The Importance of Cultivating a Strong Trading Theory

canstockphoto12385283A successful financial trader is often a thoughtful one, or more specifically an individual who has an in-depth knowledge of the financial market. While technology may have removed many of the existing barriers to entry for aspiring traders, the volatility of the markets should never underestimated in an age where multiple orders can be executed within a matter of seconds.

Despite this, however, there are a number of traders who have failed to respect the perils of the financial market. These individuals have usually entered the market with little more than a few hundred dollars and a sophisticated example of trading software, without realising that it is strategy and philosophy that deliver sustainable financial reward.

Creating Your Ideal Trading Mindset and Strategy: Things to Bear in Mind

The fist thing to develop as a financial trader is a detailed knowledge of the market. This not only relates to the individual market in which you choose to invest your money, however, but also concerns the history of trading and the fundamental principles that govern change. Cultivating such a wide and diverse knowledge base requires time and patience, but it is wisdom that ultimately delivers rewards. It is through acquiring this information that you will understand the finer workings of the financial market, and develop a sense of self-awareness with regards to your own specific trading style.

Before you establish a technical strategy to help manage your portfolio, however, you will need to understand the importance that philosophy and mindset plays in trading. As anyone who has ever digested Bill Williams’ Chaos Theory will testify, the link between psychology and investment is extremely tangible. This theory is based on the principle that technical indicators are not enough by themselves to help traders succeed as they do not offer insight into the ‘real market’. Similarly, they do not account for human emotion or thought processes, which are integral parts of every trading decision.

This theory is founded on an individual traders knowledge, both of the financial market and themselves. Firstly, a trader must utilize their acquired knowledge to discover hidden determinism in apparently random and unpredictable market events. Secondly to this, they must also have the  faith in their abilities to execute orders based on their understanding and perception. Both of these psychological features must work in harmony with one another, as otherwise a trader will never be able to make substantial gains on their initial investment.

Chinese Philosophy and How it Sits with Financial Trading

While Bill Williams’ Chaos Theory is not universally accepted, however, it does have some support in several ancient Chinese philosophies. Take the practice of Zen, for example, which emphasises the same principles of wisdom and inner confidence that are so crucial for financial traders. Essentially, Zen culture teaches individuals not to fight against the natural order or laws that govern the world, and  instead adopt a mindset that works with them. When you consider this from a trading perspective, then it is clear that investors must strive to understand and pre-empt market price movements rather than react to events as they occur.

Taoist literature also supports the notion of Chaos Theory and determinism, as it epitomises the belief that while change can take many different forms the rules that govern it remain unaltered. This has genuine connotations in the financial markets, as while each economic crisis varies from its predecessor, the way in which they influence trading, value and individual price movements remains the same. The task of the independent trader is therefore to use their market knowledge and perception to capitalise on these fundamental rules of change, while having the inner confidence to ignore what may be perceived as common knowledge among investors.

By adopting this type of philosophy, it is far easier to develop a trading strategy that can deliver profitability through the financial markets. For those heavily influenced by the Taoist theory, for example, there is an advantage to be gained by making bold and outwardly risky trades, as although they might seem unwise to fellow investors you are able to rely on your inner belief and hard earned knowledge. Those who practice the art of Zen are likely to be slightly more risk averse, although they too will resist the urge to panic or dramatically alter their course in the face of market setbacks.

How to Help Cultivate the Ideal Trading Mindset

With these points in mind, the first challenge facing financial traders in 2012 is to develop their knowledge of the market and its workings. Online brokerage firms offer an ideal opportunity for investors to acquire a broad scope of information, with literature concerning trading strategies and market theories on This data can then be digested to shape unique and individual investment strategies, which have the potential to deliver outstanding rewards over time.

The most important thing to remember, however, is the importance that psychology plays in modern financial trading. An aspiring or novice trader cannot rely on advanced technology alone, as even the most evolved trading platforms are only ever as effective as the individuals who use them. It is the responsibility of an investor to approach the market in a prepared manner, and ensure that they have the necessary knowledge to survive in a real time, volatile and often austere financial environment.

Wealth Creation and Saving Strategies | OnMoneyMaking