The articles in this section are mostly about market psychology. As a trader, you have to be aware of market psychology, what it does to you, but also what it does to other market participants. Every trader at some point realizes that everything is not what it always seemed to be. There is a somewhat hidden reality behind the obvious one. Getting to know this hidden reality, this different view on the markets and human behavior, will likely make you a better a trader in the end.
The first part of 'Market gurus and their predictions' has really caught some attention. Let's now move on to the next part about this subject.
Again, as mentioned in part 1, these pages are mostly meant as an eye opener that almost all of the 'mainstream' analysts have no added value in trading or investing. In fact, flipping a coin has a higher probability of making a correct call about expected market direction than those analysts.
As a trader or investor, you certainly have noticed the tons of analysts and self-proclaimed gurus out there who all give their opinion about what will likely happen next in the markets. But are they any good?
"Mind the gap" may be a useful warning on airports and train stations, but is it any good in short term trading? As traders we have all heard this general trading wisdom that says 'gaps get closed'. But are they? And also, let's be more specific about when they get closed. Is it the next day, next week or next year a gap gets closed?
"Never complain, never explain" - it's a well known quote. Famous people have used it, management gurus have used it, too many to accurately determine who initially came up with it. Let's apply this to trading, because trading is probably the ultimate activity where this quote fits extremely well.
Every now and then when I'm reading an article from the world of behavioral economics discussing a particular phenomenon, it makes you realize once again how much trading and investing is about human behavior.
The trading world is known for its beautiful one-liners that are all so true, but at the same time so extremely difficult to practice. Some of the most well known around are: "Cut your losses and let your profits run." or "The trend is your friend." (until it isn't), just to mention a few. Collecting more of those one-liners would be a great subject for another article. This post deals with getting with the trend.
Humans are very good at recognizing patterns in every day life, and mostly patterns that we are familiar with. For instance, it doesn't take us a whole lot of effort to recognize a face, even if that face is showing a different expression than the first time we saw it. Recognizing a road crossing, but from a different angle than the first time is equally easy.
Investing in gold has been on every front page in the last two, three years. The financial crisis has scared a lot of investors who lost faith in everything but gold. Many investors buy gold in some form, in paper or physical gold. Investing in gold is not something from the last couple of years, but has been around for many years. It's just that the last couple of years, gold has every characteristic of being a bubble. Gold investors sometimes seem to lose all good sense of judgement and logic. Buying gold has almost become a sort of religion.
It's been over a year now since we've witnessed the so called flash crash. On May 6th 2010, within minutes the markets dropped several percentages, then bounced and recovered a large part of the losses. To relive those exciting moments, here are some video clips. If you know of any other clip that should be here, please send me an email. This post with video clips is mostly fun, but it's also showing us panic, anxiety, greed and fear. Besides crash flash videos, there are some other clips that show the emotions that sometimes come with trading.
Being a short term trader, it's sometimes easy to forget about the larger picture. One could argue that short term traders couldn't care less about the larger picture or the long term view, but that's actually not the case. Trading is a game of chances, and as a trader, you make the trades that are likely to be successful. But it is also obvious that even trades that seem very likely to be successful can fail multiple times in a row.
We have all heard of the famous experiment by the Russian physiologist Ivan Pavlov where dogs have been conditioned to expect food following a particular event. The Pavlov dogs have experienced the same sequence of events so often, at some point they know what's coming next without really thinking about it. They start to show emotions 'in advance', and salivate even before their food is served. This is one form of conditioning.