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In the recent years there has been many changes and advances in technology which allow us to analyze stocks and indices in real time. We can view the history of a particular security going back to day one since it started trading. It is an amazing technological achievement to say the least.
With that said, all this information however, sometimes can lead to confusion. Many people believe that they can read a stock or commodity chart and predict what it’s next step is going to be. Even though I believe this to be true: You can predict the future by studying the past, it is imperative to understand the reasons behind this belief if you want to be any successful at reading stock charts.
It is true that a stock will go up or go down by the general public’s fear and greed. People sell the stock because they are afraid they will be losing (more) money and buy it because their greed “tells” them to not miss out on this opportunity. Majority of the people however make mistakes and lose money.
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So where does the past performance of the stock come in play when it comes to predicting the future price you ask? Well in my view it is simple. The market is controlled by people’s emotions, and in general people do not learn from their mistakes, and are bound to repeat them over and over and over.
The saying “Past performance is not an indication of future performance” is true, somewhat. Let me explain.
Knowing that people in general don’t learn from their mistakes and hence are doomed to repeat them, we can make a calculated and educated guesses as to what the next price movement will be. This is where understanding of chart patterns and their formation is extremely important. This is why you see similar patterns from time to time on a chart. If people were to learn from their trading/investing mistakes, then there would be no visible or identifiable chart patterns throughout the history of the chart. It would be completely random.
Understanding stock market psychology really is a task of understanding human or better yet stock trader’s psychology. If you build upon the understanding of stock trader’s psychology, you have a better chance of becoming a more successful trader and investor.
If you have any questions, please contact me via support [at] tradeourway.com
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