Lesson 5: Mental Beliefs In Trading

What is a belief?

Anything you or I say reflects one or more beliefs, including this sentence.

For example, I could make the statement, “I am a trader.” That’s a belief about who I am, or at least who I believe myself to be.

I could say it’s possible to make 100 percent trading every year. But, of course, that’s a belief about capability, and such ideas usually have the words “can” or “cannot” in them.

We don’t trade markets; we trade our beliefs about the markets. So, for example, a trader who believes in betting against the trend is likely to see opportunities only in contrarian trading strategies.

A belief is a practiced thought grounded in lived experience.

Beliefs are built up over years of thought patterns and require both interior and exterior validation to thrive.

Beliefs about ourselves (our personality, weaknesses, past, future) are filters that are placed over the lens of how we view our world.

In looking at how our brains work, we talked about generalization, deletion, and distortion. Our beliefs unconsciously guide all these processes.

We all have stories in our minds. These narratives guide us on who we are and how to navigate the world. Our beliefs ultimately shape our reality. How we experience the world is dependent on our premises.

Each individual has his personal history, and that account provides a set of unique filters or beliefs through which he views the world.

A trader who makes money in a bull market may believe that he can only make money in such a market environment.

It means that no two people will perceive the world in the same way. Your unique experiences shape your beliefs about the world. Our behaviors are a reflection of our unconscious beliefs.

We are not aware of most believes that we developed. Our unconscious beliefs are formed chiefly in our early childhood. By the age of seven, we create or adopt most of the assumptions that shape our experiences.

How Beliefs Affect our Trading

We have briefly described how beliefs shape our experiences.

Trading performance is dependent on the beliefs we adopt. It’s hard to succeed in the markets with toxic ideas. We constantly need to update our thoughts, or our performance will suffer.

Here are examples of toxic trading beliefs and how they will affect your trading;

  1. A good day is a winning day in the markets – Of all trading beliefs, none is more toxic. A trader who believes losses are bad is bound to suffer in the markets. Losses are a natural part of trading. Profitable trading systems and strategies have losing days. A more helpful trading belief would be a good day is characterized by following the trading process.
  2. Productivity equates to executing multiple positions – Great traders trade smart not often. Productivity does not necessarily mean live trading. Research, journal reviews, and mental rehearsals are equally productive for a trader.
  3. High returns require high risk – People have come to believe in the myth that high returns can only be attained using high risk. Great traders, however, believe in asymmetric risk to return ratios. This means we can easily earn high rewards using low-risk ideas.

A trader who believes the above three things has failed before starting. His beliefs that guide his behavior will make him trade in unproductive ways. His fate is simply a loss of capital.

Useful Trading beliefs

We have covered toxic trading beliefs. It’s now time to look at helpful trading beliefs to help traders trade and experience the markets better.

I would recommend every trader adopt these beliefs before jumping into live trading.

  1. A good day is when we follow our trading plan – I am yet to meet a successful trader who is not disciplined in following his plan. Professional traders understand the importance of developing a sound trading plan. Trading is a business.
  2. Our performance is not dictated by our profit and loss statement – We trade to make money. Traders fall into the trap of tracking our P and L statement to judge our performance. Learn to evaluate your performance based on other indicators. We can look at several opportunities present as one sample.
  3. Consistency is what ultimately matters – On the level of one trade, it is tough to know which trade setups are winners or losers. In the long run, we can trust our systems to drive us into profitability.
  4. Profitable trading is about finding low-risk ideas – Great trading is about finding low-risk ideas. We need to understand this trading belief before we start trading profitably.
  5. In trading, less is more – Newbies often think of trading success as trading multiple strategies or multiple markets. Learning to focus on a few asset classes or trading strategies is what results in profitability.

Changing our beliefs

  1. Recognize the belief as a belief, not a reality – Our first step towards changing our thoughts is self-awareness. Recognizing our beliefs and how they shape our experiences will help us change or adapt to new premises. It is easier to adjust to valuable opinions than to believe in nothing.
  2. Start thinking of your beliefs as helpful or not valid – Our goal in life and trading should be adopting valuable ideas. For example, if we chose to believe life is always working for us, not against us, we can handle adversity better.
  3. Introspection – Often, we don’t understand what runs our lives and decisions. We must do some reflection to build awareness of what runs our lives.
  4. Use mental exposure – We can rehearse our future beings. Using imagery and visualization, we can preplan what to believe in and slowly practice viewing life in a different light.