Originally posted by darkhorse
Just for kicks I thought I would steer this thread back in a more trading oriented direction.
I am sure a lot of folks don't care about faith and don't see what faith has to do with trading.
Quite a bit methinks.
Here's some nonrandom thoughts:
Faith: the subject of faith is not normally associated with trading, but it is actually a vital and necessary element. Not faith in any one position or market call, but in the trading method itself. Simple logic demonstrates why:
1) all good methods have drawdowns (losing streaks).
2) good methods look bad when they are losing money.
3) whether a method in drawdown should be ridden out or dumped is a judgment call.
3) the decision to commit or quit usually comes at the worst time (under significant emotional duress after a string of losses).
Thus it is necessary to have faith in one's method during drawdowns- that is, to discount the pain of losses and carry forward in spite of short term negative feedback. The only alternative to persistence is abandonment. And since all good methods have periods of loss, the habit of abandoning any method as soon as it hits a drawdown ultimately leads nowhere (endless roaming or quitting entirely) as all valid methods would end up eventually being discarded this way.
Discernment: The risk of false confidence makes the simple complex. You can't just vow to be confident because your confidence might be misplaced. A lot of traders have false confidence that is actually hope in disguise or simply irrational optimism. Traders may persist in applying a bad method far beyond its reasonable expiration date, because they want the method to work so badly that they are unwilling to give up in the face of mounting evidence. Quitting too soon is bad, but persisting too long is also bad. The strength to persevere is a virtue, but the flexibility to change is also a virtue. Thus the cliches break down and there is no easy answer. This is exactly why general trading advice is useless. Anyone can spout off the logical extremes, but finding the balance amidst the outliers is the hard path we must walk, and no guru can teach that. Finding the tightrope is one thing, walking it is another. Just as good methods and bad methods have a similar appearance in drawdowns, rational confidence and irrational optimism have similarity on the surface level also. That's why ya gotta swim deep.
Knowledge: strong faith must rest on a foundation of knowledge, be it logical, intuitive, experiential or ideally all three. Without this triple foundation faith is not truly strong- it may appear so but will crack under duress. From a trading perspective it is not necessary to have deep knowledge when the method is working, BUT when the method is NOT working knowledge is vital, because knowledge lays the groundwork for the rational faith that allows the trader to carry on- or provides the impetus and spur for him to change. Real trust is only required in periods of doubt or adversity (in the trader's case, during drawdowns), and we must be in tune with reality to know which way the wind is blowing. THIS is why deep knowledge of market mechanics is such a key element- if the trader does not have intimate knowledge of his methods and why they are theoretically sound, he will have a lower faith/conviction threshold and thus be more prone to giving up at the wrong time or alternatively missing a clear impetus to change.
Results: The ultimate justification for faith of any kind is concrete results. For example I put faith in my desk chair every day, and it hasn't let me down yet. Just as putting faith in a life philosophy or world view should be rewarded with consistently deeper understanding and affirmation over time, putting faith in a trading method should ultimately be rewarded with profit in the pocket in reasonable due course of time. Sitting through six losses in a row is one thing, for example; sitting through thirty losses in a row is quite another.
Different methods will have different time frames of proving ground. Some ideas can be validated in days, others requiring weeks or months. (If you are in real estate or environmental science it could be years or decades.) But the beauty is that at no point are we existing in a vacuum. This is where the efficacy of knowledge comes back in. With sufficient knowledge, it's possible to discern between positive and negative feedback and thus to have a handle on what's going on. If there is trouble with the method, that trouble should be traceable to a source. If that source of trouble crumples up your theory or otherwise contradicts a key component of your method, you have a problem. If you cannot locate the source of trouble no matter how hard you look, you are partially blind and have a problem. BUT if you can trace the cause of your drawdown/pain to the source and determine that the source is likely not in conflict with your general thesis, then you can move forward.
Sometimes the contradiction is real and permanent (western view). Sometimes it is temporary or just in your head (eastern view). But regardless of where WE are in the big picture, we have to have faith (that word again) that reality is consistent at all times, it is just our job to get in sync with it. And this has genuine, in your face bare knuckles impact on trading and profit and loss.