Friday, September 12, 2014

Psychology in Stock Market

It would not be an exaggeration if we say that Stock market is more of a psychological game. The primary tenet on which the market works is the concept of demand and supply. The demand and supply is determined by the sentiments of the crowd against existing conditions. Also market loves extremes. On bad news, it will hammer a stock as if there is no bottom till it bottoms out. On the way up, it's taken to dizzy heights for no rhyme and reason. It's often said that in the longer term market acts as per the fundamentals of the company. But sometimes that longer term might be beyond the life time of an individual. I am not saying to ignore the fundamentals but just trying to bring out a point that fundamental is just one of the elements affecting the price action. So look for everything, the long term, medium term and short term before deciding your action.
The other often said statement is that History repeats itself and it is fairly true and has been proven
time and again. The whole science or art of technical analysis is based on this premise. The harder part is to figure out which part of history will be repeating when?
Let's look into some of the important psychological aspects of trading, which once should take care of. This is far from complete and far from a universal discussion on this subject. It's just an attempt to say that to know market know the people who are in the game.
  • Know yourself: This is very important and most ignored. We all carry a super image of ourself all the time. In that super image we all act and behave as if we are very successful. If one feels the other way, it's time to urgently see a psychologist. And I am sure, this feeling of being eternal successful is in the mind of so called successful people also. Understand that if stock market is at all for you. Remember that this is not a faint hearted game as it looks like and it does requires a lot of study and efforts. Everyone knows how to play football. It is such an open secret, but how many could become Pele or Maradona. Stock market is a very simple game. One has to buy low and sell high. Is not it that simple. Try to put this into practice with a small amount of money and check how you fare. Please do not do this exercise with paper money but with real money and understand your self. It's easy to win a car race in video games.
  • Pride in your enemy: If you are self assured and highly confident individual, stock market is not for you. You can still play it but don a completely different mind set when you are trading. Become a fearing and self doubting individual in your thought process. However be careful that this nature does not stops you for taking action itself. Also avoid taking this nature to the outside world. One will stop enjoying live.
  • Patience and Discipline: This is the most difficult thing to develop and after developing most difficult thing to carry with you on daily basis. There are weak moments which are enough to devastate.
  • Tips tips tips: Ah we all love it. Such an easy way to earn money. How many actually earned it? Remember by the time tip has reached to you, it's been already known by many in the world but may be few in Jupiter also. The price would have factored already this into. Tips are still not bad, but understand who is giving and what is the logic behind it. Understand that you understand the logic before acting on it.
  • Going contrary: This actually presents the moment of big hauls. When every one is betting on one side you take an opposite positions. However do understand that never try go against the economic trend. I am differentiating between marketing and economic trend. At those reversal points usually economic trend and marketing trend diverge. Economies start reversing before the market catches it. The economy might not have reversed yet but from that point it's ready to go in the other direction. The important indicators to look for is the inflationary environment and interest rate environments. But do not go contrary just for the sake of it. Do not be Don Quixto.
  • News break if anticipated is not a news: Many times we see that some company comes with good earning and the stocks start going down. This usually happens because market was already anticipating that has factored that into price. It's not a news break but the culmination of that news trend. The astute traders will sell it as it has reached the target. The news is only a breaking news if it is not anticipated.
  • Loss is my responsibility: We can eternally blame our broker, the tip monger, the heavy rains in the morning or the neighbour's cat cutting my path. But if I loose, it's just because of me. Be humble and accept it and more than that try to rectify it in the future. And there is a corollary. If you win, attribute it to good luck.
  • Use stop losses: It will do wonders to your anger, irritation and sleep in a positive way. Try it and make it a habit.
Some classic tips:
  • Don't try to buy at the bottom and sell at the top. This can't be done—except by liars. - Bernard Baruch
  • Don't try to be a jack of all investments. Stick to the field you know best. - Bernard Baruch
  • When in doubt about what to do in the market, do nothing. Nothing can destroy the cool temperament of a man like unsystematic speculation. - Peter Wyckoff
  • If you wait too long to buy, until every uncertainty is removed and every doubt is lifted at the bottom of a market cycle, you may keep on waiting . . . and waiting. - Peter Wyckoff
  • Never be sentimental about a stock. - Peter Wyckoff
  • When in doubt, get out, and don't get in when in doubt. - W. D. Gann
  • Pay all bills before speculating. - Frank J. Williams
  • If the market makes you irritable or interferes with sleep, you are wrong. - Frank J. Williams
  • Get accurate information. Demand facts, not opinions. - Frank J. Williams
  • The market is most dangerous when it looks best; it is most inviting when it looks worst. - Frank J. Williams
  • Fortunes are not easily made in Wall Street. Some professionals give their lives to the market and die poor. - Frank J. Williams
  • Speculation is an art. The first principle of every art is to have at the outset a clear conception of the end aimed at. - T. T. Hoyne

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