Bestselling Guide For Mastering Successful Trading, Dr. Alexander Elder "Trading For A Living"
This. Is audible. Wiley. Audio is pleased to present and. Trading, for a little. Psychology. Trading. Tactics, money, management, written. By dr. Alexander, elder, director. Financial. Trading seminars, incorporated. Read. By Richard Davidson. Introduction. Trading. The, last frontier. You. Can be free you. Can live and work anywhere. In the world you. Can be independent, from routine and not answer to anybody. This. Is the life of a successful trader. Many. Aspire, to this but few succeed, an, amateur. Looks at a quote screen and sees millions, of dollars sparkle, in front of his face he. Reaches for the money and loses. He. Reaches again and. Loses. More. Traders. Lose because the game is hard or, out of ignorance or lack of discipline, if, any. Of these ail you to. I wrote this book for you in. The summer of, 1976. I drove from New York to California I, threw. A few books on psychiatry, I was a first-year psychiatric, resident, several. Histories, and a, paperback, copy of, Engels, how, to buy stocks into, the trunk of my old Dodge. Little. Did I know that a dog-eared. Paperback, world, from a lawyer friend would, in due time change. The course of my life, that. Friend, incidentally. Had, a perfect, reverse, golden, touch any. Investment. He touched went, underwater but. That's another story I. Go. Down the angle book in campgrounds. Across America, finishing. It on a Pacific Beach in La Jolla I had. Known nothing, about, the stock market and the, idea of making money by thinking, gripped, me I, had. Grown up in the Soviet Union in the days when it was in the words of a former US president, an evil. Empire. I hated. The Soviet system and wanted, to get out but, immigration was, forbidden, I, entered. College at 16, graduated. Medical school at 22, completed. My residency and then, took a job as a ship's, doctor, now. I could break free I. Jumped. The Soviet, ship in Abidjan. Ivory, Coast. I ran. To the US Embassy through the clogged dusty, streets, of an African port city chased, by my ex crewmates, the. Bureaucrats, at the Embassy fumbled, and almost, handed me back to the Soviets I resisted. And they, put me in a safehouse and then, on a plane to New York I landed. At Kennedy Airport in, February. 1974. Arriving. From Africa was, summer clothes on my back and 25, dollars in my pocket I spoke. Some English but. Did not know a soul, in this country, I, had. No idea what, stocks, bonds, futures. Or options were. And sometimes. Got a queasy feeling just from looking at the American, dollar bills in my wallet in the. Old country a handful, of them could buy you three years in Siberia. Reading. How to buy stocks opened. A whole new world for me returning. To New York I bought, my first stock, it was kinder care ever. Since then I have, avidly, studied, the markets and invested. In traded, stocks options and now, mostly, futures. My. Professional, career proceeded. On a separate, track I. Completed. A residency in, psychiatry. At, a major University, Hospital studied. At the New York, psychoanalytic. Institute and, served. As book editor for the largest psychiatric newspaper. In the United States, these. Days I am, busy trading and go to my psychiatric office, across the street from Carnegie, Hall only. A few afternoons, a week after. The markets closed I loved, practicing, psychiatry, but I spend most of my time in, the markets. Learning. To trade has, been a long journey with soaring. Highs and, aching, lows, in, moving forward or in, circles, I repeatedly. Knocked my face against the wall and ran, my trading account into, the ground each. Time, I returned, to a hospital, job put a snake together red thought.
Did, More testing, and then. Started, trading again. My. Trading slowly, improved, but. The breakthrough, came when I realized, that the key to winning was inside, my head and not, inside. A computer. Psychiatry. Gave me the insight, into trading that, I will share with you. Psychology. Is the key. You. May base your trades on fundamental. Or technical, analysis, you. May trade because, of hunches, about economic. Or political trends. Use, inside. Information or. Simply, hope. Remember. How you felt the last time you placed an order were. You anxious to jump in or afraid of losing did, you procrastinate. Before picking up the phone, when. You closed out a trade did, you feel elated or humiliated. The. Feelings, of thousands. Of traders, merge, into huge, psychological, tides. That move the markets. The. Majority, of traders spend, most of their time looking for good trades once. They enter a trade they lose control and, either squirm, from pain or grin, from pleasure, they. Ride an emotional, rollercoaster and miss the essential, element, of winning the, management, of their emotions, their. Inability, to manage themselves leads. To poor money management of. Their accounts. If. Your mind is not in gear with the markets, or if, you ignore, changes, in math psychology, of crowds then. You have no chance of making money trading all. Winning. Professionals. Know the enormous, importance, of psychology. And trading, all, losing. Amateurs, ignore. It. Friends. And clients who know that I am a psychiatrist, often. Ask me whether this helps me as a trader, good. Psychiatry. And good trading have one important, principle in common. Both focus, on reality on, seeing the world the, way it is to. Live a healthy life you have to live with your eyes open to be a good trader you, need to trade with, your eyes open, recognize, real, trends, and turns and not, waste, time or energy on regrets, and wishful, thinking. Why. Do most traders lose, and, wash out of the markets. Emotional. And thoughtless, trading are two reasons but there is another, markets. Are actually set, up so that most traders must. Lose. Money. The. Trading industry kills, traders, with commissions, and slippage. Most. Amateurs, cannot, believe this just as medieval peasants, could not believe that tiny, invisible germs, could kill them if. You, ignore, slippage. And deal, with a broker who charges high commissions, you are acting, like a peasant, who drinks from a communal, pool during, a cholera epidemic. You. Pay commissions, for, entering, and exiting, trades. Slippage. Is the difference between the price at which you place your order and the price at which it gets filled. When. You place a limit, order it. Is filled at your price or not at all when. You feel eager to enter or exit the market and give a market order it, is often filled at a worse price, than prevailed, when you placed it. The. Trading, industry keeps draining, huge, amounts of money from the markets. Exchanges. Regulators. Brokers. And advisers. Live off the markets while generations. Of traders keep washing, out. Markets. Need a fresh supply of losers, just as builders, of the ancient pyramids. Of Egypt needed a fresh supply of slaves. Losers. Bring money into the markets, which is necessary, for the prosperity, of the trading industry. Brokers. Exchanges. And advisors, run marketing, campaigns, to attract more losers, to the markets some.
Mentioned, That Futures Trading is, a zero-sum, game, they. Count on the fact that most people feel smarter, than average and expect. To win in a zero-sum, game. Winners. In a zero-sum, game make, as much as losers lose, if. You, and I bet. $10. On the direction of the next 100. Point move in the Dow one. Of us will collect $10, and the other will lose $10. The. Person who is smarter, should, win this game over a period of time people. Buy, the trading, industry's propaganda. About the zero-sum, game take, the bait and open. Trading accounts, they, do not realize that trading, is a minus, sum, game. Winners. Receive, less than what losers lose because, the industry drains, money, from the market, for. Example, roulette. In a casino is a minus, sum game because, the casino sweeps away 3%. To 6% of, all bets, this. Makes roulette, unwinnable. In the long run. You. And I can get into a - sum game if we make the same $10, bet on the next 100. Point move in the Dow but. Deal through brokers, when. We settle the, loser is out 13, dollars, and the winner collects, only $7. While, two brokers smile, all the way to the bank. Commissions. And slippage, are two traders, what, death and taxes, are to all of us they. Take some fun out of life and ultimately bring it to an end a, trader. Must support his broker and the machinery, of exchanges, before he collects a dime. Being. Simply, better. Than average is, not. Good, enough you, have to be head and shoulders above the crowd to win a -, sum game. You. Can expect, to pay a round-trip, commission, of anywhere from $12. To $100. For every futures. Contract, to trade. Big. Traders who deal with discount. Houses, pay less, small. Traders who deal with full, service brokers, pay more. Amateurs. Ignore, Commission's, while dreaming, of fat profits, brokers. Argue, that Commission's are tiny, relative. To the value of underlying, contra. To. Understand, the role of commissions, you need to compare, them to your margin, not. To the value of the contract, for. Example, you, may pay 30 dollars to trade a single contract, of corn. 5,000. Bushels worth, approximately. $10,000. A, broker. Will say that, the $30 Commission, is less than 1% of contract, value, in, reality. You, have to deposit, about, $600. To trade a contract, of corn a, $30.00. Commission, represents. 5%, of. Margin. This. Means you have to make 5%. On the capital committed, to the trade simply. To break-even, if. You trade corn, four times a year you. Will have to make a 20 percent annual, profit, to avoid losing. Money a very. Few people can do this many. Money managers, would give their eyeteeth for. 20%, annual. Returns, a small. Commission, is not a nuisance it. Is a major, barrier, to success. Many.
Amateurs, Generate, 50%, and more, of their account size in commissions, per year if. They last that long, even. Discounted, commissions raise a tall, barrier, to successful, trading I have. Heard brokers, chuckle, as they gossiped, about clients, who beat their brains out just to stay even with the game. Shop. For, the lowest possible, commissions. Do. Not be shy about bargaining. For lower rates I have, heard many brokers complain, about a shortage of customers but not many customers, complain, about the shortage of brokers. Tell. Your broker it, is in his best interest, to charge you low commissions because, you will survive and remain a client, for a long time, design. A trading, system that will, trade less, often. Slippage. Takes either piranha sized or shark, sized bytes out of your account whenever. You enter and exit, the market's, slippage. Means having your orders filled at a different, price than. Which existed, when you placed an order it. Is like paying 30. Cents, for an apple in a grocery store even. Though the posted price is 29, cents. There. Are three kinds of slippage, common. Volatility. Based and criminal. Common. Slippage is due to, a spread, between buying, and selling prices, floor. Traders maintain, two prices in the market the bid and the ask. For. Example, your. Broker may quote you 3:9 0.45. For, June S&P. 500. If, you, want to buy a contract at the market you'll. Have to pay at least three, nine 0.50. If. You want to sell at the market you, will receive, three. Nine 0.40. Or, less. Since. Each point is worth five dollars the. Ten point spread between bid, and ask transfers. $50. From your pocket to, floor traders. They. Charge you for the privilege of entering, or exiting a, trade. The. Spread between bid and ask is, legal, it. Tends to be narrow in big liquid, markets such as the S&P 500, and bonds, and much. Wider in thinly, traded markets, such as orange juice and cocoa. The. Exchanges, claim that, the spread is the price you pay for liquidity. Being. Able to trade whenever you wish. Electronic. Trading promises. To cut slippage. Slippage. Rises, with market volatility, floor. Traders can get away with more in fast moving markets, when, the market begins to run slippage. Goes through the roof when. The S&P 500 rallies. Or drops you, can get hit with a twenty to thirty point slippage, and sometimes, 100 points, or more. The. Third kind of slippage is caused by criminal, activities, of floor traders, they. Have many ways of stealing money from customers, some. Put their bad trades, into your account and keep good trades for themselves. This. Kind of activity, and other criminal, games were recently, described, in a book brokers. Bag, men and moles by. David greicy and Laurie Morse. When. A hundred men spend. Day after day, standing, shoulder-to-shoulder in, a small pit they. Develop a camaraderie and, us. Against, them mentality. Floor. Traders have a nickname for outsiders, which shows that they consider, us less than human they. Call us paper, as in. His paper. Coming in today that, is, why you have to take steps to protect yourself. To. Reduce slippage. Trade. Liquid, markets, and avoid, thin and fast-moving markets. Go, long or short when the market is quiet use. Limit, orders buy. Or sell at a specified, price. Keep. A record of prices, at the time when you placed your order and have your broker fight the floor on your behalf, when necessary. Slippage. And commissions, make trading similar, to swimming, in a shark-infested Lagoon. Let. Us compare an example, from a broker sales, pitch to, what happens in the real world. The. Party, line goes, like this a, contract. Of gold futures covers. 100, ounces of gold. 5, individuals. Buy a contract each from, someone, who sells 5, contracts, short. Gold. Falls 4 dollars and, the buyers bail, out losing. 4 dollars per ounce or, $400. Per contract. The. Intelligent. Trader who sold 5 contracts. Short covers. His position, and makes, $400. Per contract for, a total of $2,000. In. The real world however, each. Loser, has, lost more, than $400. He. Paid at least a $25.
Round-trip, Commission and was probably hit with $20, slippage coming, and going as a. Result, each, loser, lost 400, $65. Per contract, and as, a group they lost, 2,000. $325. The. Winner who, sold 5 contracts, short. Probably paid a $15.00. Round-trip, commission and was, hit with $10, slippage, coming and going reducing. His gain by, $35. Per contract, or. $175. For 5 contracts. He. Pocketed, only. 1825. Dollars. The. Winner thought he made $2,000. But, he received only, 1800. $25. The. Losers, thought they lost, $2,000. But in fact they, lost. 2325, dollars in total. Fully. Five, hundred, dollars two, thousand, three hundred and twenty five minus one thousand eight hundred and twenty five was. Siphoned, from the table the lion's, share was, pocketed, by floor, traders, and brokers who, took a much bigger cut than any, casino, or a racetrack. Would, dare. Other. Expenses. Also, drain traders, money the. Cost of computers, and data fees. For advisory, services, and books including. The one you are reading now all, come, out of your trading funds. Look. For a broker with the cheapest, Commission's and watch, him like a hawk, design. A trading, system that gives signals relatively. Infrequently, and allows, you to enter markets, during, quiet times. Individual. Psychology. Trading. Appears, deceptively. Easy, when. A beginner wins he feels brilliant, and invincible, then. He takes wild risks, and loses everything. People. Trade for many reasons some, rational, and many irrational. Trading. Offers an opportunity, to make a lot of money in a hurry, money. Symbolizes. Freedom too many people even though they often do not know what to do with their freedom if. You know how to trade, you, could make your own hours live, and work wherever, you please and never. Answer to a boss. Trading, is a fascinating, intellectual. Pursuit, chess. Poker, and a crossword. Rolled into one trading. Attracts people who love puzzles, and brainteasers. Trading. Attracts. Risk-takers, and repels. Those who avoid risk, an, average. Person gets up in the morning goes, to work as a lunch break returns. Home as a beer, and dinner watches, TV and goes, to sleep if. He, makes a few extra dollars he puts them into a savings, account a trader. Keeps odd hours, and puts, his capital at risk many. Traders are loners who abandon, the certainty, of the present and take. A leap into the unknown. Most. People have an innate drive, to achieve their, personal best to. Develop their abilities, to the fullest this. Drive along, with the pleasure of the game and the lure of money propels. Traders, to challenge, the markets. Good. Traders tend to be hardworking and shrewd, they. Are open to new ideas. The. Goal of a good trader, paradoxically. Is not, to, make money, his. Goal is to trade, well, if he trades right money. Follows, almost, as an afterthought. Successful. Traders keep honing their skills, trying. To reach their personal best is more important, to them than making money a. Successful. New York trader said to me if. I'd become half, a percent smarter, each year, I'll be a genius by the time I die his. Drive to improve himself, is the, hallmark of a successful, trader a. Professional. Trader from Texas, invited, me to his office and said if. You sit across the table from me while I day trade you. Won't be able to tell whether I am two thousand, dollars a head or two thousand, dollars behind on that day he. Has risen to a level where. Winning does not elate him and losing. Does not deflate him he. Is so focused on trading. Right and improving, his skills that, money no longer influences, his emotions. The. Trouble with self fulfillment, is that, many people have a self-destructive. Streak. Accident-prone. Drivers. Keep destroying, their cars and. Self-destructive. Traders keep destroying, their, accounts. Markets. Offer unlimited. Opportunities. For self-sabotage. As well. As for self-fulfillment. Acting. Out your internal, conflicts, in the marketplace, is a very, expensive. Proposition. Traders. Who are not at peace with themselves often. Try to fulfill their, contradictory wishes. In the market if. You do not know where, you are going you. Will wind up somewhere, you never. Wanted, to be. Trading. Psychology. Your. Feelings, have, an immediate, impact on your, account equity. You. May have a brilliant trading system but, if you feel frightened, arrogant. Or upset. Your, account is sure to suffer when. You recognize that, a gambler, is high or fear, is clouding, your mind. Stop. Trading. Your. Success, or failure as a trader depends. On controlling. Your emotions. When. You trade you, compete against the sharpest, minds in the world, the. Field on which you compete, has been slanted, to ensure, your failure if, you allow your emotions to interfere, with your trading the, battle, is over. You. Are responsible, for every trade that you make a trade.
Begins, When you decide to enter the market and ends, only, when you decide, to take yourself out. Having. A good trading system, is not enough most. Traders with good systems, wash out of the markets because psychologically, they, are not prepared to win. Markets. Offer enormous. Temptations. Like walking. Through a gold vault, or through. A harem. Markets. Evoke powerful, greed for, more gains and a great fear of losing what we've got, those. Feelings, cloud our perceptions, of opportunities, and dangers. Most. Amateurs, feel like geniuses. After, a winning streak it is. Exciting to believe that you are so good you can bend your own rules and succeed. That's. When traders deviate, from their rules and go, into a self-destruct. Mode. Traders. Gain some knowledge they. Win their. Emotions, kick in and their, self-destruct, most. Traders prompt, give their killings, back to the markets the. Markets are full of rags to riches to rags stories, the. Hallmark, of a successful, trader is his. Ability to accumulate. Equity. You. Need to make trading, as objective, as possible keep. A diary of all your trades with before and after charts, keep. A spreadsheet, listing. All your trades, including, commissions and slippage and maintain. Very strict money management rules. You. May have to devote as much energy to analyzing, yourself as. You do to analyzing, the, markets. When. I was learning how to trade I read, every, book on trading, psychology, I could find, many. Writers offered, sensible, advice some. Stress discipline. You. Cannot let the markets way you do. Not make decisions, during trading hours, plan. A trade and trade a plan. Others. Stressed flexibility. Do. Not enter the market with any preconceived notions. Change. Your plans when, markets, change. Some. Experts, suggested. Isolation, no. Business News no. Wall Street Journal no listening to other traders just, you and the markets. Others. Advised being open-minded keeping. In touch with other traders and soaking. Up fresh ideas. Each. Piece, of advice seemed to make sense, but contradicted. Other equally, sensible, advice as. A. Trader, you are in the business of trading, you need, to define your business man's risk the, maximum, amount of money you will risk on any single trade. There. Is no standard, dollar amount, just, as there is no standard. Business an. Acceptable. Business men's risk depends, first of all on the size, of your trading account, it. Also depends, on your trading method, and pain. Tolerance. The. Concept, of a businessman, risk will change the way you manage your money a. Sensible. Trader never risks, more than 2% of account equity on any trade. For, example, if you, have $30,000. In your account you may not risk more than $600.
Per Trade and if. You have. $10,000. You, may not risk more than $200. If. Your account is small limit, yourself to trading less expensive, markets, or mini, contracts. If, you. See an attractive trade, but your stop would have to be placed where more than 2 percent of equity would be at risk, pass. That trade. Avoid. Risking, more than 2 percent on a trade. The way a recovering. Alcoholic avoids. Bars, if, you. Are not sure how much to risk, err. On, the side, of caution. If. You, blame excess. Commission's on a broker and slippage, on a floor trader you, give up control of your trading life try. To reduce both but take responsibility. For them if, you lose even a dollar more than your business men's risk including. Commissions and slippage you. Are a loser. Do. You keep good trading records. Poor. Record-keeping is a sure sign of a gambler, and a, loser, good. Businessman, keep, good records, your. Trading records must show the date and price of every entry and exit slippage. Commissions. Stops. All, adjustments. Of stops, reasons. For entering objectives. For, exiting, maximum. Paper profit, maximum. Paper loss after a stop was hit and any. Other necessary, data. If. You bail out of a trade within your business one's risk it is, normal, business, there. Is no bargaining no, waiting for another tick no, hoping for a change. Losing. $1 more, than your established, businessman, risk is like getting drunk getting, into a brawl getting, sick to your stomach on, your way home, and waking, up in the gutter with a headache. You. Would never want that to happen. Each. Trader, has his own demons, to exercise, on the journey to becoming a successful, professional. Here. Are several rules that worked for me as I, grew from a wild amateur into, an erratic, semi-professional. And, finally. Into, a professional, trader you. May change this list to, suit your personality. One. Decide. That you are in the market for the long haul that, is you. Want to be a trader even, 20 years from now. To. Learn. As much as you can, read. And listen to experts but keep a degree of healthy skepticism.
About Everything. Ask. Questions, and do, not accept experts, at their word, 3. Do. Not get greedy and rush to trade take. Your time to learn the. Markets will be there with more good opportunities, in the months and years ahead. 4. Develop. A method for analyzing the, market that. Is if, a, happens. Then be is likely to happen, the. Markets have many dimensions, use, several, analytic. Methods to confirm, trades, test. Everything, on historical, data and then, in the markets using. Real money. Markets. Keep changing, you need different tools for trading bull and bear markets, and transitional. Periods, as well, as a method for telling the difference. 5. Develop. A money management, plan, your. First goal must be long-term, survival. Your. Second, goal a steady. Growth of capital, and your, third goal making. High profits. Most. Traders put the third goal first and are, unaware that goals, 1 and 2 exist. 6. Be. Aware that a trader, is the weakest, link in any trading, system, go. To a meeting of Alcoholics, Anonymous to learn how to avoid, losses or, develop, your own method, for cutting out impulsive. Trades. 7. Winners. Think, feel. And act, differently. Than, losers, you. Must look within yourself. Strip, away your illusions, and change, your old ways of being thinking. And acting. Change. Is. But, if you want to be a professional. Trader you, have to work on changing your personality. Maths. Psychology. Wolf. Street is named, after, a wall that kept farm animals, from wandering away from the settlement, at the tip of Manhattan, the. Farming legacy, lives, on in the language of traders, for. Animals, are mentioned, especially often, on Wall Street bulls, and bears hogs. And sheep traders. Say Bulls, make money Bears, make money but, hogs get, slaughtered a. Bull. Fights, by striking up with his horns the. Bull is a buyer a person, who bets on a rally and profits from a rise in prices a bear. Fights, by striking down with, his paws a bear, as a seller a person. Who bets on a decline, and profits, from a fall in prices. Hogs. Are greedy they, get slaughtered when they trade to satisfy, their greed some. Hogs buy or sell positions, that are too large for them and get, destroyed, by a small, adverse, move, other.
Hogs Overstay. Their positions, they. Keep waiting for profits, to get bigger even after the trend reverses. Sheep. Are passive. And fearful, followers, of trends, tips, and gurus. They. Sometimes put on a bull's horns, or a bearskin and try to Swagger you. Recognize, them by their pitiful, bleating, when the market becomes volatile. Whenever. The market is open Bulls, are buying Bears are selling hogs, and sheep get, trampled underfoot and the, undecided, traders wait, on the sidelines. Quote. Machines, all over the world show, a steady stream, of quotes. The. Latest prices for any trading vehicle, thousands. Of eyes are focused on each price quote as people. Make trading decisions. There. Are three groups of traders in the market. Buyers. Sellers. And. Undecided. Traders, ask. Is, what a seller asks for, his merchandise, bid. Is what a buyer offers, for, that merchandise, buyers. And sellers are always, in con, flicked, buyers. Want to pay as little as possible and, sellers, want to charge as much as possible if, members, of both groups insist, on having their way no, trade can take place no. Trade means no price only wishful. Quotes of buyers and sellers a. Seller. Has a choice to wait until prices rise, or. To accept a lower offer for, his merchandise a buyer. Also has, a choice. To. Wait until, prices come down or. To offer to pay more to the sellers a trade. Occurs, when, there is a momentary. Meeting, of two minds an eager. Bole agrees, to a sellers terms and pays up or an, eager bear agrees, to a buyers terms, and sells a little cheaper the. Presence, of undecided. Traders puts pressure on both. Bulls and, bears. When. A buyer and a seller bargain. In private, they. May hey go at a leisurely pace the. Two must move much faster when they bargain, at the exchange. They. Know that, they are surrounded, by a crowd of other traders who may butt in on their deal at any moment, the. Buyer knows that, if he thinks for too long another. Trader can step in and snap, away his bargain, a seller. Knows that if he tries to hold out for a higher price another, trader may step in and sell at a lower price, the. Crowd of undecided. Traders makes buyers and sellers more anxious to accommodate, their opponents, a trade. Occurs when. There is a meeting of two minds. Each. Tick on your quote screen represents. A deal between a buyer and a seller, buyers. Are buying because, they expect prices to rise sellers. Are selling because they expect prices to fall, buyers. And sellers trade while surrounded by crowds of undecided. Traders, they. May become buyer's or seller's as, prices, change or, as time passes. Buying. By Bulls pushes. Markets up selling. By bears pushes, markets, down and, undecided. Traders make everything happen faster. By creating a sense of urge see in buyers and sellers. Traders. Come to the markets from all over the world in, person, via. Computers. Or through their brokers, everybody. Has a chance to buy and to sell, each. Price, is a momentary, consensus. Of value, of all market, participants, expressed. In action. Price. Is a psychological. Event a momentary. Balance, of opinion, between bulls. And bears. Prices. Are created, by masses, of traders, buyers. Sellers. And, undecided. People the. Patterns of prices, and volume, reflect, the mass psychology, of the markets. Huge. Crowds converge. On stock, commodity. And option exchanges, either, in person are represented. By their brokers, big. Money and little money smart. Money and dumb money institutional. Money and private money all meet. On the exchange floor. Each. Price, represents, a momentary, consensus. Of value, between buyers, sellers. And undecided, traders at the moment of transaction. There. Is a crowd of traders, behind, every. Pattern in the chart book, crowd. Consensus. Changes. From moment to moment sometimes. It gets established in. A very low-key, environment. And at. Other times the, environment. Turns wild. Prices. Move in small increments during, quiet times, when. A crowd becomes, either spooked, or elated, prices. Begin to jump. Imagine. Bidding for a life preserver aboard, a sinking ship, that's. How prices leap when, masses, of traders become emotional, about a trend and astute.
Trader Tries to enter the market during quiet times, and, take profits, during, wild, times. Technical. Analysts, study, swings, of mass psychology, in the financial, markets, each. Trading, session, is a battle between bulls, who, make money when prices rise and. Bears who, profit, when prices, fall, the. Goal of technical, analysts, is to discover, the balance, of power, tween bulls and bears and bet. On the winning group if, bulls. Are much stronger you, should buy and hold, if bears. Are much stronger you, should sell and sell short, if both. Camps, are about equal in strength, a wise, trader, stands, aside he. Lets bullies fight with each other and puts, on a trade only when he is reasonably, sure who is likely to win. Prices. Volume. And open, interest reflect. Crowd behavior. So. Do the indicators, that are based on them, this. Makes technical. Analysis, similar, to poll taking, both. Combine science and art they. Are scientific. To the extent, that we use statistical. Methods and computers, they. Are artistic. To the extent, that we use personal, judgment to interpret, our findings. What. Is the reality behind, market, symbols prices, numbers. And graphs. When. You check prices in your newspaper, watch, quotes on your screen or plot an indicator on your chart what, exactly are you looking at, what. Is the market that you want to analyze and trade. Amateurs. Act as if the market is a giant, happening, a ball, game in which they can join the professionals, and make money. Traders. From a scientific, or engineering background. Often treat the market as a physical, event, they. Apply to it the principles, of signal, processing, noise. Reduction and similar. Ideas. By. Contrast, all. Professional. Traders know full well what, the market is it. Is a huge, mass. Of people. Every. Trader tries to take money away from other traders by out guessing, them on the, probable, direction, of the market the. Members of the market crowd live on different continents, they. Are united by modern, telecommunications. In the pursuit of profit at each other's expense. The. Market, is a huge crowd. Of people each. Member, of the crowd tries to take money away from other members by outsmarting, them, the. Market is a uniquely. Harsh. Because, everyone, is against you and you, are against, everyone. Not. Only is the market harsh you, have to pay high prices for, entering, and exiting it, you. Have to jump over to high barriers, commissions. And slippage before, you can collect a dime the. Moment you place an order you owe your, broker a commission, you are, behind the game before, you begin, then. Floor traders try to hit you with slippage, when your order arrives on the floor they. Try to take another bite out of your account when you exit your trade in. Trading, you. Compete, against some of the brightest, minds in the world while, fending off the piranhas, of commissions. And slippage. Private. Traders usually come to the market after a successful, career in business or in the professions, an average. Private futures, trader in the United States is a 50, year old married. College-educated. Man. Many. Futures, traders, own their own businesses, and many have postgraduate. Degrees the. Two largest, occupational. Groups among futures. Traders, are farmers, and engineers. Most. People trade for partly, rational, partly. Irrational. Reasons. Rational. Reasons include the desire to earn a large, return on capital. Irrational. Reasons include, gambling, and, a search for excitement, most. Traders are not aware of their, irrational, motives. Learning. To trade takes hard work time. Energy. And money, few. Individuals, rise to the level of professionals. Who can support themselves by, trading. Professionals. Are extremely, serious about what they do they, satisfy, their irrational, goals, outside, the markets while, amateurs, act them out in the marketplace. The. Major economic role, of a trader is to support his broker to. Help him pay his mortgage and keep its children in private schools, in. Addition the. Role of a speculator, is to help companies raise capital in the stock market, and to, assume a price risk in the commodities, markets, allowing. Producers. Focus on production, these. Lofty, economic, goals are far from a speculators, mind when, he gives an order to his broker. Institutions. Are responsible. For a huge, volume. Of trading their. Deep pockets, give them several advantages, they. Pay low institutional. Commissions they. Can afford to hire the best researchers. Brokers, and traders some. Even strike back at floor traders who steal too much in slippage, the. Spate of arrests, and trials of, Chicago floor traders, in 1990. And 1991, began. When Archer Daniels Midland a food, processing, firm brought. In the FBI a. Friend. Of mine who heads a trading, desk at, a bank basis. Some of his decisions on a service. Provided, by a group of former CIA, officers. They. Scan the media to detect early trends, in society and send, their reports, to him, my. Trader friend calls some, of his best ideas, from these reports. The.
Substantial. Annual, fee for those experts, is small potatoes for his firm compared. With the millions, of dollars at trades, most. Private traders do not have such opportunities. It. Is easier, for institutions. To buy the best, research, an. Acquaintance. Who used to trade successfully for. A Wall Street investment bank, found, himself in trouble when he quit to trade for himself, he. Discovered, that a real-time, quote system in his Park Avenue, apartment in, Manhattan did, not give him news as fast as the Squawk Box on, the trading floor of his old firm, brokers. From around the country used to call him with the latest ideas, because, they wanted his orders, when. You trade from your house you, are never the first to hear the news he. Says. Some. Large firms, have intelligence, networks, that enable them to act before, the public one. Day when, oil futures rallied, in response, to a fire on a platform in the North Sea I called. A friend at an oil firm. The, market was frantic, but he was relaxed, he. Had bought oil futures half, an hour before they exploded. He. Had gotten a telex from an agent in the area of the fire well, before the reports appeared on the news wire. Timely. Information is, priceless. But, only a large company, can afford an intelligence, network. The. Firms that deal in both futures, and cash, markets, have two advantages, they. Have true inside, information and, they, are exempt, from speculative. Position, limits. Recently. I visited an, acquaintance, at a multinational, oil company. After. Passing through security that. Was tighter than at Kennedy International Airport, I walked. Through glass enclosed, corridors. Clusters. Of men huddled, around monitors, trading oil products, when. I asked my host whether his traders were hedging or speculating, he looked me straight in the eye and said yes. I, asked. Again and received, the same answer. Companies. Crisscross, the thin line between hedging. And speculating. Based on inside, information. Employees. Of trading firms have a psychological, advantage, they. Could be more relaxed, because their own money is not at risk, most. Individuals, do not have the discipline, to stop, trading, when they get on a losing streak but. Institutions. Impose, discipline, on traders a trader. Is given two limits how, much he may risk on a single trade and the, maximum, amount he may lose in, a month, these. Limits, work as stop-loss, orders, on a trader. With. All these advantages. How, can an individual, trader, compete, against institutions. And win. First. Many. Institutional. Trading departments, are poorly run, second. The, Achilles heel of most institutions, is, that they often have to trade while, an individual, trader is free to trade or stay out of the market. Banks. Have to be active in the bond market and food processing, companies have to be active in the grain market, at almost, any price. An, individual, trader is free to wait for the best trading opportunities. Most. Private, traders fritter, away this advantage, by over trading an, individual. Who wants to succeed against, the Giants must develop patience, and eliminate, greed, remember. Your. Goal is to trade well, not. To trade often. Successful. Institutional. Traders receive, raises, and bonuses. Even. A high bonus, can feel puny, to someone who earns many millions of dollars for his firm. Successful. Institutional. Traders often, talk of quitting, and going to trade for themselves. Most. Traders who leave institutions. Get, caught up in the emotions, of fear greed. Elation. And panic, when, they start risking their own money they seldom, do well trading, for their own account, another. Sign that psychology. Is at, the root of trading, success, or, failure. The. Market crowd and you. The. Market is a loosely organized, crowd, whose members, bet that prices, will rise or fall. Since. Each price represents the consensus, of the crowd at the moment of transaction, all, traders. Are in effect betting. On the future mood of the crowd, that. Crowd keeps swinging from indifference to optimism, or pessimism and. From, hope to, fear. Most. People do not follow their own trading, plans because, they let the crowd influence. Their feelings, thoughts, and actions.
Bulls. And bears battle. In the market and the, value of your investment sinks, or soars depending. On the actions, of total strangers. You. Cannot control, the markets you, can only decide, whether, and when to, enter or exit trades. Most. Traders feel jittery when, we enter a trade their. Judgment, becomes clouded by emotions, after they join the market crowd, these. Crowd induced, emotions, make traders, deviate, from their trading, plans. And lose, money. Charles. Makai the, Scottish, barrister, wrote, his classic book extraordinary. Popular, delusions, and. The madness of, crowds in. 1841. He, describes. Several mass manias, including. The tulip mania in Holland in 1634. And the South Seas investment. Bubble in England, in 1720. The tulip. Craze began, as a bull market in tulip. Bulbs, the. Long bull market, convinced, the prosperous, Dutch, that, tulips, would continue, to appreciate. Many. Of them abandoned, their businesses, to grow tulips, trade them or become, julep brokers. Banks. Accepted, tulips as collateral, and speculators, profited. Finally. That mania, collapsed, in waves of panic selling leaving. Many people destitute, in the nation shocked, Makai. Side. Men. Go mad in crowds and they, come back to their senses, slowly and, one, by one. In. 1897. Gustav. Lovell a French philosopher and, politician wrote. The, crowd one. Of the best books on mass psychology, a trader. Who reads it today can see his reflection in. A century-old, mirror. Labore. Wrote that when people gather in a crowd. Whoever. Be the individuals. That compose it however. Like or unlike, be, their mode of life their. Occupations. Their, character, or their, intelligence, the. Fact that they have been transformed, into a crowd puts them in possession, of a sort of collective mind which makes them feel, think. And act, in a manner quite different, from that in which each individual. Of them would feel think. And act were, he in a state of isolation. People. Change when they join crowds they. Become more credulous and, impulsive, anxiously. Search, for a leader and react. To emotions, instead of using their intellect, an, individual. Who becomes involved in a group becomes, less capable, of thinking for himself. You. Need to base your trades on a carefully, prepared trading. Plan and not. Jump in response to price changes it, pays to write down your plan you. Need to know exactly under what conditions, you will enter and exit a trade do. Not make decisions on the spur of the moment when. You are vulnerable to being sucked, into the crowd. You. Can succeed, in trading only when you think and act as an individual, the. Weakest part of any trading system, is the trader himself, traders. Fail when they trade without a plan or deviate, from their plans. Plans. Are created by reasoning, individuals. Impulsive. Trades are made by sweaty, group members. You. Have to observe yourself and, notice changes in your mental state as you trade.
Write. Down your reasons for entering a trade and the rules for getting out of it including, money management rules you, must not change your plan while, you have an open position. Sirens. Were. Sea creatures, of Greek myths who, sang so beautifully that. Sailors, jumped overboard and, drowned. When. Odysseus wanted, to hear the sirens songs, he. Ordered his men to tie, him to the mast and to, put wax in their own ears. Odysseus. Heard the sirens songs but, survived, because he could not jump, you. Ensure, your survival is a trader when on a clear day you tie, yourself to the mast of a trading plan and money, management rules. Psychology. Of trends. Each. Price is the momentary consensus, of value of all, market, participants. It. Shows their latest vote on the value of a trading vehicle, any. Trader can put in his two cents worth by, giving an order to buy or to sell or, by refusing to trade at the current, level, each. Bar on a chart reflects, the battle between bulls, and bears, when, Bulls feel strongly, bullish, they buy more eagerly and push markets, up when. Bears feel strongly, bearish they, sell more active, and push, markets, down. Each. Price, reflects, action, or lack of action, by all traders in the market, charts. Are a window, into math, psychology. When. You analyze charts, you analyze the behavior of traders. Technical. Indicators, help, make this analysis, more objective. Technical. Analysis. Is applied, social. Psychology, it. Aims to recognize, trends and changes in crowd behavior in order to make intelligent, trading. Decisions. As. Most traders why prices went up and you, are likely to get a stock answer, more. Buyers than sellers. This. Is not true the. Number of trading instruments, such as stocks or futures bought. And sold in any market is always. Equal. If. You want to buy a contract of Swiss francs. Someone. Has to sell it to you if you, want to sell short a contract, of the S&P 500. Someone. Has to buy it from you the. Number of stocks bought and sold is equal. In the stock market. Furthermore. The, number of long and short positions in. The futures markets, is always, equal. Prices. Move up or down because of changes. In the intensity of greed, and fear, among buyer's. Or seller's. When. The trend is up Bulls, feel optimistic and do not mind paying a little extra they. Buy high because they expect prices to rise even, higher. Bears. Feel tense in an uptrend and they, agree to sell only at a higher price. When. Greedy and optimistic, Bulls meet, fearful, and defensive, bears the. Market rallies, the. Stronger, their feelings the sharper the rally the. Rally ends. Only when many Bulls lose, their, enthusiasm. When. Prices, slide bears. Feel optimistic and, do not quibble about selling, short at lower prices. Bulls. Are fearful, and agree, to buy only at a discount, as long. As bears feel like winners they continue, to sell at lower prices, and the down trend continues, it. Ends, when bears start feeling cautious and refused. To sell at lower prices. Few. Traders act, as purely. Rational. Human beings, there, is a great deal of emotional, activity in the markets most, market, participants. Act on the principle, of monkey-see, monkey-do. The. Waves of fear and greed sweep. Up bulls and bears. Markets.
Rise Because of greed among, buyers and, fear among short, sellers, Bulls. Normally, like to buy on the cheap when. They turn very bullish they become more concerned with not missing, the rally than with getting a cheap price a rally. Continues, as long as bulls are greedy enough to meet sellers demands. The. Sharpness of a rally depends, on how traders, feel if buyers. Feel just a little stronger, than sellers the, market rises slowly when. They feel much stronger than sellers the, market rises fast it, is the job of a technical, analyst to, find when buyers are strong and when, they start running out of steam. Short. Sellers feel trapped by rising markets, as their, profits, melt and turn into losses, when. Short sellers rushed to cover a rally, becomes, nearly vertical. Fear. Is a stronger, emotion, than greed and rallies. Driven by short, covering are especially, shocked. Markets. Fall because of greed among, bears and fear among bulls. Normally. Bears prefer to sell short on rallies but if they expect to make a lot of money on a decline, they, don't mind shorting. On the way down. Fearful. Buyers agree, to buy only below, the market as, long, as short sellers, are willing to meet those demands, and sell it a bid the. Decline continues. As. Bulls. Profits, melt and turn into losses they, panic, and sell at almost any price they. Are so eager to get out that they hit the bids under the market, markets. Can fall very fast when, hit by panic, selling. Buying. By happy bulls and covering, by fearful, bears pushes. Up trends higher, buyers. Feel rewarded, while sellers feel punished, both. Feel emotionally, involved, but, few traders realize, that they are creating, the uptrend, creating. Their own leader. Eventually. A price. Shock, occurs a major. Sale, hits the market and there are not enough buyers to absorb it the. Uptrend takes, a dive Bulls. Feel mistreated, like children, whose father hit them with a strap, during a meal but. Bears feel. Encouraged, a. Price. Shock plants, the seeds of an uptrend, reversal. Even. If the market recovers and reaches a new high bulls feel more skittish, and bears become, bolder. This. Lack of cohesion, in, the dominant, group and optimism. Among, its opponents, makes, the uptrend ready to reverse. Several. Technical indicators, identified, tops by tracing a pattern called bearish, divergence it. Occurs. When prices reach a new high but. The indicator, reaches, a lower high that it did on a previous, rally. Bearish. Divergences. Marked the best shorting, opportunities. When. The trend is down Bears, feel like good children, praised, and rewarded for. Being smart. They. Feel increasingly confident. Add to, their positions and the down trend, continues. New. Bears coming to the market most. People admire winners, and the financial, media keep interviewing bears in bear, markets. Bulls. Lose, money and downtrends, and that makes them feel bad, bulls, dump their positions, and many switch sides to, join bears, they're. Selling, pushes, markets, lower. After. A while Bears grow confident, and Bulls feel demoralized. Suddenly. A price, shock occurs, a, cluster. Of buy orders, soaks, up all available sell, orders and lifts. The market now. Bears feel like children whose, father has lashed out at them in the midst of a happy meal a price. Shock plants, the seeds of a downtrend, event, reversal. Because bears become, more fearful and bulls grow, bolder. When. A child begins to doubt that Santa Claus exists. He, seldom believes, in Santa again. Even. If bears recover, and prices, fall to a new low, several. Technical indicators, identify, their weakness by tracing a pattern, called, a bullish, divergence. It. Occurs when prices, fall to, a new low but, an indicator, traces, a more shallow bottom than during the previous decline. An. Individual. Has a free will and. His behavior is hard to predict, group. Behavior, is more primitive and easier, to follow when.
You Analyze markets. You an align is group behavior, you. Need to identify the, direction in, which groups, run and their, changes. Groups. Suck, us in and cloud our judgment, the. Problem, for most analysts. Is that they get caught in the mentality of the group's they analyze. The. Longer a rally continues, the more technicians. Get caught up in bullish sentiment, ignore. The danger signs and miss. The reversal. The. Longer a decline, goes on the more technicians, get caught up in bearish gloom and ignore bullish, signs, this. Is why it helps to have a written plan for analyzing, the markets we, have to decide in advance what, indicators, we will watch and how we will interpret them. Floor. Traders use several tools for tracking the quality, and intensity, of a crowds feelings, they. Watch the crowds ability, to break through recent support and resistance, levels they. Keep an eye on the flow of paper customer. Orders that come to the floor in response, to price changes, floor. Traders listen to the changes, in pitch and volume of The Roar on the exchange, floor if. You. Trade away from the floor you need other tools for analyzing crowd, behavior your, charts, and indicators reflect. Math psychology. And action, a technical. Analyst, is an, applied, social. Psychologist. Often. Armed. With a computer. Technical. Analysts, believe that prices. Reflect everything, known about the market including. All fundamental. Factors, each. Price, represents, the consensus, of value of all market, participants. Large. Commercial interests, and small speculators, fundamental. Researchers, technicians. And gamblers. Technical. Analysis, is a study, of mass psychology, it. Is partly a science, and partly an art. Technicians. Use many scientific, methods including. Mathematical. Concepts, of game theory probabilities. And so. On many. Technicians use computers, to track sophisticated. Indicators. Technical. Analysis, is also, an art the. Bars on, a chart, coalesce, into patterns and, formations. When. Prices and indicators move they produce a sense of flow and rhythm a feeling. Of tension and beauty that helps you sense what is happening, and, how to trade. Individual. Behavior, is complex, diverse. And difficult. To predict group. Behavior, is primitive. Technicians. Study, the behavior patterns, of market crowds, they.
Trade When they recognize, a pattern that preceded, past, market, moves a. Tremendous. Volume, of information pours. Out of the markets during trading hours. Changes. In prices tell us about the battles, of bulls and bears your. Job is to analyze this information and, bet. On the dominant market, group. Dramatic. Forecasts. Are a marketing, gimmick, people. Who sell advisory, services, or raise money know that good calls attract, paying customers, while bad calls are quickly forgotten. My. Phone rang while I was writing this chapter, one. Of the famous gurus, currently. Down on his luck told, me that he identified, a once-in-a-lifetime. Buying. Opportunity. In a certain agricultural, market. He. Asked me to raise money for him and promised to multiply, it a hundredfold, in six, months, I do. Not know how many fools, he hooked but. Dramatic, forecasts. Have always been good for fleecing, the pub. Use. Your common sense, when you analyze markets, when, some new development, puzzles you compare, it to life outside the, markets for. Example, indicators. May give you buy signals, in two markets, should. You buy the market that declined, a lot before, the buy signal, or the one that declined a little. Compare. This to what happens to a man after, a fall if. He falls down a flight of stairs, he made us team selves off and run up again but. If he falls out of a third-story window, he's. Not going to run any time soon, he. Needs time to recover. Prices. Seldom, rally very, hard, immediately. After, a bad decline. Successful. Trading stands. On three pillars you, need to analyze the balance, of power between bulls, and bears you, need to practice good money management you, need personal discipline. To follow your, trading plan and avoid. Getting. High in the markets. Classical. Chart analysis. Chartists. Study, market action trying. To identify recurrent. Price patterns, their. Goal is to profit from trading when, patterns, recur. Most. Chartists, work with bar graphs showing high low and closing, prices and volume, some. Also watch opening, prices and open interest. Point. & figure charts, track. Only, price changes, and ignore. Time, volume. And open, interest. Classical. Charting, requires, only a pencil and paper it appeals to visually, oriented people, those. Who plot data by hand often, develop a physical feel for prices. Computers. Speed, charting, at a cost of losing some, of that feel. The. Biggest problem, in charting, is wishful, thinking. Traders. Often convince, themselves that, a pattern is bullish or bearish depending, on whether they want to buy or to sell. Chart. Patterns, reflect, the tides of greed and fear among traders, this. Book focuses, on daily, charts but you can apply many of its principle to other data the. Rules for, reading weekly daily, hourly or intraday. Charts, are very similar, each. Price is a momentary. Consensus. Of value of all market, participants, expressed in action, each. Price, bar provides, several pieces of information about, the balance of power between bulls, and bears. The. Opening, price of a daily or a weekly bar, usually, reflects, the amateurs opinion, of value they. Read morning papers find, out what happened the day before and, call their brokers with orders before going to work. Amateurs. Are especially, active, early in the day and early, in the week. Traders. Who research the relationship, between opening, and closing prices for several decades found, that opening, prices most often occur near the high or the low of the daily bars. Buying. Or selling by, amateurs, early in the day creates, an emotional, extreme, from, which prices recoil.
Later, In the day in, bull. Markets, prices. Often make their low for the week on Monday, or Tuesday on. Profit, taking by amateurs, than, rally to a new high on Thursday or Friday in. Bear. Markets the high for the week is often set on Monday or Tuesday with. A new low toward, the end of the week on Thursday, or Friday. The. Closing, prices of daily, and weekly bars, tend, to reflect the actions of professional. Traders they. Watch the markets throughout the day respond, to changes, and become, especially active near the close. Many. Of them take profits, at that time to avoid carrying, trades, overnight. Professionals. As a group, usually, trade against. The amateurs, they. Tend to buy lower openings, sells. Short, higher openings, and unwind, their positions, as the day goes on. Traders. Need to pay attention to the relationship between opening. And closing, prices. If. Prices, closed, higher, than, they opened, then. Market, professionals, were probably, more bullish, than amateurs, if. Prices. Closed, lower than they open and then market, professionals, were probably more bearish, than amateurs. It, pays, to trade, with the professionals. And against. The, amateurs. Efficient. Markets random. Walk and nature's. Law. Efficient. Market theory is an academic notion that nobody can outperform the, market because, any price at any given moment incorporates. All available, information. Warren. Buffett one of the most successful investors. Of our century commented. I think. It's fascinating how, the ruling, orthodoxy. Can cause a lot of people to think the earth is flat. Investing. In a market where people believe in efficiency, is like playing bridge, with someone, who's been told it doesn't do any good to look at the cards. The. Logical, flaw, of efficient, market theory is that it equates knowledge, with action people. May have knowledge but the emotional, pull of the crowd often leads them to trade irrationally. A good. Analyst can detect, repetitive. Patterns, of crowd behavior on his charts, and exploit. Them. Random. Walk theorists. Claim that, market, prices change. At random, of course. There is a fair amount of randomness, or noise in the markets just as there is randomness, in any other crowd milling, around an. Intelligent. Observer can identify repetitive. Behavior, patterns of a crowd and make sensible, bets, on their, continuation, or reversal. People. Have memories, they, remember, past prices and their memories influence their buying and selling decisions. Memories. Help create support, under the market and resistance. Above, it. Random. Walker's deny, that, memories, of the past influence. Our behavior, in the present, as, Milton. Friedman has pointed out prices. Carry information about, the availability, of supply, and the intensity of demand. Market. Participants. Use that information to make their buying and selling decisions, for. Example, consumers. Buy more merchandise, when it is on sale and less when prices, are high, financial. Traders are just as capable of logical, behavior, as homemade, in a supermarket when. Prices are low bargain. Hunters step in a shortage. Can lead to a buying panic, but, high prices choke, off demand. Nature's. Law is the rallying, cry of a clutch of mystics, who oppose random.
Walkers In the financial, markets, mystics. Claim that there is a perfect order in the markets which, they say move, like clockwork in response to immutable, natural, laws. RN. Elliott even titled his last book, nature's. Law. The. Perfect, order crowd, gravitates. To astrology and looks, for links between prices, and the movements, of the planets, most. Mystics, try to hide their astrological bent, but, it is easy to draw them out of a shell, next. Time someone talks to you about natural order, in the markets, ask him about astrology, he, will probably jump, at the chance to come out of the closet and talk, about the Stars. Those. Who believe in perfect order in the markets accept, that. Tops and bottoms, can be predicted far, into the future, amateurs. Love forecasts. And mysticism, provides. A great marketing, gimmick it helps. Sell courses trading. Systems and newsletters. Mystics. Random. Walk academics, and efficient. Market theorists, have one trait in common, they. Are equally, divorced, from the reality of the markets. Extremists. Argue with one another but. They think alike. Support. And resistance. A. Ball. Hits the floor and bounces. It. Drops, after it hits the ceiling. Support. And resistance. Are like a floor in the ceiling with, prices, sandwiched, between them. Understanding. Support, and resistance, is essential, for understanding, price trends, and chart patterns. Rating. Their strengths helps. You decide whether the trend is likely to continue or, to reverse. Support. Is a price level where buying is strong enough to interrupt or reverse a downtrend. When. A downtrend, hits, port it bounces, like a diver who hits the bottom and pushes away from it, support. Is represented. On a chart by a horizontal, or near, horizontal, line connecting, several bottoms. Resistance. Is a price, level we're selling, is strong enough to interrupt or reverse, an uptrend. When. An uptrend hits resistance, it stops or tumbles down like a man who hits his head on a branch while climbing a tree. Resistance. Is represented, on a chart by a horizontal, or near, horizontal, line connecting, several tops. Minor. Support, or resistance causes. Trends, to pause while.
Major Supporter, resistance, causes, them to reverse, traders. Buy at support and sell at resistance, making, their effectiveness, a self-fulfilling. Prophecy. Support. And resistance. Exist. Because, people have, memories. Our. Memories, prompt, us to buy and sell at certain levels buying. And selling by crowds of traders creates, support, and resistance. If. Traders. Remember, that prices, have recently, stopped falling and turned, up from a certain level they are likely to buy when prices, approach that level again if. Traders, remember, that an uptrend, has recently reversed, after rising to a certain peak they, tend to sell and go short, when prices, approach that level again. For. Example, all, major, rallies, in the stock market from 1966. Until, 1982. Ended. Whenever, the Dow Jones Industrial. Average rallied. To 950. Or 1050. The. Resistance, was so strong that traders, named, it a graveyard, in, the sky. Once. The Bulls RAM the market through that level it became a major support, area. Support. And resistance, exist, because masses, of traders feel pain and, regret. Traders. Who hold losing, positions, feel intense, pain. Losers. Are determined, to get out as soon as the market gives them another chance. Traders. Who missed an opportunity feel. Regret and also, wait for the market to give them a second chance, feelings. Of pain and regret are mild and trading ranges, where swings are small and losers did not get hurt too badly. Breakouts. From trading ranges, create. Intense, pain and regret. When. The market stays, flat for a while, traders. Get used to buying at the lower edge of the range and shorting, at the upper edge in. Uptrends, Bears who sold short feel pain and Bulls feel regret, that they did not buy more both. Feel determined to buy if the market gives them a second chance the pain, of bears and regret of bulls make them ready to buy creating. Support during. Reactions. In an uptrend. Resistance. Is an area where Bulls feel pain Bears, feel regret and both. Are ready to sell when. Prices, break down from a trading range Bulls, who bought feel pain feel, trapped and wait, for a rally to let them get out even. Bears. Regret, that they have not shorted, more and wait for a rally to give them a second chance to sell short. Bulls. Pain and Bears regret, create. Resistance. A ceiling. Above the market in downtrends. The. Strength of support and resistance depends. On the strength of feelings, among, masses of traders, a. Congestion. Area, that has been hit by several trends, is like, a cratered, battlefield, its.
Defenders, Have plenty of cover and an. Attacking force is likely to slow down, the. Longer prices, stay in a congestion, zone the stronger the emotional, commitment, of bulls and bears to that area when. Prices approach that zone from above it serves, as support, when, prices rally into it from below it, acts, as resistance. A, congestion. Area can reverse its role and serve. As either support, or resistance. The. Strength of every support, or resistance zone, depends, on three factors its. Length its height and the. Volume of trading, that has taken place in it you, can visualize the, factors, as the length the width and the depth of a congestion zone. The. Longer a support, or resistance, area. Its length of time or the number of hits it took the. Stronger, it is support. And resistance, like good wine become. Better with age a two-week. Trading, range provides. Only minimal support, or resistance a, two-month. Range gives, people time to become used to it and creates. Intermediate. Supporter resistance while, a two-year, range becomes, accepted, as a standard of value and offers, major support, or resistance. As. Support, and resistance levels grow old they, gradually become weaker, losers. Keep washing out of the markets replaced by newcomers, who do not have the same emotional, commitment, to old price levels, people. Who lost money only recently remember, full well what h