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Price action is in the mind - Dr.C.K.Narayan
Dr.C.K.Narayan | 24 Jan 2013

how the mind creates the new normal. Lots of people attend training programs on technical analysis, eager to learn some new method that will help them pick that magic stock or get into that big trend or exit near the top of a big move. They latch on to the method shown by the presenter, paying particular attention to the way the method is to be applied with an eye fixed all the time on the ultimate result- which is always profits. Yeah, yeah, there is the stoploss to deal with the unfavourable out come and all that but that is for the others. Once I know this method, they tell themselves, my trades will all reach their profit making goals.

 

PRICE ACTION IS IN THE MIND
Or, how the mind creates the new normal.

Lots of people attend training programs on technical analysis, eager to learn some new method that will help them pick that magic stock or get into that big trend or exit near the top of a big move. They latch on to the method shown by the presenter, paying particular attention to the way the method is to be applied with an eye fixed all the time on the ultimate result- which is always profits. Yeah, yeah, there is the stoploss to deal with the unfavourable out come and all that but that is for the others. Once I know this method, they tell themselves, my trades will all reach their profit making goals.

There is another class – the readers. In the earlier days they used to read the books but now they read small, short write-ups on the Net. Life has become faster after all, where is the time for reading a few-hundred page book. I can get it all in a two page write up with two chart illustrations thrown in. And if I read about five such, hell, I am already well educated or indeed, well read!

The problem with both the above sets – who are setting out to become traders, mind you- is that they are doing what is deemed as ‘necessary action’ but without any understanding. The focus is all on getting to the bottom line. This is so much like us, in real life, during some pooja or undertaking some fast or attending a temple or church or mosque. We all go thru the motions, because that is what we think is the deal. We all go thru rituals of offering flowers or candles or chuddars and believe that we have done our bit. And if we don’t do all these things, we feel guilty about it. We are even made to feel guilty about it by those around us, whether elder or younger. This is the classic case of ritualistic practice. Unless philosophy behind the rituals get known, this will breed superstition.

Quite in the same way, traders also become superstitious. Some of them have ridiculous rituals that they believe is necessary for them to win. Some of them go to extreme lengths to avoid doing something in order not to lose. Typical translation of this in trading action is taking profits very early or avoiding taking a loss.

Understanding the method means understanding the price action.