Sunday, April 12, 2015

What are your beliefs?

Part of your success as a trader will depends on what you believe to be important. As Van Tharp says "You trade your beliefs about the markets".

If you look at this list below, then I do not follow or use many commonly held beliefs out there:
  • I don't study the fundamentals on a company - half the time I don't even know what these companies do;
  • These days I don't even let the price action in the indices influence my trading decisions or market exposure;
  • I don't track volume;
  • Apparently trend following on stocks doesn't work;
  • I take entry signals regardless of the time of day - whether it is in the first minute after the markets open or the last minute before they close;
  • I take intra-day exit signals.
Beyond these beliefs, you can also look at the basic approaches or trading/investing concepts taken by successful traders. Go and read the Market Wizards series as an example and see the differing methods used by some of the most successful traders ever.

This just goes to show that, while there may only be a few basic trading concepts out there, there are an infinite number of ways where you can tailor that basic idea or approach to suit you and your beliefs, and still make money.

This combination of all these approaches and the actions of the market participants using them, (be it scalpers, traders, investors etc.) who trade their beliefs all help to create a market of buyers and sellers.

My influences in trading are numerous, having studied the writings of  people like Richard Donchian, Richard Dennis and the Turtle traders,  Ed Seykota, Jesse Livermore as well as many other successful traders, past and present.

But, at the end of the day, YOU need to decide how YOU are going to participate in the markets. To do that, YOU need to determine what your basic beliefs are about how profits can be made, and then zone in on what YOU believe to be important elements that will help YOU achieve YOUR goals. 

Marty Schwartz said it best:

"I consider myself a synthesizer; I didn't necessarily create a new methodology, but I took a number of different methodologies and molded them into my own approach".

This creating or tailoring of your own approach should help you determine what elements are important to you, and allow you to strip out those elements you believe are superficial at best. I'm all for keeping my approach as simple as possible, but then again, that is a belief isn't it?

It should be clear to everyone that, as I use a trend following approach, price action determines my entries and exits. However, over the years I have come to appreciate the benefits of tracking volatility. This now helps to act as a filter as to what trades I take, has implications on position sizing and initial stop placement, and ultimately the profits or losses generated. 

A lot of those beliefs listed above may well be valuable to other traders, however they do not fit in with my own beliefs. 

Take volume as an example. Lots of traders follow volume religiously. My argument to this is, if a trending price move is on say 50% of the normal level of volume, does that mean I only get 50% of those profits (or losses!) that the subsequent price move has generated? Of course not. Therefore, to me it is irrelevant. However, I may well think differently if I was trading a multi-million dollar fund and where position sizing may become more critical when trading equities.

If you boil trading down to absolute basics, then no-one has still explained their way around this unarguable fact - the ONLY way to make a profit is if price action moves in your favour after you have opened a position. Similarly, the ONLY only way you can lose money is if price moves against you after initiating a trade. 

The supposed reasons behind any price move are immaterial - anyone can create a reason to try and justify a price move after the event. Even worse (to me) is where people try to create a reason or justification to hold onto a losing position, when price is going in the opposite direction that you are looking to profit from.

There are a lot of people out there who find that approach far too simplistic, which is fine. I like William Eckhardt's take on this: 

"Pure price systems are close enough to the North Pole that any departure tends to bring you farther south." 

Again, that is a belief - but one that agrees with my own way of thinking.

The bottom line is that, if you have tailored a basic approach based on your beliefs, it may well differ from what a lot of other people are doing. They may well do the complete opposite when it comes to certain elements. But, if you are profitable, have good risk control and are able to follow your own rules, then no-one else can say that what you are doing is wrong.

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