely to grow is probably the best investing strategy around.
The foundation of successful trading is to have an edge, a statistical advantage, that can be repeatedly used to drive profits from active trading.
Consider the trading belief you have chosen and ask yourself: “what kinds of actions would I perform if I held this belief?” This is a simpler version of the question asked in the first course (“What does this belief get me into?”), and the question has the same intent: to help you see how the belief translates into attitudes and behavior.
For example, If you believed that all you had to measure in your trading was whether you were making money, then you might answer that question by saying you would compare your account balance at one time period to another. What would your attitude be about measuring across consistent time frames? What would your attitude be about comparing against a benchmark? If your attitude about measuring these things were rather casual, it would not likely lead to a behavior of carefully evaluating objective performance.
Not measuring performance consistently would get you out of some work, but would it get you into better trading? Without such measurement, you would not be able to tell if your trading system were still working. More importantly, what if, for a period of three months or so, your account balance did not increase. Would you know what to do? If your belief was that simplistic, your next behavior might be to look for an entirely different way of trading or investing. This could lead you on a costly and time-consuming chase that led you right back where you started.
Can you see why it is so important to identify and evaluate your trading beliefs?
In addition to understanding what beliefs you hold about trading, it is important to realize that these beliefs of yours will have a significant impact on the kind of mental states you will find yourself in while trading. Mental states play an important role in trading performance. Check out the next lesson to learn why.[/vc_column_text][/vc_column][vc_column width=”1/4″][vc_widget_sidebar sidebar_id=”flash_right_sidebar”][/vc_column][/vc_row]