Markets Go Up, Markets
Markets go up, markets go down.
It shouldn't matter much, but many new market timers find that their own personal
mood fluctuates with the markets, moving from extreme euphoria as the markets
soar to new heights to deep despair when the markets plunge to abysmal lows.
Why do market trends have such power over emotions?
They don't need to, but many new market timers have difficulty cultivating an
objective mind set.
Following The Masses
By allowing fear and greed to influence their trading decisions, new traders
tend to follow the masses, and when they go with the crowd, they soon find that
market trends not only influence their moods but their account balance as well.
There's a strong tendency to follow the crowd. There is a feeling of safety in
numbers. When you see a steady upward trend, you feel secure. Everyone is buying.
They are all doing the same thing. When other people offer confirmation of your
decisions, you feel safe and assured.
In a bull market, it isn't so bad to follow the crowd. When it's a strong bull
market, the crowd is often right, and it makes sense to follow them. However,
when the market turns around, feelings of safety and security can turn instantly
into fear and panic.
Humans Tend To Be Risk Averse
Why? An obvious reason is that many new market timers don't have the ability
or financial resources to sell short, and take advantage of a bear market.
But there's a psychological issue as well. It is difficult to know how to handle
falling stock prices. For example, humans tend to be risk averse.
a strong tendency to follow the crowd... a feeling
of safety in numbers."
When one is in a bullish position and the markets suddenly
turn, it's hard to accept losses, and even harder to execute
that sell signal, issued by your timing strategy, before
more damage is done.
Denial and avoidance set in. At that point, a market timer with a losing position
panics, hopes that things will turn around, and waits for events that are unlikely
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Usually the price continues to fall, heavy losses are
incurred, and as expected, disappointment and despair
Detached And Relaxed
It's vital for your survival as a market timer to stay calm and objective. Don't
let your emotions interfere with your decision-making.
How do you stay detached and relaxed?
First, following a non-discretionary timing strategy and knowing, absolutely,
that over time it will be profitable, helps you to rise above strong emotions
and allow the strategy to make the decisions.
Second, accepting the fact that you'll likely see small losses as a market
timer and that you should expect to see the markets turn against you. What is
important is NOT to react like the rest of the crowd. Staying above the fray
is the key to profitability and knowing that the money management rules built
into your strategy will keep losses small and allow profitable positions to run
as high as possible.
Third, think of the big picture; the long-term profits across a series
of trades are all that matters, not the result of a single trade.
Develop A Logical Mind set
Don't allow your moods to fluctuate with the ups and downs of the markets.
By trading in a disciplined, methodical manner, you can cultivate an objective,
logical mind set that isn't overly influenced by market moods.
Armed with the right mind set, a disciplined trading approach, and a tested market
timing strategy, you will be able to realize the huge profits of winning market
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable.