Trading Psychology (2)

"You don't trade the market, you trade your beliefs on the market". This is a quote from the late Van Tharp, who was one of the most well known trading coaches.

The market is an abstract entity. Investors and traders "meet" at the Stock, Options, Futures Exchanges, and trade their beliefs, buying or selling, every single time the market is open.

By design, the market, in the medium and long term, is structured to go up. For instance, the average yearly return of the S&P 500 over the last 50 years, as of the end of May 2024, was approximately 11.5%. If you adjust for inflation, the annual return, for the same period, was 7.4%, still a robust return.

Keep in mind that institutional and individual investors rely on the market to achive a positive return on their portfolios. Institutional investors like the big pension funds, insurance companies, hedge funds, mutual funds, banks, trade large amounts of money capable of moving the market in either direction, up or down. This is known as "smart money".

If you're able to identify when the smart money is making the move, you should join and follow them. As they say in Wall Street: follow the smart money.

We, as individual investor, do not have the power to influence the market at all. As I said previously, we are at the mercy of the market, with no control of what's going to happen next.

We rely on the probability of the possible outcome and try to minimize the risk, by having small losses and big gains. It's inevitable that you will incur a loss in your trading journey. Success though is not guaranteed.

If you're a rule based trader, stick to it. Resist the temptation to change as you manage the trade. From my own experience, I can tell you it's not easy. Your beliefs will interfere in your decision making process. Then, later, you will regret what you just did. You will ask yourself: why did I do it? It could be another lesson learned.

Always try to learn from every loss/mistake, by analyzing the trade. Was the setup flawed? Poor entry point? Price target unrealistic? Or simply, poor risk management? If you understand the reasons, make sure you make a sound decision next time you enter a trade.

I will end today's post with this stat: trading psychology responds for about 85% of the success and 15% comes from the strategy. Strategy is a necessary condition, but not sufficient.

A word of encouragement: never give up, be persistent and continue to learn the art of trading. Trading is simple but not easy.

Stay focused and good luck.