THE TRADER
Nothing matches the
opportunities, excitement, joy, fear, and defeats, associated with
trading. To become successful in this
market, merely sound knowledge about the market does not suffice. It requires
out of the box psychological traits to emerge out as a winner. If you go by the
rumors and follow what others are doing, chances are there that you may lose
out in the end. Correctly gauging the
market psychology will result in success. The more our minds model the market,
the more in synch we get. If what you are doing is not working, re-evaluate
your strategies and increase the level of our awareness rather than the
intensity of trading. Our
internal process dictates the action. The markets are messy,
our information is imperfect, our systems will fail and we can still make money.
Seek the practice rather than the result. There is no failure, just feedback.
The
greatest fault of traders is being bullish at high prices and bearish at low
prices. Fear, greed, hope and despair continue to be key elements in
everything that we do including stock market trading. Overtrading causes anxiety, and following the
market beyond a reasonable climax is unprofitable. Try to catch the trend of a sentiment even if
against the fundamentals. Keep the mind
clear and balanced so as to avoid acting hastily on sensational information,
acting solely on your own judgment and common sense rather than emotions. The best approach would to be
unbiased to all the stocks.
Social proof is human nature to look to others
to determine the best course of action for ourselves. If we see others getting rich by buying
stocks, then it must be a good time to buy. Likewise, the same goes for when
everyone else is selling.
Competition is the
cornerstone of the stock market. Scarcity is a natural tendency to want
things in limited supply; we rush in and buy stocks at $5 because we are afraid
that in a short time they will only be available for $7, $10, or much more. We
must buy it now, because this price
may not be available for much longer. We
appreciate something most after losing it.
That’s why when there is a large drop in the stock market and we have
lost a lot of money, we are timid about buying more. Once we have lost, we want
to hold on to what we have for fear of losing more. This influences us to buy
when prices are high and sell when prices are low.
When you are engulfed
by the powerful forces of scarcity, you can fall back on your strategy. Before
making a stock trade, simply ask yourself this - Does this trade fit into my
long-term stock trading strategy and have I heard the best arguments against
it?
THE MARKET
A stock chart is nothing more than a
graph of human emotions in the market place; printed on price and time axis are
the emotions of greed, fear, hope, and euphoria. As a disciplined trader, you
capitalize on the psychological demons that plague other traders.
- Should I buy?
- Should I sell?
- Should I take profits?
- Should I take a loss?
These are some of the questions that
empty trading accounts because the novice traders asking these questions do not
have a plan. So what ends up happening?
They get excited and buy at the worst possible time. Then the stock
reverses. Fear creeps in and then the stock goes lower... and lower... and
lower. Finally the pain becomes too much to bear so they sell taking a huge
loss.
Likewise, when a stock does go in the
desired direction: Excitement! Euphoria!
I'm making money! "I had better sell to lock in these profits since I have
had several losing trades in a row." The trader then ends up selling too
soon!
"Keep your losses small and let
your winners run.” The un-disciplined
trader has just done the opposite! They have let their losses get big and they
have limited their winners!
This mental anguish can be eliminated
by having a trading strategy and the mental discipline to stick with it. Write
down a plan for the trade before you trade the stock. Then trade it according
to the plan that you have written. Remember that you have devised a plan before
you got into the trade when your emotions were stable. Now you can trade your
plan with confidence.
Learning to trade stocks and applying
technical analysis to charts is mostly about human psychology - not chart
patterns and candlestick patterns themselves. You must understand the
psychology behind these patterns.
Here is a breakdown of what happens:
Breakout Traders - These traders bought the breakout.
They operate under the "greater fool theory". They are just praying
that other traders come along and buy higher than they did.
Novice Traders - These traders just have no idea what
they are doing. They are buying shares of stock that the breakout traders are
now selling to them.
Momentum Traders - These traders are buying the
pullback and tend to buy near the 10 MA. They are likely going to put their
stop below the low of the hammer.
Swing Traders - This is where we come in. The stock
falls below that hammer and the momentum traders get stopped out. By now most
of the novice traders and momentum traders have sold. See how the volume has
tapered off? Previous resistance now becomes support.
Novice Traders - Once again, the novice traders are
buying at the worst possible time. We need these traders so that we can sell
our shares to them and make a profit.
