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The Human Element

When discussing trading, typically the conversation revolves around forecasting the future direction of the market, current news events that may change perception, or the latest indicator that’s ready to throw off a  sell signal, usually after a steep drop has already occurred. In addition, much time is spent debating the fundamentals. Factors such as earnings, GDP growth, and the jobs numbers are looked at closely and then deciphered in an effort to figure out the  market’s next  move.  In the case of commodity futures, inventory numbers, and crop reports, along with weather forecasts, are used to extrapolate future projections.

By now — at least that’s my assumption— most of you have figured out that this way of looking at the markets pays analysts on Wall St. very well,  but rarely materializes into actual trading profits.  This may sound very cynical, but the reality is that all this analysis is done by design to lull investors into traps. How so? You might be asking.  Institutions need liquidity in order to buy or sell large quantities of stock or futures contracts.  That is, when big banks have to unload, or buy sizeable positions, they have to find the counterparty to those transactions.  What better way to do that than by using the emotions of fear and greed that are common to those following the advice of Wall Street and associated media outlets such as CNBC, The Wall St. Journal and the like.

The human element is something that can never be discounted in financial markets.  Knowing how human beings react to losing money, and sometimes making profits —yes, if there were never any profits, nobody would trade—is critical if one is to make money trading.

The markets are littered with mutual funds, hedge funds, and money managers that have gone by the wayside because of their dismissal of human emotions.  In 1994 a group of former Wall St. Bond traders joined forces with a couple of Nobel- winning mathematicians to form Long -Term Capital Management.  The pedigree and credentials of these individuals, along with their computerized algorithms attracted huge sums of money.   Their mathematical models worked well for some years, until panic hit the markets in 1998 when the Russians defaulted on their debt.  They had to be bailed out – for fear that their losses could impact the US financial system in a dramatically negative fashion.   These brilliant men knew math, however they underestimated the power of human emotion, which sometimes is very difficult to quantify.

Here at Online Trading Academy we incorporate human emotion as part out of strategy.  This topic is often neglected, but should be understood.  The reasoning is quite simple.  Since trading is extremely competitive, we should first understand who we’re trading against. That way we can exploit the weakness of those that lose often, and align ourselves with the winning team. This is the harsh reality of trading, as is the case with any competitive endeavor.

The human element also has to do with control over our impulsive behavior.   A great strategy is rendered useless if the operator is incapable of having the patience to wait for the best opportunities. Suppressing  the many fears that plague traders can be very challenging. So much so, that some traders eventually wash out because they’re never able to overcome them.

In putting together a trading plan, make sure you always take into account the human element, both internally (you) and externally (market participants) because they’re equally as important.   The psychological component of trading is often the most overlooked, and undoubtedly is the most critical to long-term success.

So until next time, I hope everyone has a great week.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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