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The Power of Beliefs and How They Shape Your Forex Trading Psychology

Education - AxiTrader Team | 29 Apr 2014

The views outlined by the author in this blog post are their own and do not reflect the views of AxiTrader. Forex trading is risky and is not suited to everybody. Note: While the views of the author in this post are his own, they borrow heavily from the work of Van K. Tharp.

“You can only predict the markets over the short-term”

“You can only predict the markets over the long-term”

“Forex trading is difficult”

“Forex trading is easy”

“Technical analysis works”

“The stochastics are overbought so the market is likely to go up”

“There is resistance at 0.92080”

“Trading Forex is risky”

 

What do all of these statements have in common?

They are all beliefs about the market and they all shape the Forex trading psychology of the person who has the belief.

And beliefs can be painful.

Some of our beliefs are formed out of traumatic experiences – or at least that’s often the case with the ones we find most difficult to change.These beliefs are not necessarily bad. They serve/served a purpose at one point in our lives, but they may not be that useful for our trading.

 

Trading is All Beliefs.

Trading is an unlimited environment.

You have no teacher, parent or boss who controls what you do.

You have the freedom of choice to trade however you like.

So if you are free and unencumbered, what is it that influences your trading decisions?

It is your beliefs.

You may think it’s a piece of news or the price action on a chart, but it’s not. It’s your belief about what the news or the chart means that is causing you to take action.

From the point of decision, without fail you can trace a path back to a belief (or typically a series of beliefs) that caused you to make that decision.

For example:

Why is it your choice to trade a specific currency pair? Or;

What causes you to use that particular set-up?

There is a belief somewhere along the line that is guiding your hand. Awareness of this belief is a powerful thing. Awareness is the first catalyst of change.

What are your beliefs about the markets?

Take out a pen and paper and see if you can list 10.

Here are some of mine to get you started.

  • I must not trade without a trading plan
  • Forex is no more or less risky than trading any other market – it depends on my position size
  • I need to have a different trading strategy for each market type.
  • I must know my risk/reward ratio before I place a trade and it must be at least 3:1
  • Trading is all about beliefs (that’s a belief J)
  • Support and resistance levels can help you predict the market
  • Professional traders record their trades diligently and amateurs don’t.

And there are many more.

Can you see how having these beliefs shapes my trading? Can you see how the 10 beliefs you wrote down do the same for your trading?

 

The Origin of Beliefs

“I would never die for my beliefs because I might be wrong” – Bertrand Russell

I mentioned earlier that beliefs with charge are often formed during times of pain.

That may be true, but there are many sources for beliefs.

At the most basic level, beliefs are evolutionary. They are programmed into us as part of the fight and flight response that has evolved over thousands of years. These beliefs are part of our DNA.

Some beliefs are a product of our environment. Would you have different beliefs if you grew up in a rainforest compared to growing up in London or New York? Or would you have the same beliefs about food if you grew up hungry compared to growing up well-fed?

Other beliefs are indoctrinated in us. To a certain degree, all of us (except perhaps the truly enlightened) accept common-held “wisdom”. Our subconscious absorbs much information that is never questioned, and some of our most influential beliefs are never challenged. Think about fluoride in toothpaste for example. Is it good? Is it bad? Where did that belief come from?

There are other beliefs too, such as spiritual beliefs formed out of your relationship with God, or identity beliefs such as “I am a technical analyst”.

 

Is the Belief Useful?

“We trade our beliefs about the market” – Van K. Tharp

There are as many different approaches to the market as there are traders.

That is because there are as many different beliefs about the markets as there are traders.

It’s like we are wearing blinkers of our own design. We see what we want to see.

The good news is we get to choose the blinkers. We have the choice to wear only the beliefs about the market that serve us. We can decide if the belief is useful to our trading or not.

We don’t even have to believe the belief.

If it serves us to think that if two moving averages cross then it is a good time to buy, then we can wear that belief. Even if deep down we know that two moving averages crossing has little or no influence on the market itself.

 

The Beliefs of Top Traders

“Strong beliefs win strong men, and make them stronger” – Richard Bach

If you can choose to take on and take off the beliefs, why not wear the ones that are the most productive for your trading?

During my years of trading, study and interaction with successful traders, I have noticed that most of them tend to hold a number of similar beliefs:

  • They take personal responsibility for their trading
  • They have developed a highly organised mental model of the market
  • They recognise that their mental model could be wrong and often is
  • They understand that position sizing is the key to achieving their trading objectives
  • They are often wrong more than they are right, but they still make money
  • They see trading as a business, not a hobby, and plan rigorously
  • They recognise that losses are a part of doing business and are willing to take them
  • They believe in the importance of recording their results
  • They believe that they can win…and that the key to winning in the markets is themselves
  • They are comfortable with taking calculated risks
  • They understand risk and reward ratios
  • They believe in simple entries with complex exit strategies
  • They believe their trading system has an edge over the market and this makes them confident
  • They believe in gratitude and being thankful.

How do these beliefs compare to your own? How many of these beliefs would you like to have as your own?

 

Reorganising your Beliefs

Have you ever noticed that you can hold conflicting beliefs at the same time?

This may be because as Van K. Tharp suggests, we are all a “mix of conflicting parts” inside.

For example, you could have a:

  • Trader part
  • Husband part
  • Mother part
  • Rebellious part
  • Gambler part
  • Child part
  • Fun part.

And so on. You get the picture. Each of these parts holds different beliefs that can impact your Forex trading. For example, the fun part might want you to place a trade out of boredom, while the trader part knows you should wait for a clear opportunity.

 

The process of re-organising a belief can be quite simple.

Firstly, recognise that you would like to have that belief. Secondly, take action. For example if you decide that you believe position sizing is now an important part of your trading (if it was not previously), then you can read about position sizing and make sure that you place your next trade according to your new position-sizing model.

 

If you have no negative charge about taking that belief on and continue to take action, then you will have a newly integrated belief.

However, if you have an emotional charge around this new belief, or you have an interfering part (such as the gambler part, making you want to trade bigger than you should), then taking on this new belief may be more difficult.

If this is the case you might need a technique to help you. Van K. Tharp in his book Trading Beyond the Matrix suggests a couple of different methods that you could try, which I will paraphrase below.

 

Feelings Release

The feelings release process involves turning the traditional way we react to negative thoughts on its head. Instead of resisting a belief, you feel it fully. This serves to dissipate the belief and after a point it tends to fizzle out.

 

Parts Integration

Parts integration involves negotiating between different parts of yourself. One part mediates while another two parts discuss with each other and come to a mutually beneficial arrangement. For example, you decide that you will go surfing on the weekend to satisfy the fun part, while the fun part agrees to stand aside while you are trading.

This may sound a little off the beaten track, but when I first did this under Van K. Tharp it had a powerful transformational effect on my trading.

It’s much better to be an integrated trader.

(If you are feeling resistance to these ideas, perhaps you have some emotionally charged belief you are holding onto? Just sayin’)

For further information on these processes I recommend you read Trading Beyond the Matrix.

 

Creating a “Beliefs” Self-Improvement Routine

To be the best trader you can be requires constant work.

Top athletes work as much on the mental side of their performance as the physical.

Top traders are the same.

They work as much (if not more) on the psychological side of Forex trading as they do on their techniques.

As beliefs are such a critical part of Forex trading psychology, you could consider adding a self-improvement routine to your trading plan.

This could involve:

  • Listing your beliefs about Forex trading
  • Listing your beliefs about your Forex trading system
  • Regular feelings release
  • Regular parts integration
  • Focusing on what you want to attract
  • Using the routines in one of Paul McKenna’s books such as I Will Make You Confident to removed negatively charged beliefs around self-worth
  • Practicing gratitude by following the 28 steps in The Magic by Rhonda Byrne (highly recommended for traders).

With a routine in place that helps you to develop powerful beliefs that serve you, you are in a strong position to get what you want from your Forex trading.

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