How to change or eliminate old, outdated Market Beliefs !!

When you trade, you probably think you trade the markets. However, you don't trade the markets; instead, you trade your beliefs about the markets. Yes, this is very true, we only trade our beliefs about the markets. 

Lets ponder upon some statements and see if you believe about them:

• The market is a dangerous place in which to invest. ( You are right if you think this about the markets )
• The market is a safe place in which to invest. ( You are right here too if you think this about the markets )
• Big players in the market control the markets and its hard for the little guy to earn. ( You are right )
• You can easily make money in the markets. ( You are right )
• Its hard to make money in the markets. ( You are right )
• You need to have lots of information before you can trade profitably. ( Guess what, you are right again )

Do you notice the theme. You are right about every one of these beliefs in any of these statements, what do you believe instead? You are right about that too! However, there is no real right or wrong answer. Some people will have the same belief and agree with you and others won't. There fore, whatever your beliefs are about the markets, they will direct your thinking and your subsequent actions

Let’s look at one concept that works: Trend Following. 

To be a good trend follower, you must start by identifying something that is in a trend. Once you’ve done that, you must jump on the trend, perhaps after a retracement. Note that I’ve made two statements about trend following. Both of those statements are beliefs; they are not necessarily true. They are simply my way of organizing reality for myself. A lot of people (i.e., other trend followers) may share that reality, but it’s still based on a couple of beliefs. 

You could have beliefs that would make it very difficult to be a trend follower 

• The stock just made a new high. How could I possibly buy a stock that has made a new high? 
• Trend following works for some people, but when I get in at a new high, that’s likely to be the turning point in the market. 
• Whenever I enter the market, it’s a signal to the market operators to do the opposite of what I just did. 
• Momentum trading doesn’t work; you have to buy value. 
• The stock market doesn’t trend very well; it tends to be very choppy. 

Note that these are all beliefs. Yet how could you be a trend follower if you believed any of these things? Are you beginning to see how beliefs shape your trading behavior?

Let’s look at another method that works: Value Trading. 

To be a value trader, you probably have to have one or more of the following beliefs: 

• When I buy things that are undervalued, with patience they will move toward fair value and I’ll make money. 
• When I buy things that are undervalued, they eventually will become overvalued, and that’s when I should sell. 
• Something is overvalued when ..... 

There are many successful value investors, but you probably couldn’t be a value trader if you believed that things must be moving rapidly in your favor for you to make money. Also, if you buy undervalued stocks, it can take forever to make a profit, but you want to make money each day. 

My purpose in getting you to explore your beliefs about the market is to show the major influences on the way you trade. Write down your beliefs about the market and the way you should trade. You have not completed this exercise until you’ve written down 200 or more beliefs. If you find this difficult, try looking at charts and predicting what will happen next. 

Your beliefs may fall into the following categories: 

• What do I believe about the market? 
• What do I believe about trading? 
• What trading concepts do I believe work? 
• What risk management principles work? 
• How do the best traders trade? 
• Who are some of the best traders, and what do they believe that I believe? 
• What are the secrets to making money in the markets? 
• What have I read lately about trading that resonates with me? 
• When I try to predict what a stock will do from a chart, what concepts come up for me?

To give you a sample, here is a list of my beliefs, one from almost every category: 

• I believe we are in a long bear market in which market valuations (price/earnings ratios) will go down to the single-digit range. 
• I believe that whenever you enter a trade, you must know the point at which you are willing to say, “I was wrong about this trade” and get out. This is your stop loss point. 
• I like to trade stocks that are very efficient (i.e., moving up with very little volatility).
• Sometimes there are a lot of efficient stocks to select from, and sometimes one cannot find any.
• When you get stopped out of a trade, make sure (if you can) that you don’t lose more than 1% of your equity in that trade. 
• The best traders trade by finding a niche that fits them and then becoming an expert in that niche. 
• One of the secrets to making money is to have well thought-out objectives and then understand that you meet those objectives with position sizing. 
• What have I read about trading lately that resonates with me? I just noticed a Warren Buffett quote: “Diversification is a substitute for not thinking.” 

Each belief fits me. They may not fit you at all; however, I believe that you’ll have trouble as a trader/investor if you ignore some of those beliefs (i.e., the second, fifth, sixth, and seventh). But that’s another story. Anyway, your job is to now write down 10 to 15 beliefs from each category. 

When you’ve finished the exercise, look over each belief and run it through the Belief Examination Paradigm: 

• Who gave me the belief—where did it come from? 
• What does this belief get me into? List at least five things. 
• What does this belief get me out of? List at least five things.
• Is this belief useful, or is there a more useful belief? 
• Does this belief limit me? 
• How could I change it so that it is less limiting? 
• If I can’t change it, is there a charge on the belief? 
• If it’s appropriate, ask questions such as, “How do I define that?” and “How do I know?” 

This is an excerpt taken from "The Super Trader" book by Van K Tharp. Its an exercise that can change your trading or investing life completely. Do it to believe it !!