The Esoteric Truth about Market Psychology vs Fundamental Analysis

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

Every element on this list can exist anywhere on the scale of “relevant” to “immaterial,” depending on whether the market has correctly anticipated the future implications of that element. The bottom line: We are constantly bombarded with a mind-boggling amount of information, and the brain has a habit of filtering out everything except what is most self-serving. This process may make us temporarily comfortable, but when has comfort ever been associated with profitability?

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

Market Breadth and Human Psychology

Hello World, this is my first posting on the stock market mechanics. I created this blog not to teach people how to trade nor giving tips, but instead revealing the true insight on how investment advisors, fund managers, insiders, portfolio managers, etc actually operate the stock market and how their actions can create an immense impact on the stock prices.

Giving tips and teaching people how to trade will make you money, but true education and understanding the minds of the "big boys" can bring you wealth. Follow the footstep of their actions and your risk is reduced to the lowest. It is not always easy to guess what they are trying to do, be it moving the market up/down, however all their traces can be found in the chart. The market is made up of minds of many men and if you can read their mind, the winning percentage is on your side. This will never be changed even for the next hundred years because every human has emotions, fear and greed embedded in them.

It takes time to master and learn the skill, and maybe many losing trades to get it right. Unless you are prepared for a roller coaster ride or please do not attempt to trade without knowing the background action. There is no secret formula in the stock market, just understanding supply and demand, accumulation and distribution, re-accumulation and redistribution phases will get you there. No indicators are as accurate as reading the chart bar by bar. Based on my years of experience, all indicators are lagging indicators and they don't give instant buy low sell high / sell high buy low signal. Worst of all they are mathematical calculations of certain formula to derive the indicators and they don't tell you where and what prices big boy are purchasing. They are useful for investors and for people who holds a longer trend and view of the broader market, but definitely not for short term swing/intraday traders who needs an instant answer if any unloading or purchasing are taking place. What most of us is trying to achieve is to put the winning percentage on our side with the lowest risk, isn't it?

If you really want to be a master of an art, technical knowledge is not enough. You will have to transcend the technique so that the art becomes an 'artless art' growing out of the unconscious and when that happens, nothing can stop you from reading the fine lines between supply and demand!

Ronald K