How Important Is Your Trading Style?

Everyone already has an ingrained trading style, it’s simply your belief system. Changing your trading style requires a shift in your belief system, which is no easy task. Moves in the markets are a result of psychology, supply, and demand. Profitable traders make money in the markets by being masters of psychology, in addition to supply and demand. Winning or losing in the markets is more of a result of your mental make-up than your actual trading style. What is more important than chart reading or understanding fundamental analysis is to first understand how people think.

If you’re experiencing challenges with trading or investing, instead of focusing on changing your actions, have you first thought about where those actions come from? Starting from the beginning 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 moreso, your ability to differentiate reality from illusion. It’s time to take a deeper dive into where your beliefs about what works and what doesn’t in trading and investing comes from.

In life most of us tend to repeat the same processes over and over again and expect something to change. The famous quote (wrongly attributed to Albert Einstein) springs to mind: “Insanity is doing the same thing over and over again and expecting different results.”

This repeating of the same process carries over to our trading and investing. That’s good if your trading style is getting the results you want. Not so good if you aren’t getting the results you want. Research suggests that the majority of active traders lose money.  And from our experience in the business of trading, there are some very clear differences between the consistently profitable trader and the consistently losing trader.

Trading Style: The Faulty Belief System

1.  Follows the herd
   • Watches and does what others are doing
   • Takes comfort in numbers
2. Avoids taking risk unless others are sharing the risk as well
3. Feels that if others are buying then it is “ok” for them to buy also
4. Acts on the advice of so called “experts”
5. Complicates the trading process and ignores the important simplicity of markets
6. Tends to make the same two mistakes:
   • Buy and sell after a move in price is well underway (late and high risk) and they buy at price levels where our strategy tells us supply exceeds demand (low probability)
   • Sell at price levels where our strategy suggests demand exceeds supply

Trading Style: The Proper Belief System

1. Leads the herd
2. Tunes out all the noise that gets in the way of making proper buy and sell decisions
3. Disregards what others are doing, and makes decisions based on a mechanical and unemotional set of rules based solely on the laws and principles of supply and demand
4. Often identifies the proper entry that most people never see
5. Buys after a period of selling, at or near demand  (buys fear)
6. Sells after a period of buying, at or near supply (sells greed)
7. Successful traders:
   • Identify opportunity before others
   • Execute trading plans (rules) mechanically

One of the most important things to understand about proper trading and investing is that conventional visible confirmation and low risk opportunity are completely inversely related. This is a game changer once you fully understand it, and it’s what separates the successful and unsuccessful buyer and seller of anything. This is why those who know what they are doing often get paid from those who don’t.  This is how the markets work.