Market Psychology

Trader Scott’s Market Blog

It’s disgusting to seethe clowns out there with GURUstatus who have very popular websites where they talk economics, politics, etc. And then they make the allegedly seamless transition right into their “predictions” of where markets are headed. My repugnance, however, is specifically aimed at the ones who have been wrong for years and years. It’s baffling why folks keep listening to them. They may be brilliant at economics, etc. and they’re very likely much smarter than I, but what they don’t have (apparently) is any working knowledge about how markets actually operate in the real world. They live in their fantasy world (market-wise) of academia and high IQs. Markets are markets, that’s it – nothing magical. Markets move on one thing only – supply vs. demand/liquidity flow. Why in the world do people continue to waste their precious time on all of the total crap out there in lieu of focusing like a laser beam on how to learn, understand, and totally respect these two tools? All of the other nonsense is basically noise. When a market is ready to turn – when the transfer from weak hands to strong hands at bottoms (ACCUMULATION) or the transfer from strong hands to weak hands at tops (DISTRIBUTION) is nearing an “end” – none of the big picture economic, political, etc. “noise”is going to help us one bit. When the market is ready to move, it’s going to move. Period.

Success in any tough, competitive endeavor requires a devotion to filter out noise. It’s too easy to get off track, especially when the bombs are exploding all around you – meaning, for example: market volatility (when it’s likely to actually be the lowest RISK time/price to enter the market); or shooting free throws in a visiting stadium; or facing a pitcher with a 95 MPH fastball with great movement to it. So allowing yourself to even entertain “noise” in the situations where you have to let “instinct” (experience, subconscious learning, constant practice, planning, strategy, educated anticipation) guide you, will greatly reduce the probability of success.

So is it that people don’t want to be successful, and/or don’t know how to be successful and/or don’t have the drive, passion, work ethic to be successful? And by success, I’m referring to what any individual deems that to be. But successful means relatively better, so to speak. Any level greater than average is successful – how much does it mean to you? Basically none of us will be Jimi Hendrix, Walter Payton, Ty Cobb, or Jesse Livermore. But if one wants to feel the pride of doing a “good” job, then why not spend our total focus on how to achieve those ends. The most important focus should be on a very good entry point into a market. We have ZERO control over what happens with the market once we are in. We only have control over when/where we get in and when/where we get out (profit or loss). That is it. (Actually when we really screw up, the broker has control over when we get out.) So initially all of our attention should be geared towards the great entry point.

After that then work on trade management once you’re in. How many GURUS ever mention trade management? So you see how we’re “learning” all of the wrong things about markets. Excellent trade management skills are mainly about two things – humility and greed. A good trader learns how to reverse those emotions, but only at at the appropriate time, of course. Meaning, for example, when a market has been soaring for awhile, and the crowd is greedy, it’s, at a minimum, prudent to consider taking partial profits. But how greedy is too greedy. Greed can persist for quite awhile (in market terms vis-á-vis time and price). That’s when having some understanding of the technical condition of the market can help with the timing. Myself, if I even feel a twinge of greed, combined with a great market to sell into (a strong price rally), I will put in a market order to take at least partial profits. It’s amazing how many times in this type of situation we can have our market sell orders filled above where the market was when we initially entered the order. It is a big confidence builder. And remember it for the next similar situation. But just be aware, since the “market” loves to confuse us – these situations never repeat exactly.

An example of massive, blatant greed is the bubble in silver in April 2011. The chart of silver (SLV) is shown below. And to all of the silver permabulls,right there was actually that exact situation of total greed, and an incredibly magnificent market to sellinto right in front of their noses. Yet many folks back then deemed it to be a great buying opportunity.

So ,the point is we need to rein in our emotions ALWAYS when dealing with markets. Don’t get euphoric during the good times and also keep your wits about you during the losing times that we all experience.

And lastly, a great book that delves into these topics is “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay.