Wednesday, February 3, 2010

Confidence Vs Faith

One of the most popular behavior I have observed amongst people new to forex trading is the immediate need they develop to use a sort of trading system. You will find that the Internet is filled with people looking for solutions to become profitable in forex trading by following A+B+C. Most new people to forex trading believe that there is some sort of "magic formula" used by all the "gurus" and "insiders" which they could definitely use to achieve profitable returns. Even if there are several time proven trend following techniques which are fairly simple and work in the long term, new traders fail to follow them and in the end fail to achieve profitability. The same is true for automated trading systems. But why does this problem happen ? The reason is simple, faith Vs confidence.

When I started trading, I remember that I was also looking for a holy grail, in fact, many years after I started trading, when I began this blog, I was still looking for a holy grail (this time in automated trading). I remember how I used to pick up systems like candy and then ditch them after a week if I did not like the results. I would go into endless searches in forums and websites and tested as many things as I could, anything that would put two colorful lines on a screen would be a good candidate for me to test. I also bought many of those "buy when green" "sell when red" systems which are supposed to work "flawlessly" and involve no guessing or emotions into your decisions. Boy was I wrong.

The problem is actually pretty simple. When you want a person who is totally ignorant about trading to follow a trading system to the letter you will fail because the person does not know why he/she has to follow the signals, the person does not know if they will be successful in the long term, they get filled with fear when draw downs come and they are overwhelmed with greed when profits come, etc. A person who is ignorant about trading will have a hard time trading any system and the only solution for them to trade the system while being ignorant is to have faith. The problem is that it is very difficult to have faith in a trading system and trade it like a black box. This is one of the many reasons why people fail to profit from automated and manual trading systems, even if the systems are profitable. People don't know if the system is profitable or not and they doubt the system on every turn, their faith is simply not enough to overcome these obstacles because they have the fear that they may be wrong. That is, they fear to have faith on a system which will fail them eventually.

My dear readers, faith is not the solution. It is impossible to trade something blindly, without understanding and generate profits in the long term from it. It is psychologically extremely hard to do and almost impossible if you don't have someone by your side reassuring your faith along the way (usually someone who really knows that he/she is doing, like Richard Denis pushed faith on the turtle traders). What is the solution then ? Confidence ! Confidence is different than faith because confidence does not mean that you believe the trading system will work, confidence means you know that the trading system will work and you also know what happens when it does not. Confidence is a very hard thing to achieve in trading and it is the corner stone of almost all people who are profitable with automated or manual systems. Confidence is simply the consequence of knowledge. When you understand how something works, you know what to expect from it and how to evaluate if its working. As a very wise man once said, "knowledge is power".

Building confidence is a long road because you have to get rid of trying to "believe" things will work out, you have to really dig into the systems you are going to use. What does it do? Why does it work ? Run simulations, look at 200 trades, why does the logic work ? What is the math behind this logic ? Is it sound ? All of these are questions that you HAVE to get answered through your OWN research to get you to really trust what you are trading. If you have knowledge, you have confidence and if you have confidence you will most likely succeed in either manual or automated trading. How do you know if you have confidence ? The market will test your knowledge and from those tests you will see when your confidence arises.

If you want to learn more about the confidence in automated trading and how it is extremely important for you to really know and trust the systems you use please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

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