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Nadeem Walayat's Trading Lesson - The Psychology of Technical Analysis, Past, Present and Future

InvestorEducation / Trader Psychology Jul 17, 2013 - 04:31 AM GMT

By: Nadeem_Walayat

InvestorEducation

If you have read my past trading articles and ebook's you should understand that I consider Technical Analysis in large part to be a red herring in terms of the decision making process with regards trading. In that technical analysis assumes knowledge and understanding of past price history as the key towards trading success i.e. that the outcome of past price patterns are likely to repeat in the future and thus should be acted upon when they re-occur.


An simple example is the head and shoulders pattern which is very easy to learn to interpret and then apply, the only problem is that it does not actually deliver a greater than 50% probability of its outcome being probable for virtually all markets i.e. a coin flip is actually more probable than the head and shoulders pattern, if so then why not just flip a coin?

Because psychologically it is not possible to commit to a trade on the flip of a coin, so over time reasons for entering into trades eventually created what came to be known as Technical Analysis.

The truth of how to trade can only be known to those who are ignorant of the technical methods for understanding markets.

The truth is that one can only consistently make trading profits by reacting to price movements in real time. Rather than repeat what I have already written at length I refer you to this section on the real secrets of trading in my recent ebook The Stocks Stealth Bull market update 2013 (FREE DOWNLOAD).

If you understand this to be true, then it may well change your whole perspective on life because once one understands what the past is and what the future is and that neither are as important as the present, because it is ones actions in the present that determine our interpretation of the past and expectations of the future.

For instance religions have their whole basis in stories of events in the distant past i.e. the story of Adam and Eve and the Garden of Eden, or that our sins will be forgiven if we follow what was said to be written several thousand years ago, as psychological baggage that effects our perceptions of the present as a determinant for guiding ones actions towards a future outcome that is reliant on stories of far distant events.

Whereas if one understands that the PRESENT is not connected to a manufactured record of the past i.e. your skewed perception of past market price action in terms of price patterns, as a means of controlling your perception or actions in the present, then you will understand that you are FREE from the burdens that a manufactured past imposes upon your current actions, as the past does not matter because the truth is that the past does not effect the future instead our current actions seek out a cause in the past.

Religion clearly illustrates this tendency to find reason in the past when non exists. For instance talk to some one of any religious faith with regards any of the scientific discoveries of the past few two hundred years that bring religious doctrine into disrepute such as the Big Bang, and they will tend to re-interpret scripture to imply that their religion already alluded to such scientific knowledge i.e. usually taking the form that God was behind the big bang and hence created the universe, and draw on vague re-interpretations of existing texts such as-

Colossians 1:15-17
He is the image of the invisible God, the firstborn over all creation. For by him all things were created: things in heaven and on earth, visible and invisible, whether thrones or powers or rulers or authorities; all things were created by him and for him. He is before all things, and in him all things hold together.

And on and on it goes as all religions play the same game of attaching present discoveries to vague past texts.

The weight of past doctrine, be it in markets, politics, society or religion is purely to explain and control our actions in the present, so that we lose sight of the here and now, as we remain fixated both on the past and the future as we have effectively given up control of our present.

Humans are the only animal that does not live in the present, because we recognise that we are going die, so we give up the present to cope with knowledge that we will one day die by immersing ourselves in a manufactured past that implies we could live beyond death so that we forget about the present. Not only that but religion fools us into thinking that our bodies are disposable i.e. we tend to view body parts in terms of possessions - my hands, my legs, my eyes, my body rather than all being me. Not only that but religion and society puts us on a conveyor belt that is focused on some future reward, such as wealth, power or a place in heaven, whilst the present is ignored right upto the point we arrive at our end.

Know this we cannot explain anything by looking to the past, as all it does is to delay our understanding and experience of the present as we remain fixated on the past and the future.

When one puts on a trade, that action is in the present, the mistake many people make is to want to connect our decision in the present with what may have happened in the past, which is understandable because that is how society / religion programs us to think.

My window out of this societal programming is to realise that the past does not matter but what does matter is how one perceives the trade in the present, (reacting to price movements in real time) and the tools for this are risk management, not technical analysis i.e. risk management has its basis in the present whereas technical analysis has its basis in the past and implied future, but the flaw here is that the future does not exist!

In terms of the bigger picture we could also say that religion is the same as technical analysis in that it enslaves ones actions in the present to the past as a consequence of most people being unable to cope with the freedom of making decisions in the present as a consequence of being indoctrinated.

Music can act as a good tool to escape indoctrinated focus on the past and future for we always listen to music in the present, and so our minds become focused on the present, therefore it can be useful to listen to music whilst trading in real time, and the same goes for many other human activities, to remind us that the present is the only thing that actually matters!

Source and Comments: http://www.marketoracle.co.uk/Article41436.html

Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2013 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of four ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series.that can be downloaded for Free.

The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

jgizzo
29 Jul 13, 03:12
Days away

The bear market is imminently approaching. Bernanke leaving will disturb the complacency.

Down 20% by year end.


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