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Greed and Fear
| Stock chart
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 |
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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.
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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.
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| 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. |
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