We all face a continuous flow of conflicting information, and it’s easy to overweight the latest piece of information, or to choose just one of those pieces of information as the basis of a trade decision. History reveals that people aren’t very good at reaching accurate conclusions when enormously complex information must be analyzed and weighted correctly. We may be good at looking at each piece of information separately, but when it comes to relating each piece to the larger, cohesive whole, context is an elusive thing. Consider just a few of the myriad divergent information sources that can influence the performance of a market, sector, or single security at any given moment:
- A company’s ability (or inability) to innovate
- Earnings—rising, falling, or remaining static
- PE multiples—expanding or contracting
- Sales—expanding or contracting
- Competitors—entering or exiting
- Profit margins—expanding or contracting
- Overall sector growth and acceptance
- Global events
- Analyst upgrades or downgrades
- Money managers long or short on cash
- Commodity prices—rising or falling
- Interest rates—rising or falling
That’s where the market psychology proves to be an invaluable tool, keeping us psychologically and intellectually honest. We may not be good at crunching enormously complex data, but we humans are exceptionally adapted at spotting possibilities, opportunities and integrating them into workable solutions. Market psychology proves by arranging the aggregate result of all these complex actions in a single, simple distribution curve.
Ronald K
