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Last week we talked about the overall importance of beliefs.
I told you about the systematic application of winning beliefs by professional traders in The Wall Street Journal's pros versus dartboard competition.
You'll recall that through 100 contests, the pros' average win was a striking 140% higher than those stocks picked at random, striking a blow against the old academic tenet that markets are random.
I want to give you a guided tour of the beliefs that form the foundation for The 10-Minute Millionaire's systematic approach to trading.
So today, I'm going to show you the individual steps that form the foundation of how we believe the markets work. Think of it as our "beliefs roadmap."
Let's get started…
The 10-Minute Millionaire Beliefs Roadmap
1. Markets are auctions. This a useful first step to our belief system. That's because in the financial markets, just like in auctions, buyers and sellers arrive at a fair price most of the time. But then there are times where emotions run high and people get crazy.
2. Auction markets usually find fair prices, but frequently prices get driven to extremes. During these emotional flights of fancy, people can get into bidding wars and drive the price of an item much higher than what would be considered "normal" or "fair." Likewise, thanks to poor or inaccurate information, a valuable item can receive little interest at an auction, and its price can end up far below what is considered its "true value."
The same thing happens in financial markets – over and over again. Take the case of Shake Shack Inc. (NYSE: SHAK), whose stock soared when expectations and hope were high and traders bid the price up beyond what was reasonable:
We also see the price collapse when reality kicks in. Traders call this kind of move "up one side of the Eiffel Tower and down the other."
3. Extremes happen in all time frames. The Shake Shack example above shows us an extreme that played out over about a year. I call long-term trends that change direction like this "Extreme Turnarounds."
There are other extremes that happen in shorter time frames.
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.