Sunday, April 27, 2008

Trading Psychology - Stage 4. Through the Looking-Glass

... and What Alice Found There.

This last stage of a trader's development in psychology department is fairly simple to understand, maybe not very easy to implement... but give it due recognition and make an attempt, and it will happen with not much effort - as long as you are ready for this transition.

The idea is really simple. There are emotions that, at your early stages, plague your trading and cause erroneous entries and exits. Those are the same emotions that cause the crowd's mistakes. As you learn to deal with your emotions, take control over them and diminish, then eliminate, their impact on your trading decisions, you don't completely eliminate emotions themselves. You just learn to dull them and separate your trading actions from what your emotions try to push you to. However, you still should be able to observe them as detached cold-blooded observer, This is a stage where you gain an ability to actually utilize them instead of being their slave. If you can feel how huge selloff creates this feeling of panic somewhere deep in you, this is what crowd feels. Feel the temptation to buy this parabolic upward spike, seemingly unstoppable? Chances are, at the moment when you feel the strongest urge to give up and just buy, that's when the last buyers desperate not to miss the train hit their Buy at Market buttons.

You see the point now. Use this as a mirror, as your window into understanding how crowd acts. Together with your strict self-control, such approach will put you on the right side of trades - and as we know from Tape Reading principles, right side is usually not the crowd's side. It's not a stand-alone method of trading of course but it's a good supplement to your tape/chart reading skills. Overall, this approach is in perfect alignment with a few Taoist principles described in our A Taoist Trader course

Two fair warnings. First, do not try to implement this element into your trading too soon. You really need to be at Stage 3 and get steady and confident at it before you try to move to Stage 4. No jumping over steps. Contrarian approach of this kind requires a lot of experience and perfect self-control.

Second, somewhat humorous... as you progress, you may find that you stop experiencing those crowd-like emotons altogether and your impulses are fully in line with your own reading now. When it happens, your attempt to read YOUR impulses as a window in CROWD's impulses may backfire as you start trading as a contrarian to yourself rather than crowd, eseentially becoming a part of a crowd again. OK, that was half-joke.
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