A while back I was honored to write a post for the “Market Masters” series on See It Market. But today marks my first official post as a contributor. And I’ll look to continue my theme of trading education today by sharing a few things that I believe in and what drives my trading process.
After all, having a belief system is at the core of what provides traders with an “edge”.
1. I believe trading is 100% psychological. I know what you are thinking: what about technical analysis? What about the chart? You mean trading has nothing to do with price? Yes, trading has everything to do with price [see below]. Let me explain what may appear, on the surface, to be two diametrically opposing thoughts…a belief in, and extensive use of, the technical analysis of stock charts vs the overriding belief in the preeminence of psychology. Traders approach trading from different perspectives and with various tools. For instance, why does one trader use candlestick charts and another line charts? Why does one trader prefer the 10 minute time frame as opposed to a 60 minute? Why does one trader use a simple moving average and another exponential? And what about indicators? Why use the MACD and not the ADX or a combination of both? How does a trader determine overbought and oversold conditions? Our answers to these questions, and any number of others, are 100% psychological. The psychology drives the technical; not the reverse.
2. I believe price is all that matters. I am not interested in joining a debate about the efficient market theory. I do not wish to discuss the mathematical influence of Leonardo Fibonacci nor do I wish to entertain the possible effects of the moon phases on investment decisions. Any one technical indicator or a combination thereof takes a backseat to the driver…price. Indicators provide an indication of potential price action, nothing more. And what is the source of these indicators? Price.
3. I believe complexity is for selling and simplicity is for buying. There is a mistaken notion that complexity equals quality. That the more complex a trading strategy the more certain its ability to accurately predict the future. Those who sell complex trading services take advantage of our human nature that would have us believe that simple equals easy…and we all know that successful trading is not easy. We reason that a complex system with multiple inputs and language that only a few ivory college graduates can understand must equal quality. However, the markets are complex because of the various participants involved and the emotional decision making of these participants that can, and do, change at any given point in time. There is absolutely nothing that can predict what a complex emotional system will do from day to day, even minute to minute. Simple is not easy. In fact, a simple trading plan is quite difficult to follow, for as soon as our simple plan chalks up a few losses we begin a complex, emotionally driven, search for an answer to our ‘losing system”. If we survive this search we will find the answer was there from the beginning, we just didn’t buy into it at the time.
4. I believe a simple, historically tested and proven, trading edge with well managed risk parameters is the foundation for consistent trading success. Stock prices do one of three things: trend higher, trend lower, or trade within a range. They always have and they always will. If a trading edge is designed around this basic concept it will be difficult not to succeed as long as we accept that our trading edge will not produce profits on each and every trade. No trading edge ever will. A clearly defined trading edge should be designed in such a way that it first tells us when we are wrong. Secondly, a clearly defined edge should confirm when we are right. The old adage “let your winners run and cut your losers short” isn’t meaningful until an edge is clearly defined and followed.
If we wish to become confident, successful traders the answer will not be found in the sudden discovery of a high winning percentage trading system. The answer will be in a belief system that takes into consideration our own psychology, the psychology of the market (i.e., others), and the acceptance of the ever present uncertainty at the right side of the chart.
Follow David on Twitter: @crosshairtrader
Author does not have a position in any mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.