Psychology

From Traderpedia

Revision as of 11:39, 28 June 2005 by EK1 (Talk | contribs)

The concept of Psychology in the markets can be broken in 2 broad ideas - Trader Psychology and Market Psychology (or Sentiment).

Trader Psychology

There is an oft quoted statistic that 80 percent of traders fail. They lose money – they either retire or go broke. It is not that they make a lot of mistakes. It's all in the mind.

Successful traders always acknowledge the importance of psychology in their trading. Traders must be disciplined and remain emotionally detached from the markets.

Trading requires management of the emotional states. Emotional imbalance impairs the ability to make congruent decisions. The most optimal state is one of complete emotional detachment, to remain calm and to act in accordance with your strategy. That includes negative as much as positive emotions - the key word is to stay "cool".

Your psychological mind set may play a larger role in your trading career than your chosen technique or any other details associated with your day-to-day practice. Indeed, discipline is just one attribute of trading psychology, but it just so happens to be the most important psychological factor that affects a trader's success.

It doesn't matter whether you trade stocks, indices, commodities, futures or any tradeable instrument, the most importnat part of the trading game is your own mind.

Market Psychology

The feeling or tone of a market (i.e. crowd psychology) is shown by the activity and price movement of the securities. For example, rising prices would indicate a bullish market sentiment. A bearish market sentiment would be indicated by falling prices.

Charles Mackay's famous book, "Extraordinary Popular Delusions and the Madness of Crowds", is perhaps the most often cited in discussions of market phenomena, from the tulip mania in 17th-century Holland to most every bubble since. The story is a familiar one: an enduring bull market in some commodity, currency or equity leads the general public to believe the trend cannot end.

The key to such widespread phenomena lies in the nature of the crowd: the way in which a collection of usually calm, rational individuals can be overwhelmed by such emotion when it appears their peers are behaving in a certain universal manner. Those who study human behavior have repeatedly found that the fear of missing an opportunity for profits is a more enduring motivator than the fear of losing one's life savings. At its fundamental level, this fear of being left out or failing when your friends, relatives and neighbors seem to be making a killing, drives the overwhelming power of the crowd.



Related T2W Resources