Lessons from the Pros

Your Belief System is Your Trading Style

Last week, I profiled a year long journey of one of our students. I referenced a part of a piece I wrote a while back, comparing the traits of the novice trader and the consistently profitable trader. I received many emails from people asking for this information so I thought I would share this with you today.

Moves in markets are a result of mass psychology. We make money in the markets by being masters of human psychology and supply and demand. It is well-known that trading is 90% mental. Winning in the markets is more defined by your mental make-up than your trading style. What is more important than chart reading is to first understand how people think. Instead of focusing on changing our actions if you’re having issues with trading, it’s time to notice where those actions come from. Moving backward, one step at a time, actions stem from behavioral patterns, and behavioral patterns stem from beliefs. So, it’s at the level of beliefs (thoughts) that decisions are made, and moreover, where your ability to differentiate reality from illusion lie. It’s time to start considering where your beliefs about what works and what doesn’t in trading come from. In life, which includes trading and investing, most of us tend to repeat the same processes over and over, expecting a different result. Over my many years in the business of trading, there are some very clear differences between the consistently profitable trader and the consistent losing trader.

The Novice Trader

1. They tend to follow the herd.
   • Watch and do what others are doing
   • Comfort in numbers
2. They avoid taking risk unless others are sharing the risk, as well.
3. They feel that if others are buying then it is "ok" for them to buy, too.
4. They act on the advice of so called "experts," i.e., the advice of market gurus, CNBC, analysts, and their brokers.
5. As humans, they tend to complicate the trading process and ignore the important simplicity of markets.
6. They always make the same two mistakes; they buy and sell after a move in price is well underway (late and high risk) and they buy into resistance and sell into support (low probability).

The Consistently Profitable Trader

1. They lead the herd.
2. They tune out all the subjective noise that can get in the way of making proper trading decisions. They don’t care what others are doing and make decisions based on a very mechanical and unemotional set of criteria based solely on the laws and principles of supply and demand.
3. They learn to identify the proper entry that most people never see.
4. They buy after a period of selling and into support. They buy fear.
5. They sell after a period of buying and into resistance. They sell greed.
6. Successful traders:
   • Can identify opportunity before others
   • Execute trading plans mechanically

Successful Trading

1. Having the ability to spot ill-informed individuals in any market and any time frame.
• These ill-informed individuals buy at price levels that are too high. You know by objectively assessing real supply and demand.
2. Having the tools, knowledge, and ability to take the proper action when this ill-informed market player appears.
3. Play the bandwagon correctly.
• Proper trading is knowing how other market participants think and react when they are correct and, more importantly, when they are wrong. Price patterns are thought patterns.

Mental Musts…

1. Confidence
2. Discipline
3. Patience

How to get these…

1. Reduce and eliminate subjective analysis.
2. Learn to fight the urge to do what others are doing and make decisions based on a very mechanical and unemotional set of rules and criteria.

The Proper Entry

• Know Where To Enter, Support and Resistance – Smart money enters here.
• Trade with the trend – The odds are on your side.
• Entry Must Be Low Risk – Most important part of the trade.
• Enter Before Others – This is how we get paid.

One of the most important things to understand about proper trading and investing is that conventional visible confirmation and opportunity are completely inversely related in trading. In the Extended Learning Track (XLT) program, this is a point I focus on more than any other. Those who know get paid from those who don’t; that’s how markets work.

Have a great day.

- Sam Seiden sseiden@tradingacademy.com