Have you ever thought what are we actually trading, as traders? Are we trading currencies, beans, stocks, futures, indices?
No we are not. In any market, we are trading feelings, emotions thoughts, and actions. We are trading psychology. The more prominent term is sentiment. It doesn’t matter what market you are trading in, you are essentially trading sentiment. The emotions of what other traders are thinking and feeling determine the way in which the market moves.
The sentiment of the market consists of numerous factors, most of which we can’t even fathom. However the market will move according to how many of the market participants feel more bearish or more bullish at that particular moment. A large part of their emotions come from their own reaction to fundamentals or news events. Each individuals view on this event aggregates as a whole on the charts which creates patterns. In essence, the fundamentals drive, shape and manufacture sentiment, and technicals expresses this.
“In essence, the fundamentals drive, shape and manufacture sentiment, and technicals expresses this.”
Viewing these reactions on a chart, they create price patterns. These reactions are just reflections of the markets repeated human emotion of fear and greed in response to news events. These patterns repeat themselves over and over again. And what at first seemed random, becomes repetitive. The most frustrating thing for a trader however, is not the sheer mundane repetitiveness of the patterns, but the amplitude of the moves. Sometimes the retracements are shallow, sometimes they are deep. Sometimes the market breaks out for a 120 pip move and sometimes it moves only 12 pips.
To conclude, the market is always right. In fact we never truly know what will happen next. However, we have observed these price patterns long enough to know, that with a certain degree of expectancy, not fact, that the market should move within our intended direction. It is however very important, that we treat each trade independently of each other, because each price pattern was engineered by different fundamentals. Understand this, and you will never fight the market again. Rather you’ll move with it, and be flexible enough to accommodate its ever-changing, yet repetitive flow.