By Dr. Van Tharp
“You do not trade the markets. You can only trade your beliefs about the market.”
What does it mean to say we only trade our beliefs about the markets?
Let’s look at some examples and see what you believe about them:
* The market is a dangerous place to invest. (You are right.)
* The market is a safe place to invest. (You are right.)
* Wall Street controls the markets and it’s hard for the little guy. (You are right.)
* You can easily make money in the markets. (You are right.)
* It’s hard to make money in the markets. (You are right.)
* You need to have lots of information before you can trade profitably. (You are right.)
Do you see the theme?
You are right about every one of these beliefs (whether you said yes or no to any of them) and if you don’t believe in any of these statements, what do you believe instead? You are right about that too!
However, there is no real right/wrong answer. Some people will have the same beliefs and agree with you and others won’t. Therefore, whatever your beliefs about the markets are, they will direct your thinking and your subsequent actions.
What Is a Belief?
Beliefs are a primary way to filter information from the world. Beliefs are judgments, categorizations, meanings or comparisons. They determine how we perceive reality and relationships in reality.
What you expect (i.e. your reality) depends upon your beliefs and they are largely unconscious. Every sentence in this document represents one or two beliefs, including this one.One of the beliefs that is most productive for good trading is the belief that you are totally responsible for your own results as a trader. When you adopt this belief, then you can learn from your mistakes.
However, if you tend to blame someone else (your broker, your spouse, the person giving you tips) or even the market for the results that you get, then you will tend to repeat the same mistakes over and over again.
When traders “own their problems” and assume responsibility for the results produced, they then discover that their results come from some sort of mental state, which either allowed them to
1) follow their rules,
2) not follow their rules, or
3) trade without having any rules.
When traders take the time to write down all their beliefs (about themselves, the markets, money etc.), then they can establish a much better idea of what they want to trade, how they want to trade and they can also see flaws in their thinking much easier.
It is valuable to know which beliefs support you as a trader and which ones hinder your progress.
What Is a Mental State?
Every task has an optimal mental state that will allow you to accomplish that task effortlessly.
For example, to execute a trade you benefit from courage and total commitment. Fear, in contrast, is a big disadvantage as a mental state for executing trades.Mental states are primarily what most people call discipline or emotional control. Examples include,: being impatient with the markets, being afraid of the markets or being too optimistic about the markets.
Controlling your mental states is just part of the answer, but when you can see that you are the creator of your own results as a trader, then you have come a long way and can really make progress.
What Is a Mental Strategy?
To understand mental strategies, you have to understand how people think. People think in their five sensory modalities, that is, in terms of visual images, sounds, feelings, taste and smell. A mental strategy is the step- by -step way in which you use these modalities; it is the specific sequence of your thinking.
For example, the most effective strategy for the action step of executing a trade is to
1) see the signal;
2) recognize internally that this is the signal you decided you should take;
3) feel good about it; and
4) take action.
If you do anything else, you probably won’t be able to take action or you will be very slow to act.
Dr. Van Tharp