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Is There An Investing State Of Mind?

Lewis Humphries

As Hurricane Sandy wreaked havoc along the east coast of America, the U.S. stock market experienced its first weather-related closure in 27 years. The decision, which was made in unison by the New York Stock Exchange (NYSE) and other leading players within the industry, was intended to protect individual investors from the threat of plummeting trading volumes.

In addition to this, an enforced break from the market may also allow traders to gain greater perspective on their individual trading strategies, as they seek wealth and fortune within the most volatile of financial environments. More specifically, it affords them the opportunity to consider the role of psychology in trading success, and ponder whether there is a specific state of mind required for investors.

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Investment and Chaos Theory: The Importance of Having a Trading Philosophy
The influence of psychology in financial trading is a much-discussed topic, with Bill William's unique Chaos Theory one of the first to make a connection between the development of an investment philosophy and market success. He argued that the cultivation of a trading philosophy was far more important than the use of technical indicators and analytical tools, especially when it came to earning long-term returns in an increasingly unpredictable economy.

Chaos Theory suggests that there are two main aspects of any investment philosophy, each of which is crucial to a trader's overall performance. The first aspect relates to knowledge of the financial markets, including how they operate. The second aspect refers to an individual trader's own level of self-awareness and inner confidence. These two mental factors combine to create a strong investment mindset, as the ability to make bold decisions is largely dependent on a core knowledge base and in-depth understanding of a specific financial structure or environment.

The Link between Chinese Philosophy and Financial Gains
Although the theory is not without its critics, its fundamental principles share a great deal in common with some the world's most long-standing philosophies. Take the ancient Chinese practice of Zen, for example, which despite having its origins rooted firmly in the seventh century, retains considerable relevance in the modern age. Most importantly, part of its wisdom dictates that inner belief and having the courage of your convictions is crucial to the attainment of goals, and this certainly echoes the sentiment of Bill Williams' Chaos Theory.

Separate to the philosophy of Zen is the I Ching (Chinese Book of Changes), which offers far greater insight into individual leadership and the art of decision making. In particular, it discusses the need for conviction in decision-making and how an individual's strength of mindset remains the one constant amid changing external conditions and an evolving environment. This has undeniable relevance within the financial markets, as while particularly volatile platforms, such as the foreign exchange, are subject to constant price movements, successful traders are able to rely on their own knowledge, self-assurance and perception in order to succeed.

The Taoist development is another Chinese philosophy that supports the need for an investment mindset, especially in the second phase of its teachings. Within this literature, it is recognized that, "although things in this world are ever changeable and changing, the laws that govern this change are not," and this wisdom reflects one of the defining features of the financial market place.

Although the nature of each economic and financial crisis may change, for example, the subsequent reaction of the market remains largely unaltered, which in turn provides an opportunity for traders who are inwardly confident and knowledgeable to profit from bold investment moves.

SEE: Create Your Own Trading Strategies

The Bottom Line
With concerns growing about the impending fiscal cliff and a worsening eurozone crisis, the current economic climate is certainly posing a potentially debilitating threat to financial traders and investors. While this threat is tangible, however, experienced investors will point to the fact that the financial markets are consistently vulnerable to change and potentially influential global events.

This week provides a case in point for U.S. investors, with the October jobs report and election scheduled within a short space of time. However, the majority of seasoned investors will still often find a way to protect their interests and acquire profit in a volatile market. This is primarily because they have cultivated a well-defined trading philosophy over time; this mindset distinguishes them from investors who are driven by emotion or simply new to the workings of the financial markets.

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