Introduction to Psychology

I was reading a technical analysis website which informed me that there are only three things price can do, it can move up, down and sideways. Well I’m out of a job, I had no idea that was the case. The comment would be funny if it wasn’t intended to be serious. What a simplistic way of looking at things, while accurate to the specifics of each word, the site failed to mention the 8000 ways price can move up, down or sideways.

Sites like these cause problems in that they over simplify and claim that making money in the markets is far easier than the reality tells us it is. Consistent returns aren’t easy, they require hard work, countless hours of study and dedication. While markets are in a bullish cycle, many traders/investors develop a false sense of confidence, almost an indestructible ‘this is easy’ euphoria. So we start your Intermediate course with a few basic examples of various psychology. From there we’ll start to look at different trend periods on a macro scale and study how various structures work at certain times and delve into some of the psychology behind each structure.

For now lets take a basic look at a few market participants, these each have their own characteristics and own areas of analysis. The view is that these participants have a relatively limited level of skill in their respective field.

Today we’ll start this study by meeting Joe Average. He’s a normal kind of guy, works full time, has a bit of spare cash (hopefully not too much), and has the odd bet on the stock market.  Now one day he has a drink with a friend, this friend knows a guy that works for this small pet food company. The company develops high protein dog and cat biscuits and in development of these biscuits the company discovers that one protein may be linked to a cure for Alzheimer’s, amazing story I know. Now Joe and his buddy have been friends for a long time and he knows his friend wouldn’t lead him astray, so he decides to look into it. He looks at the share price, goes to an online chart program and he can see that the Mangy Scraggy Flea Trading company (MSFT) is doing quite well. He keeps an eye on things and in no time he starts to read a bit of media coverage about how well the company is travelling. So he makes a call to his broker and says, buy ten thousand MSFT !! Now Joe’s away, no return, so lets see how he travels.

1: The Entry Now Joe has bought in a little higher than he had hoped, he’s received his contract note from his broker, feeling quietly confident but focus is on work, he knows he’s in on the ground floor and he just needs to wait.

2: Exuberance Well we’ve progressed on a bit and Joe is very pleased with himself, walking around with a bit of a spring in his step. The Mangy Scraggy Flea Trading company haven’t announced a cure for Alzheimer’s yet but he’s not concerned, the company is sound. The profit is his after all.

3: Euphoria Joe couldn’t be happier, his wise investment is going great guns. He certainly did get in on the ground floor and now everyone else is starting to catch up. He’s planning the Christmas holiday to Hawaii and thinking how very pleased his wife will be when she learns of his astute decision. Joe becomes so confident in his skill, he starts looking for the next stock to buy.

4: Anxiety Well Joe is a bit nervous today, he’s not concerned as he knows the stock market can be volatile at times and this is simply profit taking from people that don’t know as much as he does. He’s astute decision is still very much in profit.

5:Denial Well today Joe just doesn’t want to look at the markets, everything is fine he tells himself. The market is wrong, they’ll wake up to themselves. My buddy wouldn’t lead me astray, I have confidence, this is nothing. But still, in the back of his mind he’s not sure if he should sell and take this profit of his.

6: Relief Joe is certainly breathing a bit easier today, he knew he was right and all those sellers were wrong. He just had to hold on and he’d be fine. Everything looks good, the holiday is back on track and man is he looking forward to how pleased his wife will be. He tells himself stocks will always have sellers, just hold through and you’ll be fine.

7: Complacency Well here we go again, Joe’s now thinking how stupid these sellers are, don’t they know how ridiculous they are? He wants to get each one on the phone and let them know what he knows. Oh well, not to worry, they’ll figure out what a mistake they’ve made in time, Joe will be in Hawaii by then. ‘Sit tight Joe, you’ll be fine’ he tells himself.

8: Concern Selling has now driven price down a bit further and Joe’s back to where he first considered selling. Ahh but Joe knows better, had he sold last time it would have been a mistake, so he decides to hold through. The announcement still hasn’t come out and he knows that this process can take time. He reinforces his decision to himself, but still . . .

9: Fear Well Joe’s in a bit of panic now, this great profit of his has now become a loss. The holiday to Hawaii is now looking like a trip to Grandmas to listen to her reminisce about the good old days and instead of his wife being grateful for marrying such a brilliant man, he now gets to clean the gutters out as punishment. But Joes fear also incorporates anger as it so often does, Joe is too smart, he did his homework and he will not tolerate a loss.

10: Acceptance Now Joe doesn’t really have any emotion left, he’s now accepted he got things completely wrong. He knows he won’t be going to Hawaii, he knows he won’t be impressing his wife. He tells himself the company is good, just hold the stock and forget about it, dogs and cats will always eat biscuits after all.

So Joe catches up with his buddy, turns out the Alzheimer’s story was made up by one of the directors secretary to annoy an ex broker boyfriend of hers. Still his mate is grateful he used money management to protect his position. How about you Joe, you did get out didn’t you???         Oh yes said Joe, money management, yep, I got out.

In our next Intermediate Newsletter we meet Joe Trader Terrific.

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