Link: Belief

Dr. Bruce Hong at Trader Psychology recently detailed to us four levels of belief in his post “Belief“.

Beliefs follow the following four-step progression:

1. Opinions

2. Belief

3. Conviction

4. Core Conviction

Not only do these principles apply in the market, but in various interpersonal communication, including miscommunication as a result of a failure to perceive the deepness of the other individual’s beliefs on a particular issue.

Dr. Hong asks traders: “What level of belief are you operating in when you enter a trade?”

If you approach a trade with core conviction, can you be open to other possibilities (like a major loss)? If not, you will be unlikely to take appropriate action should the trade turn against you.

However, if you have a casual opinion on a trade, you will lack the conviction to stay with it and hold through inevitable market ‘noise’ and volatility. A trade-off is optimal.

The idea is similar to principles discussed by Mark Douglas in the classic work The Disciplined Trader, a work which many people recommend all traders read and study intensely. There is so much to be said on this point, but the entire book weaves the theme throughout the discussion.

The main thesis is that you alone are responsible for your trading results and how you approach the market, and you do so through your beliefs (and experiences which solidify beliefs) about the market. Each trader is unique in this sense because of the level of beliefs, experiences, and conviction he or she brings to the market and how they approach trade entry/selection, management, and exit. The market cannot force you to do any of those things – you alone are responsible.

Dr. Hong concludes his article with the following quote:

“…[I]s the market amenable to trading within the framework of a belief structure? Or should you approach each trade from the level of Opinion; one that is free to be modified if conditions change?”

Read the whole article for more insights and develop your own answer to his question.

(image courtesy www.tnpsc.com)