Is Your Philosophy Aligned with the Markets?

Just as a structural iron worker will tell you walking on a 6 inch wide girder 50 stories above the street is simply putting one foot in front of the other, or a pilot will tell you landing a plane on a windy day is just a matter of staying focused and following step by step procedures, a trader will tell you a successful trading day is just a matter of buying and selling.  Execution in any profession is just the tip of the iceberg, and can appear very simple when demonstrated by a professional in the right place at the right time.  Before an individual is ready to be trusted to execute a job involving risk however, there needs to be an indoctrination period where a philosophy is introduced and the individual’s psychological tendencies identified – for example is the student motivated by a fear of failure, or a fear of not succeeding -there is a big difference– and finally, the student must see repetitive demonstrations of what is expected of them by others who are similar in nature. All three steps must dovetail neatly into a trading methodology, and be understood explicitly, before the student writes out their trading plan.

Before an individual can focus on execution – the 10% of the job –they must understand the 90% mental preparation. Unless you have a philosophy that is aligned with how markets move, and understand your own psychology, you will never develop sufficient belief in success to be able to risk your funds trade in trade out.  Pulling the trigger is a simple physical act; doing so under the duress of loss and threat of being wrong is much more difficult. While many books have written on trading psychology, it is trading philosophy which must be ingrained first. Philosophy addresses why a methodology works. And it is this understanding and belief of a method, which will determine if a trader can execute when the time comes. It is extremely important that you understand why a method works, and that you know if it will work better or not in different market environments, i.e.: trending or counter-trending environments.
One of the paradoxes of learning to trade is the student’s existing belief system, i.e.: their pre-trade personal philosophy, will determine their new trading philosophy and trading methodology. To be successful it’s imperative they chose a trading philosophy and method which are aligned with how markets move, yet they may have no experience thinking like a trader, i.e.: make decisions based on market generated information only. So they are making the critical trading decision – which methods to use – with little or no experience.  Another paradox is that retail traders more often have to train themselves.  

Let’s take a look at a couple of popular trading philosophies and see how they might influence a trader.

“You get what you pay for”

“Markets tend toward disequilibrium”

The first one: “You get what you pay for” is popular for many beginners because it’s conventional, kitchen table advice.  Unfortunately it does not lend itself to trend trading, and can lead to individuals getting attached to a particular method based on what they paid for it in time and money, and not its actual performance. It also leads to students becoming enamored with buying sell-offs because of their perception the market is “cheap”, or selling rallies too soon because of the perception the market is “expensive”, which is very dangerous for a trader. While good advice for buying hiking boots “you get what you pay for” can lead to trouble in trading.

The second: “Markets tend toward disequilibrium” is one held by more experienced traders. It means that markets go both up and down, and often for no apparent reason, which points out the danger of becoming attached to a directional opinion. It also reminds us to be patient and not chase markets because by nature markets go up, and down. Missing a trade is not a big deal, given the manic nature of price movement.  There will likely be another trade soon enough. This philosophy also provides a good reason to take a profit on a portion of a position following a price burst in your favor, because given the unstable nature of markets, the gain can be short lived. By the same token that unstable nature can lead to trends carrying farther than most would consider reasonable, reminding us of the importance of leaving a portion of our position on to let profits run.

These two philosophies are typical of the choices people make, and also typical of why many fail. The first choice is logical while the second misunderstood, even confusing. Yet the second choice is the wiser. While it may seem daunting at first to embrace chaos over convention, it is essential that you have the appropriate mind-set before choosing which methods to study. Philosophy may seem a bit esoteric for most of us at first, but our philosophies, whether we realize it or not, represent our core believes. And it is these beliefs which determine so many of the important decisions we make. So before you determine a trading method make sure your existing beliefs don’t conflict with the up and down world of markets and trading.           

To attend a webinar tomorrow on how to determine between a trending and a counter-trending market go to: Overview of Directional Lines

Jay Norris is the author of Mastering Trade Selection & Management, McGraw-Hill, 2011, and Mastering the Currency Market, McGraw-Hill, 2009.

To win a $3,499 scholarship, courtesy of Trading University in Chicago click on:  Trading-U Scholarship

Trading futures or Forex is a risky endeavor and not suitable for all investors!