If you want to invest well you need to learn one thing, how to tune out the noise. This is the psychology of investing. Experts have written many books on this topic, however, they are all wrong. Why? There is only one rule for investing in the stock market or currency market or any other exchange when it comes down to your thinking and emotions. What is that rule? Play your own game.
- At the end of this post please comment too if you are an intuitive market player or logical market player and why?
I have traded stocks since I was fifteen. I learned the hard way how to play the psychology of the market. I hope you can learn from my advice.
Investing and chess a similar in that they are logical activities with a mix of psychology. If you are investing or playing chess and you are listening to the noise or even advice of people around the table, you are playing other people’s game. No expert chess player does listen to the people around him nor his opponent, during a live match.
I do not recommend you do if you have invested in the market. You might want to read up and practice with paper trades whether you are a trader or a long-term buy and hold person before you put your money into the market. However, you once in do not think you will read the psychology of the market. Do not think you can react on news faster than computer programs or insider trading? Think again.
A psychological approach to trading stocks
The best book on the understanding human behavior is by Stan Weinstein. This basically uses trend analysis. Psychology might make women feel less guilty with their lives, I guess, but it has little place for the battlefield of the bulls and bears in the market. Making money off emotions in the market is almost, but not quite as bad as trying to predict the market with Astrology. It does not work. The only people who make money with psychology are people writing books and newsletters.
If there is an edge in the trading it is playing your own game, this could be called intuition but it certainly has nothing to do with the interrelationship between the feelings of the aggregate market.
The reason that psychology is nonsense when it comes to trying to systematically predict the market is, in the short-term the market is a zero-sum game. This means for every winner there is a loser. Only in the long-run does it become a positive-sum game.
- The reason is prices are expectations and forward-looking, therefore the psychological element is already built into the price.
Perhaps the only way to objectify this process is to look at trend analysis, as mentioned in Stan Weinstein’s book.
If you think you are so smart and can make money off the stock market or trading with psychology, be my guest. However, let me know about it if you do. It will only be luck. It comes back to my basic point.
- Prices are expectational and forward-looking by their nature and psychology is already factored into the current price.
Wall Street traders have perfect information in this efficient market, so do not think you will beat the traders.
The human element is already in the price. Do not think otherwise. Breaking news and fear move too fast and already reverse themselves by the time you log into your discount broker account. I have tried this before as I was watching new feeds live reacting to the market with my laptop by the side but by the time the trade was executed, the trending price already jumped. It was the biggest and fastest free-fall in the history of the market and I was trading as it was going down, but the execution price already jumped as computer trading beat me. It is zero-sum to beat the market on emotions or trading.
The best way to win in the stock market with psychology is to be a chess player, be Mr. Spock but do not read books on the psychology of the stock market.
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