An Idiots View On Market Psychology

[xSPACECOWBOYx]

I always hear a lot on various chat sites about the markets and the old adage is batted about that the markets are based on fear and greed. Traders beat themselves up when they get out of trade too early (fear) only to watch it run. They beat themselves up when a good runner turns into a loser because they didn’t take profit (greed) in fact it’s amazing us traders aren’t black and blue considering the amount of times we berate ourselves. The whole problem with our trading and why we aren’t in profit is because we are fearful and greedy. We then read hundreds of books on psychology and how we can control our emotions. We want to turn ourselves into lean mean fighting machines. Super robots with no emotion-we seek out mechanical trading techniques that will promise us no more emotions in trading. No longer will we be shouting at our screens-no more curled up in a ball under our desk.
But is it really our physiology that’s at fault or is the market just one crazy bitch that can’t be tamed? Don’t tell me that the thought hadn’t crossed your mind at some point. We have all gone to bed thinking that but we still wake up in the morning with renewed hope (or disillusion) and try and make sense of it all. After all we don’t want to be beaten by the markets because that would make us feel very stupid after all the work we have put in (fear) and if we get it right it could reward us massively (greed). Anyway I am digressing. What I want to know is-ARE THE MARKETS BASED ON FEAR AND GREAD. Well the way I see it is when looking at the charts is that yes and no. There are moments of fear (that whacking great red candle) and moments of greed but for most of the time in-between these periods the market is just doing its humdrum stuff, which is collecting orders and filling orders. Nothing more, nothing less. There are enough pips for everyone during these times, you don’t need those volatile moments that have you climbing the walls or jumping for joy. They are just moments, what I think we need is those times in-between when the market nicely ticks up (or down) for days on end and we can relax and think about logical places to take profit or add to positions. We don’t need to constantly question ourselves or find books to tell us what we are doing wrong or right. If you took profit too early than at least you took profit. If you let a winner turn into a loser than you are an idiot. It’s that simple…..XspacecowboyX

[CortneyWilliams]

It is human nature to look to others to determine the best course of action for ourselves. If we look outside and see people wearing shorts, we assume that the weather is warm and will switch to wearing shorts. If we see cars ahead start to change lanes, we will try to change lanes as well, in anticipation of an upcoming road block or accident.

If we see others buying stocks, then it must be a good time to buy. The same goes for when everyone else is selling.

Social proof alone however, does not create such a strong effect that we will act so contrary to our own interests. The other key force at play is scarcity.

[xSPACECOWBOYx]

I am glad you agree with me Courtney, thanks for the reply

..xspacecowboyx...

[xSPACECOWBOYx]

Winning or losing large sums of money.
All right.
To most people, making the right decision is much more important to them than actually making any money.
Being right is king in pretty much everything. But we can't always be right can we (unless your my wife of course)
We all ways here the same o' same o' "cut your losses short and let your winners ride". Easier said than done don't you think. When you entered the trade you never doubted your ability, so now the market turned against you do you suddenly close the trade or get down on your knees and pray to the heavens. You close your trade-this is the psychology of trading. Trading isn't about wishes and hopes. Its not about whether YOU were right or wrong, its about what the market is doing. Only the market is right or wrong. Hope will send you broke. On this occasion you were wrong so get out and wait. Wait for a better opportunity. Of course you have your stop there to protect you but this should be for the worst case scenario. You don't always have to wait for your stop to be hit to know you were wrong. Get out and wait. You will spend at least 50% of your time waiting in trading-waiting for the right price-waiting for your take profit-its all about waiting but you don't need to sit there for hours waiting for your stop to hit. So here comes the psychology bit. You have three incorrect (not really bad) trades in a row. Your 4th trade is good. How do you now handle this. Do you let your previous 'incorrect' trades affect this one. Sure you do. You caught that new trend and got out way too early because you need the pips after the losses. You see a runner for 200 pips +. Now you cant find a safe entry. Its over.
How can we solve this problem. Before we look at that you need to realize that this is totally natural. Humans are designed to learn from their mistakes. if we didn't then we wouldn't rule the planet. Every part of our design, every gene in our body is made so that we learn from our mistakes, after all as cavemen we only put our hand in the fire once. So, when we have been burnt by the market then of course we are using that previous bad experience to effect our next trade. We are accumulating experience and emotions to give us our fight or flight responses the next time we pull the trigger.
One of the first ways to solve this problem after a string of losses is to recognize you have a problem. You are a human being designed to learn from your mistakes. Your mistakes are telling you to take that profit as quick as you can before you get burnt. So get rid of that emotion and set a limit order. Look at the charts and let them tell you where the logical place to take profit is because at the moment you are a seething mass of emotion and cant be trusted. Use machines for what they were designed for. Let them take the emotion out of your trading. At least for awhile, at least until your confidence is back. Overconfidence is for another day and is a whole new topic.
……XspacecowboyX……

[CortneyWilliams]

Originally Posted by xSPACECOWBOYx

I am glad you agree with me Courtney, thanks for the reply

..xspacecowboyx...

got some thought here; We are accustomed to thinking about the psychology of the individual trader, but the marketplace has its own psychology that makes a significant difference in its price behavior over the short-term. The best measures of market psychology are not polls of trader sentiment, as what traders say and what they do can be quite discrepant. Rather, we want to track what traders are *actually* doing in the marketplace.....I hope it makes sense...

[xSPACECOWBOYx]

Courtney-thanks for your reply-It is nice to know that someone listens to my rambling thoughts. The individual trader dose make the market-why would you think that you are feeling any different from the guy at the bank. THE FEELINGS ARE THE SAME BUT THE GUY AT THE BANK HAS THE FORESIGHT THAT HIS TRADES CAN MOVE THE MARKET-So he sits there for awhile and sees levels being hit and try's to think like we think. He then pushes the market through our stops and sits back to see how the market will react-whether other institutions see this as a market top- or rally the market higher, so in answer to your question-YES we want to know what the market is doing at all times-and never-never think that we are behaving any differently from the markets-Its all in the charts-every blood sweat and tears... Once again thanks for your input its much appreciated.

By the way Cortney whats your method of trading , you sound very knowledgeable , i would like to hear more. Keep up the good work......

XspacecowboyX

[CortneyWilliams]

Hi XspacecowboyX,

I'm glad that you have shared your "rambling thoughts" here ..also very grateful to know that somebody has the time to contribute his *brilliant* ideas. Uhm, actually I am not a *full time* trader, I mean this isn't my priority as I have so many things to do, therefore I just do "it" when I have a spare time..., and I actually call it "my time" since I am doing the greatest thing that I want, and that is *trading*.,.I always make it sure that when I am in the "business" (which I believe you are good at..) I will definitely make the most out of it. I don't wanted to be in a "win-lose" situation. I always wanted a compromise. I want to earn and I am doing it my way, yet I am not leaving somebody behind. I will get what I want and will give what the other party wants. It’s always a "mutual" thing for me. Then that's it. A single day will do. I started and ended my day with a good deal!. and will certainly do the same thing the following days. For me, if you engage in this business you will never want to think that you alone will "benefit" the situation. You should also be an "instrument" for somebody else's success. The profit itself is a secondary thing, you need first to have a good working relationship with your "mates" and then everything follows. That's the principle that I've learned along the years... I hope I am giving you relevant information that you just needed.

I am looking forward to hearing all of your thoughts in the coming days. I am more than willing to figure things out with you. I guess this would be a good start of a "friendly" relationship...


regards,

Cortney.

[xSPACECOWBOYx]

I often trade the S&P 500 for an afternoon (2.30GMT) of simple scalping techniques. But the last few weeks the S&P plunge more than 15% and the US lost it triple-A rating. Old news i know but one of the technical indicators that is causing this down slide is something just like a tittle out of a Stephen King novel "The Death Cross". The death cross occurs when the 50-day MA crosses its 200-day MA.
Now i'm no expert when it comes to technical studies i tend to use a more fundamental approach but with this cross hanging above our heads and the markets are selling off into this, maybe its time to look for new opportunities. (Are The Bears Back In Town)
So the big question: Is this death cross more likely to be the mild one of June 2010 or the disastrous one of January 2008?
Some say this death cross hasn't been a relevant indicator for 20 years. If this is the case and the big boys are just using their algorithmic trading , the technical analysis trader is being made redundant?
I don't think so. Having traded the S&P 500 for many years now i believe you have to change with the market conditions all the time. Now like i said i have never really been one for technical indicators and based my trades on price action (supply and demand) only. Forcing myself to make a change in my trading methodology. Adding a couple of indicators to the S&P has now transformed me i hate to say. If this bear market progresses then i'm riding it all the way…An idiots View or The Death Cross.

[xSPACECOWBOYx]

Just a quick update on an idiots view of trading the S&P 500. Keeping a cool head and lots of patience pays off. http://imageshack.us/photo/my-images/830/sp500p.png/

[jen]

Originally Posted by CortneyWilliams

It is human nature to look to others to determine the best course of action for ourselves. If we look outside and see people wearing shorts, we assume that the weather is warm and will switch to wearing shorts. If we see cars ahead start to change lanes, we will try to change lanes as well, in anticipation of an upcoming road block or accident.

If we see others buying stocks, then it must be a good time to buy. The same goes for when everyone else is selling.

Social proof alone however, does not create such a strong effect that we will act so contrary to our own interests. The other key force at play is scarcity.

Well-said, Courtney. Very well-said indeed.

I would like to add that just like we think it's warm outside from scantily clad people, our training in childhood helps us make informed decisions. The same way, training and tutorials can also help make informed investments in the forex markets.