Saturday, March 18, 2017

Trading my own beliefs

I have a set of beliefs particular to myself, and my preferred style of trading. 

My beliefs about how to make money in the markets may be different to yours, or I may operate on a different timeframe to you, with different entry and exit parameters, and that is fine. That's what helps create a market of buyers and sellers.

For example, when I am trading, what is it I am buying and selling? My beliefs are that:

  • I am NOT buying into (or selling out of) the company;
  • I am NOT buying or selling based on fundamental analysis;
  • I am NOT buying or selling based on the economy;
  • I am NOT buying or selling a broker's recommendation;
  • I am NOT buying or selling based on what I think may (or may not) happen
I am simply making decisions based on the stock price and its movements.

And what moves price?

The buying and selling activity of other market participants - nothing more, nothing less.

I discussed here what I referred to as trading's equivalent of the butterfly effect. So, if your beliefs match my own, then you know that you cannot predict with any accuracy what will happen going forward, whether it be in one minute, one week or one months's time.

All we can do is place trades based on our own rules, which should be designed so that you have an 'edge' (a method that generates a positive expectancy over a meaningful sample of trades), and you then play the odds or probabilities using that edge combined with good risk control.

As a trend follower, I have a belief that trends tend to persist - until they don't. As Marty Schwartz said:

"Based on the first law of physics, an object in motion will continue in motion until an outside force affects it. A stock that's going down will continue to go down until it stops going down. A stock that's going up will continue to go up until it stops going up."

It is impossible to make a profit unless price moves up after you have opened a long position, or price drops after you have opened a short position. That is why I focus on price. So all those other factors, which may be key to other market participants, are irrelevant to me and my trading method.

Yes, they may act as a catalyst for the buying and selling, but price will not move until that buying and selling occurs!

It is my belief that the company itself and the same company's stock price are two completely separate entities.

In the same way, the 'stock market' is a market of individual stocks. I'm not bothered what the index is doing - unless I am trading the index itself. I solely concentrate on what price is doing in the individual stocks I am watching for an entry.

All I can control is the amount I am prepared to risk, identify my entry point and initial stop level, and my position size.

After I am in a trade, I am no longer in control. I cannot influence what is going to happen - my position is established.  It is the buying and selling of other market participants that will determine if price moves in my favour or not. 

All I am doing is giving my 'edge' the chance to generate a profit or a loss. If price goes against me, then I get out - quick. If price goes in my favour, then I will hold the trade until my trailing stop gets hit.

And that, in a nutshell, is how I go about trading, based on the beliefs I have. 

Some of these beliefs may agree with your own. Some of them may be the polar opposite to yours. But the more objective you are about clarifying your beliefs and how you can you use to make money, the better. That gives you a basis to start formulating your rules that you will use to begin trading. Go here for more.

No comments:

Post a comment