What is your Trading Religion?

In trading your belief system will determine whether you win or lose over the long term. The trading method you choose to pursue for profits is really determined by your beliefs about the market and how it works. Choose your beliefs carefully because how you think the market works will play the key role in your development of your own trading plan and system.

Trading like you are in a cult: When you trade like a cult member you believe in your stock or your trade no matter what. You may have brain washed yourself or had a ‘guru’ convince you of a stock’s story and a price target that it will reach. This does not work, you must also have a price level that you decide will be the proof you are wrong so you have an exit strategy to keep losses small. Holding a cult like belief in your trades will cause you to eventually blow up your account. Look at Long Term Capital Management, Amaranth, and Victor Niederhoffer, they just didn’t know when to admit that they were wrong and they all eventually failed dramatically and quickly. They ignore facts, price, and reality to keep their beliefs in tact regardless of new evidence that process them wrong.

Trading like a fundamentalist: A fundamentalist just like in religion believes that they have the truth and ignore all other evidence. A fundamentalist will believe that a company has a certain value regardless of what the market price is telling them. They believe a stock is “too expensive” or “too cheap” ignoring the facts about what the current price trend is telling them. Also they look at balance sheets much more than the technical price action on the charts. They do not consider that what is priced in based on the future earnings expectations may still not be enough for the hottest growth stocks or concept stocks. Stocks do not trade based on fundamentals, the truth is that they trade based on the beliefs of investors and traders and whether they think they can make money in the future by buying the stock in the present. The believe they can know the future price through current balance sheets.

Trading like an Agnostic: A trading agnostic believes it is impossible to know the future. They hold what they believe to be true about current price action loosely and are ready to switch their trade and opinion based on what is happening with price action in the market. The best traders hold no opinions about future prices they trade purely based on their own signals, systems, and price action by using  back testing, chart patterns, and trend following. They try to follow what the market is telling them not their own predictions. The are obedient to the market price action.