Basic Assumption

History Repeats Itself over Time

The psychology of trading and human nature in general is based on emotional factors.

Pride, greed, hope, anger, sadness and ego are all factors that affect the market place as much as they do our normal lives.

Even if some investors are completely risk adverse and others are risk tolerant — these factors all have a substantial impact on the decision making process you adopt.

If you wrote down all the goals you seek to achieve in your trading strategy, you would find that the majority relate in some way to making a profit.

Is this a bad thing?

It could be argued that either side of this argument will present differing strengths and weaknesses.

The most significant factor to realize is that you are not the only person motivated by profit. All traders tend to react in the same way each time they encounter a situation which is similar.

While it is true that some traders react positively from any mistakes made and learn from them, other participants decide to leave the market and therefore create a balancing pendulum of traders entering and leaving the market.

Consequently, the same oversights are made by each generation of traders in the market which infers that history tends to repeat itself as time moves forward.

Another important market factor to consider is that most people act like sheep when it comes to a trading situation — “once the flock begins to move, all the other sheep follow.”

So what? You ask …

How Does this Affect Me?

Quite simply, all our emotions tell us to follow what the majority of people are doing and as a result we are heavily influenced by market majority.

This idea of “majority rules” negatively affects trading interpretations because it adversely influences what degree we interpret both buyers? and sellers? nature in the market and how they are reacting to a situation.

This then persuades our judgments about future price directions and our independency of making market decisions.

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