Saturday, December 24, 2016

The "Emotional Market Sphere" - Separating Yourself From The Crowd.

I think traders sometime forget that market movement is powered by other traders actions. The collective force of every trader's decision, including your own, moves the market. I call this the Emotional Market Sphere.

It's like a bubble of human consciousness that fails to see the error of it's ways. Everyone finds unique, apparently well-reasoned motives for falling into the trap of cognitive biases...some do it without ever learning that they even exist. The paradox is that, although everyone's way of expressing their cognitive short-comings is as unique as their fingerprint, the result is an entirely predictable constant. Repeatable patterns. The Emotional Market Sphere.

In order to profit from the market, we need to be able to 1) identify the EMS's emotions/actions and then 2) take advantage of them without succumbing to the same emotions (which leads to the same actions).

So the first step is to stop thinking of the market as a bunch of patterns with some rules that we can apply to profit from them, and start thinking about the emotions of the participants. The easiest way to do that is to take note of what you yourself are feeling. Look for the traps that you are about to fall in and position yourself to ride the panic/fear/greed/hope that you would have felt had you fallen for the trap. This requires you to be able to analyse yourself from a 3rd person perspective.

With practice, you'll widen the gap between what you felt like doing and when you took action...eventually, you'll hardly (hardly!) associate with the feelings that would have caused you to have knee-jerk reactions in the past. For the most part, you will have separated yourself from the crowd.

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