In forex trading, your beliefs play a key role in shaping your decisions and actions.
This is because, as renowned trading coach and Market Wizard Van Tharp once stated:
“You don’t trade the markets – you trade your beliefs about the markets.”
He also said that trading is 100% about your beliefs.
The reality is that your beliefs about trading shape the way you trade, and the decisions you make.
This is because what you believe affects the way you behave.
Freedom and responsibility
As a forex trader, you have unparalleled freedom to make decisions. No teachers or bosses are standing over your shoulder telling you what to do.
I believe this freedom is what draws many people into trading.
This autonomy presents both opportunities and challenges. Whilst liberating, it can also lead to making decisions outside of a structured framework.
In essence, you are free to click the buy and sell buttons on your trading platform whenever you want, for good or bad.
The need for trading rules rooted in beliefs
To navigate trading effectively, it’s essential to establish a set of rules that align with your beliefs. That’s why here at MarketMates we recommend a rules-based trading system.
These rules serve as guiding principles, filtering your actions in the market. Each rule should reflect a belief that will enhance your trading edge.
For example, if you believe it’s bad to take losses, you might not close a small losing trade, turning it into a winning trade.
Conversely, if you believe that you need to cut your losses short, you will be comfortable adding a rule to your trading plan to exit out of the same losing position with a minimal loss.
The impact of your beliefs on your trading decisions
Your beliefs significantly influence your trading behaviour and outcomes.
For instance:
- If you perceive Forex trading as risky, you might hesitate to execute trades.
- Trust in a particular chart pattern may prompt you to enter a trade.
- Resistance to accepting losses could lead to avoiding stop-loss orders.
- If you believe Forex trading is difficult, you might find it difficult
- If you believe Forex trading is easy, you might not take it seriously
You can see here how you are making decisions based on beliefs. These statements are not judgments.
They are simply the way you operate, rightly or wrongly.
Navigating challenges along the trading journey
Many traders unknowingly have counter-productive beliefs, which can hinder their success.
For example:
- I am right and the market is wrong
- Trading is a hobby
- The market is going to change direction now
These beliefs may compel you to:
- Hold onto losing positions to avoid acknowledging losses
- Overtrade, out of excitement (or boredom!)
- Prematurely exit winning trades
However, as humans, we possess the capacity to consciously examine and alter our beliefs for the better.
Choosing the right beliefs for trading success
“Truth – more precisely, an accurate understanding of reality – is the essential foundation for producing good outcomes.” – Ray Dalio
There are three steps to choosing the right trading belief:
- Become aware of your current beliefs
- Learn the beliefs of top traders so you can model them
- Start implementing the new beliefs in your trading
The path to belief transformation is not a straight-line
Changing your beliefs can be straightforward or challenging. Start by identifying your existing beliefs, and then explore new, more beneficial alternatives (the subject of the next lesson.
For example, if one of your beliefs is: ‘High volatility in forex is risky and dangerous,’ try changing your mindset to: ‘High volatility in forex presents me with exciting trading opportunities.’
While some beliefs may shift effortlessly, other deeply ingrained beliefs may require more effort to shift.
Often the beliefs we hang onto the hardest are the ones that are in most need of changing.
What are your market beliefs?
“I think investment psychology is by far the more important element.” – Tom Basso
In this lesson, we will walk you through the beliefs of top traders.
Before delving into the beliefs of successful traders, let’s examine your convictions about the market.
Action Step:
List your beliefs about the markets – try to come up with at least twenty.
To get you started here are some common beliefs:
- Market volatility is risky
- Market volatility is good
- I need to demo trade to learn to trade
- Demo trading is a waste of time as there is no money on the line
- Bitcoin is a bubble
- Currency movements are correlated with interest rates
- My broker is hunting my stops
- I am not a profitable trader
- It’s important to trade the correct strategy for the market type
- I need to have a risk/reward ratio of three to one
As you can imagine I could go on.
Don’t think too hard and start writing. If you are having trouble with this step, you can try adopting this belief:
“By having the beliefs of successful traders, I will be safer and smarter in my trading decisions.
I will make better trading decisions if I adopt the beliefs of successful traders.”
Till next time,
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