Your Belief System is Your Trading System

Moves in markets are a result of mass psychology. We make money in the markets by being masters of human psychology and supply and demand. It is well known that trading is 90% mental. Winning in the markets is more defined by your mental make-up than your trading style. What is more important than chart reading is to first understand how people think. Instead of focusing on changing our actions if you’re having issues with trading, it’s time to notice where those actions come from. Moving backward, one step at a time, actions stem from behavioral patterns, and behavioral patterns stem from beliefs. So, it’s at the level of beliefs that decisions are made, and moreover, where your ability to differentiate reality from illusion lie. It’s time to start considering where your beliefs about what works and what doesn’t in trading come from. In life, which includes trading and investing, most of us tend to repeat the same processes over and over, expecting a different result. Over my many years in the business of trading, there are some very clear differences between the consistently profitable trader and the consistent losing trader.

The Novice Trader

1.They tend to follow the crowd.

Watch what others are doing

Comfort in numbers

2.They avoid taking risk unless others are sharing the risk as well.

3.They feel that if others are buying then it is "ok" for them to buy, too.

4.They act on the advice of so called "experts", i.e. the advice of market gurus, CNBC, analysts, and their brokers.

5.As humans, they tend to complicate the trading process and ignore the important simplicity of markets.

6.They always make the same two mistakes: They buy and sell after a move in price is well underway (late and high risk) and they buy into resistance and sell into support (low probability).

The Consistently Profitable Trader

1.They lead the herd.

2.They tune out all the subjective noise that can get in the way of making proper trading decisions. They don’t care what others are doing and make decisions based on a very mechanical and unemotional set of criteria based solely on the laws and principles of supply and demand.

3.They learn to identify the proper entry that most people never see.

4.They buy after a period of selling and into support. They buy fear.

5.They sell after a period of buying and into resistance. They sell greed.

6.Successful traders:

Can identify opportunity before others.

Execute trading plans mechanically.

Successful Trading

1) Having the ability to find two sets of ill-informed individuals in the markets in any time frame.

Those willing to sell their stock or futures to you at a price you know is too cheap. You know by objectively assessing supply and demand.

Those willing to buy your stock or futures at a price that you know is too expensive. You know by objectively assessing supply and demand.

2) Having the tools, knowledge, and ability to take the proper action when these two groups appear.

3) Play the bandwagon correctly…

Proper trading is knowing how other market participants think and react when they are correct and, more importantly, when they are wrong. Price patterns are thought patterns.

Mental Musts

1)Confidence

2)Discipline

3)Patience

How to get these

1) Reduce and eliminate subjective analysis.

2) Learn to fight the urge to do what others are doing and make decisions based on a very mechanical and unemotional set of rules and criteria.

The Proper Entry

Know Where To Enter, Support and Resistance.

- Smart money enters here.

Entry Must Be Low Risk.

- Most important part of the trade.

Enter Before Others.

- This is how we get paid.

One of the most important things to understand about proper trading and investing is that visible confirmation and opportunity are completely inversely related in trading. In class, this is a point I focus on more than any other.