single trade and the maximum amount he may lose in amonth. These limits work as stop-loss orders on a trader.
With all these advantages, how can an individual trader compete againstinstitutions and win? First, many institutional trading departments are poorlyrun. Second, the Achilles heel of most institutions is that they often have totrade, while an individual trader is free to trade or stay out of the market.Banks have to be active in the bond market and food processing companieshave to be active in the grain market at almost any price. An individualtrader is free to wait for the best trading opportunities.
Most private traders fritter away this advantage by overtrading. An indi-vidual who wants to succeed against the giants must develop patience andeliminate greed. Remember, your goal is to trade well, not to trade often.
Successful institutional traders receive raises and bonuses. Even a highbonus can feel puny to someone who earns many millions of dollars for hisfirm. Successful institutional traders often talk of quitting and going to tradefor themselves.
Only a handful of them manage to make the transition. Most traders wholeave institutions get caught up in the emotions of fear, greed, elation, andpanic when they start risking their own money. They seldom do well tradingfor their own account — another sign that psychology is at the root of tradingsuccess or failure.
The Swordmakers
Medieval knights shopped for the sharpest swords, and modern tradersshop for the best trading tools. The growing access to data, computers, andsoftware creates a more level playing field for traders. Prices of hardwarefall almost monthly and software keeps getting better. It is easy for even a54 MASS PSYCHOLOGY
computer-illiterate trader to hire a consultant and set up a system (seeSection 24).
A computer allows you to speed up your research and follow up on moreleads. It is not a substitute for making trading decisions. A computer helpsyou analyze more markets in greater depth, but the ultimate responsibilityfor every trade rests with you.
There are three types of trading software: toolboxes, black boxes, andgray boxes. A toolbox allows you to display data, draw charts, plot indica-tors, and even test your trading system. Toolboxes for options traders includeoption valuation models. It is as easy to adapt a good toolbox to your needsas it is to adjust your car seat.
What goes inside a black box is secret. You feed it data, and it tells youwhen to buy and sell. It is like magic—a way to make money without think-ing. Black boxes usually come with excellent historical track records. This isonly natural because they were created to fit old data! Markets keep chang-ing, and black boxes keep blowing up, but new generations of losers keepbuying new black boxes.
Gray boxes straddle the fence between toolboxes and black boxes. Thesepackages are usually put out by prominent market personalities. They dis-close the general logic of their system and allow you to adjust some of theirparameters.
Advisors
Advisory newsletters are colorful splashes on the trading scene. Freedom ofthe press allows anyone to put a typewriter on his kitchen table, buy a fewstamps, and start sending out a financial advisory letter. Their “trackrecords” are largely an exercise in futility because hardly anybody ever takesevery bit of advice in any newsletter.
Some newsletters provide useful ideas and point readers in the directionof trading opportunities. A few offer educational value. Mostly, they sell out-siders an illusion of being an insider, of knowing what happens or is about tohappen in the markets.
Newsletters are good entertainment. Your subscription rents you a penpalwho sends amusing and interesting letters and never asks you to write back,except for a check at renewal time.
Services that rate newsletters are for-profit affairs run by small business-men whose well-being depends on the well-being of the advisory industry.14. THE TRADING SCENE 55
Rating services may occasionally tut-tut an advisor, but they dedicate mostof their energy to loud cheerleading.
I used to write an advisory newsletter: worked hard, did not fudge results,and received good ratings. I saw from the inside a tremendous potential forfudging results. This is a well-kept secret of the advisory industry.
When I was getting into letter writing, one of the most prominent advisorstold me that I should spend less time on research and more on marketing.The first principle of letter writing is: “If you have to make forecasts, make alot of them.” Whenever a forecast tums out right, double the volume of pro-motional mail.
Trading Contests
Trading contests are run by small firms or individuals. Contestants pay orga-nizers to monitor their results and publicize the names of winners. Tradingcontests have two flaws—one mild, and another possibly criminal. This is ascandal waiting to be explored by investigative journalists.
All contests hide information about losers and tell you only about win-ners. Each dog has its day in the sun, and most losers have at least one goodquarter. If you keep entering contests and taking wild chances, eventuallyyou will have a winning quarter, reap the publicity, and attract money man-agement clients.
Many advisors enter trading contests with a small stake, which they chalkoff to marketing expense. If they get lucky they receive valuable publicity,while their losses are hidden. Nobody hears about a contestant who destroyshis account. I know several traders who are so bad they could not tradecandy with a child. They are chronic losers — but all of them appeared on thelist of winners of a major contest, with great percentage gains. That publicityallowed them to raise money from the public— which they proceeded to lose.If trading coritests disclosed the names and results of all participants, thatwould promptly kill the enterprise.
A more malignant flaw of trading contests is the financial collusionbetween some organizers and contestants. Many organizers have a directfinancial incentive to rig the results and help their co-conspirators obtainpublicity as winners. They use it to raise money from the public.
The proprietor of one of the contests told me that he was raising moneyfor his star winner. How objective can a judge be if he has a business rela-tionship with one of his contestants? It appeared that the amount he could56 MASS PSYCHOLOGY
raise depended on how well his “star” performed in his contest. That highlytouted star promptly lost money put under his management.
The worst abuses can occur in contests run by brokerage firms. A firmcan set up contest rules, attract participants, have them trade through thefirm, judge them, publicize their results, and then go for the jugular—raisingmoney from the public for winners to manage, thereby generating fees andcommissions. It would be easy for such a firm to create a star. All it wouldhave to do is open several accounts for the designated “winner.” At the endof each day it could put the best trades into a contest account and the rest ofthe trades into other accounts, creating a great “track record.” Trading con-tests can be an attractive tool for fleecing the public.
15. THE MARKET CROWD AND YOU
The market is a loosely organized crowd whose members bet that prices willrise or fall. Since each price represents the consensus of the crowd at themoment of transaction, all traders are in effect betting on the future mood ofthe crowd. That crowd keeps swinging from indifference to optimism or pes-simism and from hope to fear. Most people do not follow their own tradingplans because they let the crowd influence their feelings, thoughts, andactions.
Bulls and bears battle in the market, and the value of your investment sinksor soars, depending on the actions of total strangers. You cannot control themarkets. You can only decide whether and when to enter or exit trades.
Most traders feel jittery when we enter a trade. Their judgment becomesclouded by emotions after they join the market crowd. These crowd-inducedemotions make traders deviate from their trading plans and lose money.
Experts on Crowds
Charles Mackay, a Scottish barrister, wrote his classic book, ExtraordinaryPopular Delusions and the Madness of Crowds, in 1841. He described sev-eral mass manias, including the Tulip Mania in Holland in 1634 and theSouth Seas investment bubble in England in 1720.
The tulip craze began as a bull market in tulip bulbs. The long bull marketconvinced the prosperous Dutch that tulips would continue to appreciate.Many of them abandoned their businesses to grow tulips, trade them, or15. THE MARKET CROWD AND YOU 57
become tulip brokers. Banks accepted tulips as collateral and speculatorsprofited. Finally, that mania collapsed in waves of panic selling, leavingmany people destitute and the nation shocked. Mackay sighed, “Men go madin crowds, and they come back to their senses slowly and one by one.”
In 1897, Gustave LeBon, a French philosopher and politician, wrote TheCrowd, one of the best books on mass psychology. A trader who reads ittoday can see his reflection in a century-old mirror.
LeBon wrote that when people gather in a crowd, “Whoever be the indi-viduals that compose it, however like or unlike be their mode of life, theiroccupations, their character, or their intelligence, the fact that they have beentransformed into a crowd puts them in possession of a sort of collective mindwhich makes them feel, think, and act in a manner quite different from thatin which each individual of them would feel, think, and act were he in a stateof isolation.”
People change when they join crowds. They become more credulous andimpulsive, anxiously search for a leader, and react to emotions instead ofusing their intellect. An individual who becomes involved in a groupbecomes less capable of thinking for himself.
The experiments of American social psychologists in the 1950s haveproven that people think differently in groups than they do alone. For exam-ple, an individual can easily tell which of the two lines on a piece of paper islonger. He loses that ability when he is put into a group whose other mem-bers deliberately give wrong answers. Intelligent, college-educated peoplebelieve a group of strangers more than they believe their own eyes!
Group members believe others, and particularly group leaders, more thanthey believe themselves. Theodore Adomo and other sociologists showed intheir two-volume study, The American Soldier, that the single best predictorof an individual’s effectiveness in combat was his relationship with hissergeant. A soldier who trusts his leader will literally follow him to his death.A trader who believes he is following a trend may hold a losing positionuntil his equity is wiped out.
Sigmund Freud explained that groups are held together by the loyalty ofmembers to the leader. Our feelings toward group leaders stem from ourchildhood feelings toward our fathers—a mixture of trust, awe, fear, thedesire for approval, and potential rebellion. When we join groups, our think-ing on issues involving that group regresses to the level of a child. A leader-less group cannot hold itself together and falls apart. This explains buyingand selling panics. When traders suddenly feel that the trend they have beenfollowing has abandoned them, they dump their positions in a panic.58 MASS PSYCHOLOGY
Group members may catch a few trends, but they get killed when trendsreverse. When you join a group, you act like a child following a parent.Markets do not care about your well-being. Successful traders are indepen-dent thinkers.
Why Join?
People have been joining crowds for safety since the beginning of time. If agroup of hunters took on a saber-toothed tiger, most of them were likely tosurvive. A lone hunter had a slim chance of coming out alive from such anencounter. Loners got killed more often and left fewer offspring. Groupmembers were more likely to survive, and the tendency to join groupsappears to have been bred into humans.
Our society glorifies freedom and free will, but we carry many primitiveimpulses beneath the thin veneer of civilization. We want to join groups forsafety and be led by strong leaders. The greater the uncertainty, the strongerour wish to join and to follow.
No saber-toothed tigers roam the canyons of Wall Street, but you probablyfear for your financial survival. Your fear swells up because you cannot con-trol changes in prices. The value of your position rises and falls because ofbuying and selling by total strangers. This uncertainty makes most traderslook for a leader who will tell them what to do.
You may have rationally decided to go long or short, but the moment youput on a trade, the crowd starts sucking you in. You need to pay attention toseveral signs that indicate when you start turning into a sweaty crowd mem-ber instead of an intelligent trader.
You start losing your independence when you watch prices like a hawkand feel elated if they go your way or depressed if they go against you. Youare in trouble when you start trusting gurus more than yourself and impul-sively add to losing positions or reverse them. You lose your independencewhen you do not follow your own trading plan. When you notice what ishappening, try to come back to your senses; if you cannot regain your com-posure, exit your trade.
Crowd Mentality
People become primitive and action-oriented when they join crowds.Crowds feel simple but strong emotions such as terror, elation, alarm, andjoy. Crowds swing from fear to glee, from panic to mirth. A scientist can be15. THE MARKET CROWD AND YOU 59
cool and rational in his lab but make harebrained trades after being sweptup in the mass hysteria of the market. A group can suck you in, whether youtrade from a crowded brokerage office or from a remote mountaintop.When you let others influence your trading decisions, you lose your chanceof success.
Group loyalty is essential for the survival of a military unit. Joining aunion can help you keep a job even if your performance is not very good.But no group can protect you in the market.
The crowd is bigger and stronger than you. No matter how smart you are,you cannot argue with the crowd. You have only one choice —to join thecrowd or to act independently.
Many traders are puzzled why markets always seem to reverse immedi-ately after they dump their losing position. This happens because crowdmembers are gripped by the same fear—and everybody dumps at the sametime. Once the fit of selling has ended, the market has nowhere to go but up.Optimism returns to the marketplace, and the crowd feels greedy and goeson a new buying binge.
Crowds are primitive, and your trading strategies should be simple. Youdo not have to be a rocket scientist to design a winning trading method. If thetrade goes against you—cut your losses and run. It never pays to argue withthe crowd—simply use your judgment to decide when to join and when toleave.
Your human nature prepares you to give up your independence understress. When you put on a trade, you feel the desire to imitate others andoverlook objective trading signals. This is why you need to develop and fol-low trading systems and money management rules. They represent yourrational individual decisions, made before you enter a trade and become acrowd member.
Who Leads?
You may feel intense joy when prices move in your favor. You may feelangry, depressed, and fearful when prices go against you, and you may anx-iously wait to see what the market will do to you next. Traders join crowdswhen they feel stressed or threatened. Battered by emotions, they lose theirindependence and begin imitating other group members, especially the groupleader.
When children feel frightened, they want to be told what to do and lookup to their parents. They transfer that attitude to teachers, doctors, ministers,60 MASS PSYCHOLOGY
bosses, and assorted experts. Traders turn to gurus, trading system vendors,newspaper columnists, and other market leaders. But, as Tony Plummer bril-liantly pointed out in his book, Forecasting Financial Markets, the mainleader of the market is price.
Price is the leader of the market crowd. Traders all over the world followthe market’s upticks and downticks. Price seems to say to traders, “Followme, and I will show you the way to riches.” Most traders consider them-selves independent. Few of us realize how strongly we focus on the behaviorof our group leader.
A trend that goes in your favor symbolizes a strong, bountiful parent call-ing you to share a meal or risk being left out. A trend that goes against yousymbolizes an angry, punishing parent. When you are gripped by these feel-ings, it is easy to overlook objective signals that tell you to exit. You mayfeel defiant, or bargain, or beg forgiveness — while avoiding the rational actof accepting your loss and getting out of a losing position.
Independence
You need to base your trades on a carefully prepared trading plan and notjump in response to price changes. It pays to write down your plan. You need ©to know exactly under what conditions you will enter and exit a trade. Donot make decisions on the spur of the moment, when you are vulnerable tobeing sucked into the crowd.
You can succeed in trading only when you think and act as an individual.The weakest part of any trading system is the trader himself. Traders fail whenthey trade without a plan or deviate from their plans. Plans are created by rea-soning individuals. Impulsive trades are made by sweaty group members.
You have to observe yourself and notice changes in your mental state asyou trade. Write down your reasons for entering a trade and the rules forgetting out of it, including money management rules. You must not changeyour plan while you have an open position.
Sirens were sea creatures of Greek myths who sang so beautifully thatsailors jumped overboard and drowned. When Odysseus wanted to hear theSirens’ songs, he ordered his men to tie him to the mast and to put wax intheir own ears. Odysseus heard the Sirens’ song but survived because hecould not jump. You ensure your survival as a trader when on a clear dayyou tie yourself to the mast of a trading plan and money management rules.16. PSYCHOLOGY OF TRENDS 61
16. PSYCHOLOGY OF TRENDS
Each price is the momentary consensus of value of all market participants. Itshows their latest vote on the value of a trading vehicle. Any trader can “putin his two cents’ worth” by giving an order to buy or to sell, or by refusing totrade at the current level.
Each bar on a chart reflects the battle between bulls and bears. When bullsfeel strongly bullish, they buy more eagerly and push markets up. Whenbears feel strongly bearish, they sell more actively and push markets down.
Each price reflects action or lack of action by all traders in the market.Charts are a window into mass psychology. When you analyze charts, youanalyze the behavior of traders. Technical indicators help make this analysismore objective.
Technical analysis is applied social psychology. It aims to recognizetrends and changes in crowd behavior in order to make intelligent tradingdecisions.
Strong Feelings
Ask most traders why prices went up, and you are likely to get a stockanswer —more buyers than sellers. This is not true. The number of tradinginstruments, such as stocks or futures, bought and sold in any market isalways equal.
If you want to buy a contract of Swiss Francs, someone has to sell it toyou. If you want to sell short a contract of the S&P 500, someone has to buyit from you. The number of stocks bought and sold is equal in the stock mar-ket. Furthermore, the number of long and short positions in the futures mar-kets is always equal. Prices move up or down because of changes in theintensity of greed and fear among buyers or sellers.
When the trend is up, bulls feel optimistic and do not mind paying a littleextra. They buy high because they expect prices to rise even higher. Bearsfeel tense in an uptrend, and they agree to sell only at a higher price. Whengreedy and optimistic bulls meet fearful and defensive bears, the market ral-lies. The stronger their feelings, the sharper the rally. The rally ends onlywhen many bulls lose their enthusiasm.
When prices slide, bears feel optimistic and do not quibble about sellingshort at lower prices. Bulls are fearful and agree to buy only at a discount.62 MASS PSYCHOLOGY
As long as bears feel like winners, they continue to sell at lower prices, andthe downtrend continues. It ends when bears start feeling cautious and refuseto sell at lower prices.
Rallies and Declines
Few traders act as purely rational human beings. There is a great deal ofemotional activity in the markets. Most market participants act on the princi-ple of “monkey see, monkey do.” The waves of fear and greed sweep upbulls and bears.
Markets rise because of greed among buyers and fear among short sellers.Bulls. normally like to buy on the cheap. When they turn very bullish, theybecome more concemed with not missing the rally than with getting a cheapprice. A rally continues as long as bulls are greedy enough to meet sellers’demands.
The sharpness of a rally depends on how traders feel. If buyers feel just alittle stronger than sellers, the market rises slowly. When they feel muchstronger than sellers, the market rises fast. It is the job of a technical analystto find when buyers are strong and when they start running out of steam.
Short sellers feel trapped by rising markets, as their profits melt and turninto losses. When short sellers rush to cover, a rally becomes nearly vertical.Fear is a stronger emotion than greed, and rallies driven by short coveringare especially sharp.
Markets fall because of greed among bears and fear among bulls.Normally bears prefer to sell short on rallies, but if they expect to make a lotof money on a decline, they don’t mind shorting on the way down. Fearfulbuyers agree to buy only below the market. As long as short sellers are will-ing to meet those demands and sell at a bid, the decline continues.
As bulls’ profits melt and turn into losses, they panic and sell at almostany price. They are so eager to get out that they hit the bids under the mar-ket. Markets can fall very fast when hit by panic selling. ,
Trend Leaders
Loyalty is the glue that holds groups together. Freud showed that groupmembers relate to their leader the way children relate to a father. Group16. PSYCHOLOGY OF TRENDS 63
members expect leaders to inspire and reward them when they are good butto punish them when they are bad.
Who leads market trends? When individuals try to control a market, theyusually end up badly. For example, the bull market in silver in the 1980s wasled by the Hunt brothers of Texas and their Arab associates. The Huntsended up in a bankruptcy court. They had no money left even for a limousineand had to ride the subway to the courthouse. Market gurus sometimes leadtrends, but they never last beyond one market cycle (see Section 6).
Tony Plummer, a British trader, has presented a revolutionary idea in hisbook, Forecasting Financial Markets — The Truth Behind Technical Analysis.He showed that price itself functions as the leader of the market crowd! Mosttraders focus their attention on price.
Winners feel rewarded when price moves in their favor, and losers feelpunished when price moves against them. Crowd members remain blissfullyunaware that when they focus on price they create their own leader. Traderswho feel mesmerized by price swings create their own idols.
When the trend is up, bulls feel rewarded by a bountiful parent. The longeran uptrend lasts, the more confident they feel. When a child’s behavior isrewarded, he continues to do what he did. When bulls make money, they add tolong positions and new bulls enter the market. Bears feel they are being pun-ished for selling short. Many of them cover shorts, go long, and join the bulls.
Buying by happy bulls and covering by fearful bears pushes uptrendshigher. Buyers feel rewarded while sellers feel punished. Both feel emotion-ally involved, but few traders realize that they are creating the uptrend, creat-ing their own leader.
Eventually a price shock occurs—a major sale hits the market, and thereare not enough buyers to absorb it. The uptrend takes a dive. Bulls feel mis-treated, like children whose father hit them with a strap during a meal, butbears feel encouraged.
A price shock plants the seeds of an uptrend’s reversal. Even if the marketrecovers and reaches a new high, bulls feel more skittish and bears becomebolder. This lack of cohesion in the dominant group and optimism among itsopponents makes the uptrend ready to reverse. Several technical indicatorsidentify tops by tracing a pattern called bearish divergence (see Section 28). Itoccurs when prices reach a new high but the indicator reaches a lower highthan it did on a previous rally. Bearish divergences mark the best shortingopportunities.
When the trend is down, bears feel like good children, praised and62 MASS PSYCHOLOGY
As long as bears feel like winners, they continue to sell at lower prices, andthe downtrend continues. It ends when bears start feeling cautious and refuseto sell at lower prices.
Rallies and Declines
Few traders act as purely rational human beings. There is a great deal ofemotional activity in the markets. Most market participants act on the princi-ple of “monkey see, monkey do.” The waves of fear and greed sweep upbulls and bears.
Markets rise because of greed among buyers and fear among short sellers.Bulls. normally like to buy on the cheap. When they turn very bullish, theybecome more concerned with not missing the rally than with getting a cheapprice. A rally continues as long as bulls are greedy enough to meet sellers’demands.
The sharpness of a rally depends on how traders feel. If buyers feel just alittle stronger than sellers, the market rises slowly. When they feel muchstronger than sellers, the market rises fast. It is the job of a technical analystto find when buyers are strong and when they start running out of steam.
Short sellers feel trapped by rising markets, as their profits melt and turninto losses. When short sellers rush to cover, a rally becomes nearly vertical.Fear is a stronger emotion than greed, and rallies driven by short coveringare especially sharp.
Markets fall because of greed among bears and fear among bulls.Normally bears prefer to sell short on rallies, but if they expect to make a lotof money on a decline, they don’t mind shorting on the way down. Fearfulbuyers agree to buy only below the market. As long as short sellers are will-ing to meet those demands and sell at a bid, the decline continues.
As bulls’ profits melt and turn into losses, they panic and sell at almostany price. They are so eager to get out that they hit the bids under the mar-ket. Markets can fall very fast when hit by panic selling.
Trend Leaders
Loyalty is the glue that holds groups together. Freud showed that groupmembers relate to their leader the way children relate to a father. Group16. PSYCHOLOGY OF TRENDS 63
members expect leaders to inspire and reward them when they are good butto punish them when they are bad.
Who leads market trends? When individuals try to control a market, theyusually end up badly. For example, the bull market in silver in the 1980s wasled by the Hunt brothers of Texas and their Arab associates. The Huntsended up in a bankruptcy court. They had no money left even for a limousineand had to ride the subway to the courthouse. Market gurus sometimes leadtrends, but they never last beyond one market cycle (see Section 6).
Tony Plummer, a British trader, has presented a revolutionary idea in hisbook, Forecasting Financial Markets —The Truth Behind Technical Analysis.He showed that price itself functions as the leader of the market crowd! Mosttraders focus their attention on price.
Winners feel rewarded when price moves in their favor, and losers feelpunished when price moves against them. Crowd members remain blissfullyunaware that when they focus on price they create their own leader. Traderswho feel mesmerized by price swings create their own idols.
When the trend is up, bulls feel rewarded by a bountiful parent. The longeran uptrend lasts, the more confident they feel. When a child’s behavior isrewarded, he continues to do what he did. When bulls make money, they add tolong positions and new bulls enter the market. Bears feel they are being pun-ished for selling short. Many of them cover shorts, go long, and join the bulls.
Buying by happy bulls and covering by fearful bears pushes uptrendshigher. Buyers feel rewarded while sellers feel punished. Both feel emotion-ally involved, but few traders realize that they are creating the uptrend, creat-ing their own leader.
Eventually a price shock occurs—a major sale hits the market, and thereare not enough buyers to absorb it. The uptrend takes a dive. Bulls feel mis-treated, like children whose father hit them with a strap during a meal, butbears feel encouraged.
A price shock plants the seeds of an uptrend’s reversal. Even if the marketrecovers and reaches a new high, bulls feel more skittish and bears becomebolder. This lack of cohesion in the dominant group and optimism among itsopponents makes the uptrend ready to reverse. Several technical indicatorsidentify tops by tracing a pattern called bearish divergence (see Section 28). Itoccurs when prices reach a new high but the indicator reaches a lower highthan it did on a previous rally. Bearish divergences mark the best shortingopportunities.
When the trend is down, bears feel like good children, praised and64 MASS PSYCHOLOGY
rewarded for being smart. They feel increasingly confident, add to their posi-tions, and the downtrend continues. New bears come into the market. Mostpeople admire winners, and the financial media keep interviewing bears inbear markets.
Bulls lose money in downtrends, and that makes them feel bad. Bullsdump their positions, and many switch sides to join bears. Their sellingpushes markets lower.
After a while, bears grow confident and bulls feel demoralized. Suddenly,a price shock occurs. A cluster of buy orders soaks up all available sellorders and lifts the market. Now bears feel like children whose father haslashed out at them in the midst of a happy meal.
A price shock plants the seeds of a downtrend’s eventual reversal becausebears become more fearful and bulls grow bolder. When a child begins todoubt that Santa Claus exists, he seldom believes in Santa again. Even ifbears recover and prices fall to a new low, several technical indicators iden-tify their weakness by tracing a pattern called a bullish divergence. It occurswhen prices fall to a new low but an indicator traces a more shallow bottomthan during the previous decline. Bullish divergences identify the best buy-ing opportunities.
Social Psychology
An individual has a free will and his behavior is hard to predict. Groupbehavior is more primitive and easier to follow. When you analyze markets,you analyze group behavior. You need to identify the direction in whichgroups run and their changes.
Groups suck us in and cloud our judgment. The problem for most analystsis that they get caught in the mentality of the groups they analyze.
The longer a rally continues, the more technicians get caught up in bullishsentiment, ignore the danger signs, and miss the reversal. The longer adecline goes on, the more technicians get caught up in bearish gloom andignore bullish signs. This is why it helps to have a written plan for analyzingthe markets. We have to decide in advance what indicators we will watchand how we will interpret them.
Floor traders use several tools for tracking the quality and intensity of acrowd’s feelings