Moves in markets are a result of mass psychology. The stock markets have been on about a 6 year rally. We called the March 2009 bottom in our XLT program and have only had long positions in our ProActive Investor XLT program for years. Yet, the average person out there is not participating in this uptrend at the level they would desire. Why not? We make money in the markets by being masters of human psychology and supply and demand. It is well known that trading is 90% mental. Winning in the markets is more defined by your mental make-up than your trading style. What is more important than chart reading is to first understand how people think. Instead of focusing on changing our actions if you’re having issues with trading and investing, it’s time to notice where those actions come from. Moving backward, one step at a time, actions stem from behavioral patterns, and behavioral patterns stem from beliefs. So, it’s at the level of beliefs (thoughts) that decisions are made, and moreover, where your ability to differentiate reality from illusion lie. It’s time to start considering where your beliefs about what works and what doesn’t in trading and investing come from. In life which includes trading and investing, most of us tend to repeat the same processes over and over, expecting a different result. Over my many years trading, there are some very clear differences between the consistently profitable trader and the consistent losing trader.
The Novice Trade
- They tend to follow the herd.
- Watch and do what others are doing
- Comfort in numbers
- They avoid taking risk unless others are sharing the risk as well.
- They feel that if others are buying then it is “ok” for them to buy too.
- They act on the advice of so called “experts,” i.e. the advice of market gurus, analysts, and their brokers.
- As humans, they tend to complicate the trading process and ignore the important simplicity of markets.
- They always make the same two mistakes, they buy and sell after a move in price is well underway (late and high risk) and they buy into supply (retail prices) and sell into demand (wholesale prices). This is the opposite of how you make money buying and selling anything.
The Consistently Profitable Trader
- They lead the herd.
- They tune out all the subjective noise that can get in the way of making proper trading decisions. They don’t care what others are doing and make decisions based on a very mechanical and unemotional set of criteria based solely on the laws and principles of supply and demand.
- They learn to identify the proper entry that most people never see.
- They buy after a period of selling and into demand (wholesale prices).
- They sell after a period of buying and into supply (retail prices).
- They buy fear and sell greed
- Successful traders:
- Can identify opportunity before others.
- Execute trading and investing plans mechanically.
- Having the ability to spot ill-informed individuals in any market and any time frame.
- These ill-informed individuals buy at price levels that are too high. You know by objectively assessing real supply and demand.
- Having the tools, knowledge, and ability to take the proper action when this ill-informed market player appears.
- Play the bandwagon correctly…
- Proper trading is knowing how other market participants think and react when they are correct and, more importantly, when they are wrong. Price patterns are thought patterns.
How to get these…
- Reduce and eliminate subjective analysis.
- Learn to fight the urge to do what others are doing and make decisions based on a very mechanical and unemotional set of rules and criteria.
The Proper Entry
Know Where to Enter, Demand and Supply
- Smart money enters here.
Trade with the trend
- The odds are on your side.
Entry Must Be Low Risk
- Most important part of the trade.
Enter Before The Masses
- This is how we get paid.
Lets look at a trading opportunity that was given to our students using one of our trade picking services. This trading opportunity was given in the Daily Market Overview which comes out well before the market opens, five days a week. We identified where banks were buying and selling using our core supply and demand strategy. Notice, when there was fear, people were selling, and price declined rapidly, the proper decision was to buy at our demand zone. Conversely, when there was a price breakout to the upside and most people started buying, the proper decision was to sell as price was right into our supply zone. Throughout history, the masses are on the wrong side of the market and this can be attributed more than anything else to a faulty belief system.
One of the most important things to understand about proper trading and investing is that conventional visible confirmation and opportunity are completely inversely related in trading. Those who know get paid from those who don’t, that’s how markets work.
Hope this was helpful, have a great day.
Sam Seiden – firstname.lastname@example.org