If you must play, decide on three things at the start: the rules of the game, the stakes, and the quitting time…Chinese Proverb
Never in the history of mankind has it been easier for people to tap into the financial markets. Millions of people visualize themselves sitting in their pyjamas at home or on mobile devices as they play or travel about–trading and earning a really good living. Trading goes on all over the world, and people can buy and sell at almost any time of the day or night. What’s not to like about this? How easy can this be?
Not easy at all. Simple, maybe—but not easy. Markets are open, complex adaptive systems that are always in motion. Other than the regulations set by the exchanges, there are very few rules. Trading is a game where we make our own rules and strive to take money from other people before they take our money. This is serious business because it is our hard-earned money that we put at risk every time we enter a position. There is almost no way, short of very complex hedging strategies (that often don’t work) to put money into the markets without putting it into the realm of risk.
Why do so many traders fail? Why are so many called and so few chosen? There are several main reasons for this, but the fundamental one centers around belief systems. When you think about it, the market is pretty much a level playing field. Everyone has access to similar information, charting systems, and trading platforms. For a price, you can get just about anything you need in terms of trading. The two things you really need to be successful are not for sale: Your belief system and the belief system of others.
You are not really trading the markets. As Dr Van Tharp often says– and I agree completely– you are trading your beliefs about the markets against the beliefs of everyone else who is trading. This is the area where the majority fails. They do not have a good understanding of their belief systems, yet struggle to put them into action to generate profits. You are what you believe, and if you don’t know who you are or what you believe, the market is a very expensive place to find out. Why? Because you will act out your neurotic tendencies and insecurities to others in the markets, who will exploit them. This happens every day on a very large scale—those who know themselves take money from those who do not know themselves.
Let’s look at a price chart as one example of this. What is a price chart? It is emotions plotted on a grid. That’s it. A price chart is the sum total of belief and emotion. Why do you execute on that chart? Because you believe something about it. The thousands of others who are executing on that chart are also trading their beliefs. In order to have a chart, it is necessary to have both buyers and sellers. In order for price movement to occur, there have to be both buyers and sellers. Someone is buying, and someone is selling to them. That means that these people are trading their beliefs in that moment. That also means that they have beliefs which are diametrically opposed. If it were not so, there would be no price movement and no chart.
How can we understand this even more clearly? A price print means different things to different people. Those who win have learned to focus on what the price means to others, rather than to themselves. Put another way, top traders are always looking to find out where the other person is going to execute. Where is the person who is already in the position going to get out of that position? What does that person think or believe about his position, and what is going to cause him to get out? Therefore, it is the beliefs of the other person that matter to you in terms of profit. When everyone who is going to get in is in, and everyone who is going to get out is out, there is no price movement. Movement occurs when the loser decides to get out, because the winner can wait. This is the edge that people have when they let profits run.
Put yourself in the position of the loser and try to fathom what that person believes about his or her position. See if you can do that over the coming week and see how it feels. Constantly question your own belief systems until you know why you are doing something. Always ask yourself, “What do I believe that is not true? What do others believe that is not true?” That is a good place to start.
Janice Dorn, M.D., Ph.D. received a Ph.D. in Anatomy (Neuroanatomy) from the Albert Einstein College of Medicine in New York. She is certified by the American Board of Psychiatry and Neurology as well as the American Board of Addiction Medicine. Dr Janice Dorn has written over 1,000 articles on trading psychology and behavioural finance. Dr Dorn is dedicated to providing education and training about how the brain, psychology and emotions impact financial decision-making. Janice is an advocate for the elderly, lifelong dancer and a pianist. Her website is: www.mindmoneymarkets.com