Section X: Not Being Psychologically Tuned
This is one of the most underestimated subjects when it comes to trading. For this reason we have developed a complete lesson on this subject.
For now, it will be important for you to understand some terms and important concepts about trading psychology.
Have you thought about what a market is?
A market is made when there is at least one buyer and one seller of any good or service. What is important for you to understand though is how things are valued.
Take for instance, you need a car right away because you just got a new job and it is quite far away from where you live. A friend of yours also wants a new car, just to change his or her old car. You both run to the nearest car agency. Both of you are keen about the same car. When you both see the price, you will probably think “hey, what a good deal” and your friend will probably go “wow, this car is expensive”. This kind of thinking is obvious since you have a real need; you actually need a car to drive to your new job. Your friend, on the other hand, does not have a real need, he or she just want to change the old car. When people have real needs, they tend to overvalue things, while people with no real needs tend to undervalue things.
The same goes for the markets; the price of each instrument is based on perceptions of each participant in the market. Should the perceptions change, the price will change. It is impossible to understand the perceptions of every single participant in the market, thus almost impossible to forecast the price movement.
We will develop more on this subject later in the course.
FACT - Understanding all the psychological barriers that affect every trading decision will put us one step ahead of the game.