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Trading for a Living

Mass Psychology



What is price?

A stock’s price is what a person is willing to pay. An adverse event might change an investor’s perception overnight which will  cause the value of a share to go the other way rapidly.

A price is a Psychology event, a difference of opinion between bulls and bears. The patterns between prices, volume and open interest reflect the mass psychology of the market and the prices are based on them. 

Each price represents a monetary consensus of value between sellers, buyers, and undecided traders when a transaction takes place. There is a crowd of traders behind every stock’s pattern.


Technical Analysts try to profit from these patterns.


What is the market?

The market is a huge crowd of people and every group of people try to outsmart each other by outguessing the other person’s behaviour. In India, we have two popular markets, namely the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).


All traders need to understand how a crowd can influence their behaviour. A successful trader must think independently, regardless of what the crowd thinks.


A crowd's actions are repetitive, their behaviour is simple. We should respect the power of a crowd, but not fear it.


Mr Elder touches the point of insider trading and says that trading on inside information is simply illegal. It is legal in the futures market. A technical analyst can detect whether insider trading is happening or not by looking into the charts.


There are two kinds of traders:


A) Individual Traders - The goal of an individual should be to trade well, not to trade often.


B) Institutional Traders - Institutions are responsible for a huge volume of trading. They pay low institutional commissions and can afford to hire the best researchers, brokers and traders.


Several advisors who send "newsletters" regularly are of good entertainment value because advisors try to pretend that they are an insider of the business, but in general, they don't know much. 


An individual does not have the power to control the markets, all they can do is to decide on when to enter and exit a trade.


Group members, on the other hand, can catch a few trends here or there, but suffer huge losses when those trends reverse. 


Joining a group is like following a parent.  The parent might guide you, but unless you use your brain and make your own decisions, the guidelines will not yield any benefits.


To be a successful trader, it is necessary to become an independent thinker, as markets do not care about your well-being.  It is very important to observe ourselves and notice the changes in our mental state as we trade. As stated, write the reasons for entering and exiting a trade.


Journal all your trade and trade ideas. 

Do not change your plans when your trade is open and live. 


Our human nature takes away our ability to make independent decisions when we are in stress. That's why we start intimating other's actions and overlook warning signals.


Only a few traders act as a purely rational human being. Majority of the traders are irrational when it comes to their behaviour.


Fundamental Analysts can lose their money if they are not synced with the medium and short-term trends. 


Technical Analysis is a study of mass psychology. It’s a beautiful blend of science and art. It aims to recognize the trends and changes in crowd behaviour in order to make intelligent decisions. 


Successful trading stands on 3 pillars:

  • Analyse the balance between bulls and bears,
  • Practice good money management, and,
  • Personal discipline for trading plans.

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Units 5/17