Thread by @MrigankPuri

Markets & Emotions

(A thread)
#RltBlogThreads

1/21 Can you simply look at someone & intuitively tell if they are absolutely furious, superlatively happy or deeply depressed? Well yeah, obviously (in most cases)!

Ever wondered how?

2/21 If we dumb it down to the very basics, here is how that happens.

We've been building deep neural connections right from the moment we were born by observing people around us.

3/21 We've basically learnt the patterns of What/How/When people around us act in different circumstances & scenarios. We've memorized what kind of facial expressions & body language is exhibited by people in different moods.

4/21 Back as an infant, we didn't plan on doing it deliberately. We just did it as its an essential survival skill. So now we naturally get a 'feeler' for the general mood of people around us.

Now, the markets are inherently emotional.

5/21 The root of all price movement is human emotion. Obviously macro-financial / fundamental / technical frameworks have their role to play but in the end what really moves the price is people (or their algos) making a decision to buy or sell something.

6/21 In case you're skeptical of the role of emotions there, help yourself & just Google 'desire & decision'.

~ Ok, yeah. Emotions move price. Now what?

7/21 Well, if emotions move price; that makes a price chart, a true representation of the overall emotional state of all market participants. That makes looking at a chart (or looking at the tape) very similar to looking at another human.

8/21 Every market (& a person) has their own ways of reacting to different situations & stimulus. If you spend enough time with charts (or people), you intuitively feel their emotional state & the behavior they are likely to exhibit before reacting in a certain manner.

9/21 For example, you would naturally know when someone is going to punch you in the face (at most times!). The same concept applies to the study of chart patterns in technical analysis.

10/21 They are a set of behaviors that the price is likely to exhibit before reacting in a certain manner.

~ Hold on! I don't think its that 'easy'. Where's the CATCH?

Well, here's the catch..

11/21 (a) As in infant, it takes us about an year before we start connecting the dots & begin to understand the emotional responses & body language of people around us. If you do it right, that's how long it will typically take you to get good at charts.

12/21 (b) With real money on the line, our perceptions get colored very easily. You can easily make connections that don't actually exist. Keeping a check on that is by no means an easy feat!

13/21 (c) Another big challenge is the 'randomness'. Like judging people, its all probabilistic. Even if all signs point to an outcome, its not certain. This means that an unfavorable outcome is not necessarily wrong analysis. Might be, might not be.

14/21 (d) Subtleties of how people behave & react change from culture to culture, region to region & even time to time! Translated to markets, different asset classes will have vastly different tendencies & an asset class might have different tendencies in diff market regimes.

15/21 (e) There are times (lot of times!) when you have no idea what the other person is thinking/feeling. The same in the markets. You need to know that you don't know & thats alright! You need to accept that & move on. Filtering signal from noise isn't easy, but essential.

16/21 After all, reading the emotions of a market & along the way, managing your own is mostly what trading is really about.

So, like getting good with people, getting good with charts is really a skill.

Or rather, an 'indispensable' skill!

17/21 ~ Fine. I get it. But how do I get started with all that?

Well first of all, remove the money from the equation. You've just made the battle much easier for yourself!

18/21 The reality is that even if you tried, you most likely wouldn't be able to make any significant & consistent returns from trading in your first year. So leave that idea of 'quick' money. It's the worst market myth of all!

19/21 Start with a good book or a course. Agreeably there is a lot of those out there & most of it is utter, absolute B.S.

The one I most highly recommend is this by @AdamHGrimes
marketlifetrading.com/course/index

20/21 Along with that, you need a ton of consistent exposure to looking at actual charts. Start doing that along the way. But careful to not get stuck with merely looking at them. If its possible to trade a minuscule size, that's GREAT! Do that.

21/21 Trading a mini account is the best way I know to learn the ropes. But remember, you're going to lose. So, keep that account size tiny!

Be patient. As you grow in skill & confidence, you'll know how/when to proceed further.

All the best & happy trading!