Trading Psychology

In the financial markets there are many players who are sellers and buyers. And as any other persons gathered in a crowd they start following the common sentiments. A person saves individual traits until he becomes a part of the group. It happens because joining something bigger begins to control the person’s behavior. There can be many reasons for this but the most important reason is a sense of pressure of the large group. If you are a trader you should save your personality. This will give you a chance to recognize changes in the crowd sentiments and use this knowledge for making a profit. The psychology of the trading crowd in the financial markets has definite regularities and if you understand these regularities you can be a successful trader.

At first to understand the motivators of the traders we should study who are they. According to the slang used in Wall Street we can divide all traders into four groups:

• The bulls are the traders who play on price rise and trade when the price increases. They prefer to buy at a low price and earn if the price rises. As a bull attacks its prey from the bottom up so the bullish traders push the market from the bottom upward helping the price to increase;

• The bears are traders who prefer to sell playing and making profit on the price drop. As a bear attacks its prey from the top down so the bearish trader pushes the price downwards helping it to reduce.

• The pigs are the traders who are careless because of their greed. They trade on huge volumes and lose money when the price moves against them. Also they are the traders who try to earn as much as possible delaying a position and losing their money. Such traders are the most desirable preys of the bulls and bears.

• The sheep are the uncertain traders who follow the crowd taking the side with bulls

All these animals move the price when trading and they are called the participants of the market. A basis of impulse determining the price direction are always bears or bulls having won in a hard competition for the price.

The price is also a psychological phenomenon representing the up-to-the-minute balance point between two fractions of bulls and bears. All this happens due to collision between sellers and buyers: a buyer wants to pay less and a seller tries to earn as much as possible. And this fight will be endless if they do not accept a compromise. As there are a lot of players in the market who watch a deal and have their own opinion about the favorable price the buyers and sellers become more compliant and quickly arrive at a consensus. Every price level in the market is an up-to-the-minute value agreement reached by the participants and represented by opening a deal. So the price charts and trading volumes reflect psychology of the trading crowd of sellers, buyers and observer who are ready to take a position of any of them. Insensibly they all make a price into idol and it punishes those who were mistaken in their forecast and reward those who were right. And this value agreement always changes. Sometimes it happens in a calm atmosphere when the price changes slowly and in other cases it happens when the market is too emotional and the price jumps as crazy. The experienced trader always starts trading when the market is calm and gains profit when the price starts jumping.

Technical analysis of the market is the very method of studying psychology of the crowd trading and moving the price. Its aim is to determine a dominant trading fraction and place a bet on a stronger group and make a profit. When there is a force balance the provident trader will always stay aside to avoid unexpected effects. Like a public opinion poll technical analysis is a combination of science and art. As in science we use statistical methods, indicators and advisors and after as in art we interpret and use the results.