Right beliefs lead to profitable trading | stockbee

7/03/2014

Right beliefs lead to profitable trading

Our beliefs about economy or economic policy or market or a stock or sector or growth or value or momentum drive our behavior.
If you believe (rightly or wrongly ) that only low p/e stocks are worth buying and high p/e is dangerous, your behavior is dictated by that . As a consequence you will focus on particular type of stocks.
If you believe market is manipulated (rightly or wrongly) you will spend time and effort propagating that view and explain any failure in your trading by saying the game is manipulated and you can see several popular blogs dedicated to such beliefs and thousands of ardent believers lap up every new conspiracy theory on these sites.
If you believe growth stocks is the way to make large fortune in market based on your study of traders who have built big fortune starting from small account you will act on your belief and learn everything about growth stocks. As a result of your beliefs you will develop and trade growth stocks.
If your belief is all the people trading stocks are wasting their time and only instrument worth trading are triple ETF , you will build your entire trading around it. And you will be the one eyed king in the blind kingdom of etf believers.
If your beliefs are that only way to trade is using mechanical strategies, your entire empire will be built around that belief and you will develop your beliefs about market based on testing and backtesting.

Right beliefs lead to profitable trading

Our first starting point should be to examine our own beliefs about own trading if we want to change our trading.
The trading blogosphere is a good indicator of overall market and kind of traders you will see in the real market. Go through thousands of trading blogs and you will find common beliefs patterns and that attracts similar thinking readers.
If your trading is profitable for long period of time and it is working for you, it is likely to be because you have correct beliefs about the market you trade and the methods or indicators you use.
As against that if you observe carefully you will see the big problem for most struggling traders is that they have beliefs about market which are not necessarily based on market structure or behavior.
Or are gullible and believe anything or everything and flirt from beliefs to beliefs. They easily get influenced by others belief.

Right beliefs lead to profitable trading

How do we develop our beliefs, by education , by scientific examination or by experience.
As A child we have several beliefs that once we grow up know are not true and we replace those simplistic beliefs with more sophisticated and nuanced beliefs as a result of education, reading , life experience and so on.
One of the problem in trading is there is no established education path which will inculcate right beliefs in people.
In any other profession you undergo a 4 to 10 year education or professional training before you start practicing that profession. During that period you learn the right things to do in that profession . You acquire a thorough theoretical grounding and right kind of beliefs are inculcated in you. As a result when you practice that profession you behave in certain manner.
As against that in trading you are mostly on your own with no formal established belief system. All kinds of weird beliefs are propagated as holy grail and some slice of people believe it. If those beliefs are wrong they lead to loss.
Let us say you want to become a doctor and you believe a person's heart is in his ass or people have black blood and green blood in their body, or the brain is situated in your knees it is unlikely you would be allowed to practice medicine. You will not pass the medical exam, you will not get licence. But in trading no one will stop you from trading with all kind of such wrong beliefs.

Right beliefs lead to profitable trading

If you want to build a long term enduring edge then you must base your beliefs on science and structure of market.
Mankind made more progress in last 300 years than in any of the past millions of years once the system of scientific beliefs was established.
The scientific revolution was the emergence of modern science during the early modern period, when developments in mathematics, physics, astronomy, biology (including human anatomy) and chemistry transformed views of society and nature.
According to traditional accounts, the scientific revolution began in Europe towards the end of the Renaissance era and continued through the late 18th century, influencing the intellectual social movement known as the Enlightenment.

Right beliefs lead to profitable trading

Same kind of approach we should take to our trading. We must base our trading beliefs on empirical evidence. We must challenge wrong beliefs and replace them with correct beliefs.
In last 50 to 60 years markets have been studied using scientific methods and now we know based on overwhelming statistical evidence certain anomalies exists in the market.
We know momentum is one of the best demonstrated anomaly in the market.
We know PEAD (post earnings announcement drift) is another persistent anomaly in the market.
We know several anomalies and why they exist. If we study them we will be basing our views and trading on right beliefs.
If every study shows momentum is the biggest and the most persistent phenomenon in the market then you will base your trading on it. You will develop methods to exploit momentum.
Within that people have studied how momentum works on various time frame and as a result two kinds of methods of trading momentum have evolved. One buys in direction of momentum while the other buys on mean reversion.
Now if you believe momentum does not matter or it is wrong to trade momentum or high p/e stock are bad for investors then you are like a doctor who believes your heart is in your ass in spite of overwhelming evidence that it is in the chest.

Right beliefs lead to profitable trading

Every method we trade is based on some market study.
Stockbee Momentum burst is based on momentum
Stockbee Double Trouble method is momentum based
Stockbee Trend intensity method is momentum based
Stockbee Lemonade Strategy for 401k is momentum based
Stockbee Episodic Pivots method is based on PEAD (post earnings announcement drift)
You can go and verify it yourself. These anomalies exist and well documented and researched.
There is nothing that I trade that is based on irrational beliefs or far fetched scenarios or some manipulation theory or super secret sauce.
I would encourage all of you to follow similar approach. And if you take that approach you will thrive in this community because several people will help you test your beliefs will tell you 10 nuances about it that you may not have thought about .
Get rid of your irrational beliefs and replace them with right beliefs and money will flow.

Right beliefs lead to profitable trading

1 comment:

Allen Rodgers said...

All strategies and points are right but what actually we need is to examine our own beliefs about own trading if we want to change our trading.