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pattern analysis unveils a world driven by lust and pain.
The
financial
markets are about money. No other controlled
substance awakens the best and worst of our humanity with quite
so much intensity. When we risk our capital, the markets become
our lovers, our bosses and the bullies who beat us up when we
were kids. As
assets
shrink and swell, emotions flood in to cloud our reason,
planning and self-discipline. Fight/flight impulses emerge and
trigger unconscious (and inappropriate) buying and selling
behavior
Rising prices attract greed. Paper profits distort
self-image and foster inappropriate use of margin.
The addictive thrill of a
stock rally draws in many participants
looking for a quick buck. More jump on board just to
take a joyride in the
market
's amusement park. But greed-driven rallies
will continue only as long as the greater fool
mechanism holds. Eventually, growing excitement
closes the mind to negative news as the crowd
recognizes only positive reinforcement. Momentum
fades and the uptrend finally ends.
Falling
prices awaken fear. The rational mind
sets artificial limits as profits
evaporate or losses deepen. Corrections
repeatedly pierce these boundaries,
forcing animal instinct to replace
reason. Destructive traits in the
non-market personality invade the psyche
of the wounded long. Short covering
rallies raise false hopes and increase
pain. The subsequent drop becomes
unbearable and the long finally sells,
just as the market reverses.
The impulse-driven crowd generates constant
price imbalances that
traders can exploit. But
successful execution requires accuracy in both
time and direction. Chart pattern analysis
allows measurement of the emotional crowd's
impact on these key elements. Within the
charting landscape, exact price triggers can be
located where these unstable forces should
erupt.
You can only capitalize on the emotions of
others when you are able to control your own.
Pattern analysis cautions the trader to stand
apart from the crowd at all times. In simplest
terms, they represent the attractive prey from
which your livelihood is made. And just as a
wild cat stalks the herd's edge looking for a
vulnerable meal, the trader must recognize
opportunity by watching the daily grind of
pattern swings and volume spikes.
Hole In The
Wall Gap: Gaps reveal sudden and
important changes in crowd sentiment
better than any other pattern tool.
Always distinguish between gaps made in
the direction of the prevailing trend
and those going against it. Countertrend
gaps often flag major reversals without
the need for a long series of price
bars.
