Posted by: Bevan | October 24, 2009

Beliefs

Our beliefs influence everything we do.  Formed from the values and paradigms that we have built up as a result of childhood programming and our life experiences, they create our filters on reality, and determine our actions and responses to life.  Trading is a fantastic activity to learn about yourself, and the importance of beliefs is critical here.  Its been quite interesting reflecting on my own beliefs about the markets, as unlike most areas of my life I have acquired most of them over a relatively short time period – since I first embarked on my trading journey in 2007.

The shortness of the time period doesn’t make them any weaker, but I am acutely aware of the biases that they introduce.  Most have come about because of the books I’ve read – I’ve picked up certain arguments that resonate with me and internalised them.  Others have come about as a result of mistakes I’ve made along the way.  A quick inventory of my beliefs is:

  • Long term trading is easier than short term trading, as the fact that decisions are made outside of market hours means that mistakes, and more importantly breaches of discipline, are less likely
  • Long term trading is more profitable for most people who are not market makers, as the costs of trading (data, slippage, commissions and the spread depending on your vehicle) are lower relative to the average trade
  • A robust tested mechanical trading method is best, as it removes the potential for cognitive and emotional biases to affect decision making.  It also means that a trader can have a concept of the behaviour of the system, especially in terms of strings of losses and drawdowns, which may help to overcome meddling or abandoning the system in tough times
  • A proven edge is vital – I must have confidence that over time I will earn more than I risk, in my case by engaging in ongoing major market trends at low risk points where the majority of other market participants are supporting a reversal
  • Diversification is important – I have a small bank so this isn’t easy but I believe that improved risk control and smoother returns result from trading a variety of non-correlated markets using different methods
  • Money management is the key to ensuring decent returns whilst not being knocked out by an adverse price move or through losing heart after a series of losses
  • Consistency is the key

Although most of my belief’s probably serve me well, I’m acutely aware that people with different, and in some cases directly opposing beliefs are doing really well in the markets.  One belief that I think might be restricting me is my lack of faith in the ability of short term trading methods to produce consistent profits over time.  This is founded on good arguments I’ve read and thought about relating to the costs of trading, noise and randomness in this timeframe, the regular changes in market behaviour, and the difficulty in maintaining discipline when making almost instantaneous decisions.  My own ‘short term’ efforts earlier in my trading were characterised by switching from method to method, emotional trading and a desire to fulfill my innate desire for action rather than pursue profits.  These experiences mean that it is hard for me to trust short term methods.  My challenge is to become more open minded.

If I could find a solid system for short term trading which suited my schedule, it could potentially enhance my returns and allow me to compound faster (rather than having capital tied up for extended positions as at present).  The challenge I have is finding such a system and achieving the mindshift to allow me to apply it convincingly without internal conflict.

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