| Dear Fellow-Trader.
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| | direction its taking. And thus, there are
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| This is a topic that is crucial and
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| | two crucial emotions that come into play
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| vitally important to trading.
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| | and that we have to be aware of. Fear and
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| Its a Market of Emotions and 90% of all
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| | Greed!
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| trading is based on psychology!
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| | Fear:
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| Thats a fact just like it is a fact that
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| | The problem is that we all want to
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| 90% of all traders who ever trade lose
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| | succeed and when we do make a loss, it is
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| money and that 10% actually make a total
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| | easy to let those losses effect us
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| loss going bankrupt. If the first number
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| | emotionally out of fear to lose even
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| doesn't set off your alarm bells then the
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| | more.
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| second definitely should.
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| | In this case, a trader exits a trade as
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| But why is it then that such a large
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| | soon as the market hits the slightest
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| number of traders get driven by
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| | bump even though the broad market is very
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| psychology and fail? Intelligent people
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| | bullish and the fundamentals of the
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| with a high level of education watch
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| | company hes trading are good. So instead
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| their trading accounts erode taking one
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| | of being patient and waiting for the
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| loss after the other.
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| | trade to go up again, he sells and
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| So why do traders fail?
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| | accepts the initial loss out of fear of
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| Without Education And an Understanding of
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| | losing even more.
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| The Psychology of The Market Your Chances
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| | Fear of losses can also show up in the
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| of Profitable Trading are Profoundly
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| | following way.
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| Limited!
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| | Irrespective of any rationality, a trader
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| While the trading instruments that make
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| | holds on to a losing position for too
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| up the market have no emotions, the
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| | long hoping for it to go up again. Even
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| individuals that trade those instruments
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| | when the news and fundamentals are
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| are human beings and are very emotional
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| | hopeless he wont give up forgetting that
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| by nature. Realizing that the human
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| | this attitude can easily lead to a total
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| emotions of fear and greed often drive
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| | loss.
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| prices up and down, allows one to begin
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| | In another case, fear can also manifest
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| to understand how to position oneself on
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| | itself in not wanting to miss the boat
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| the right side of the market. Because
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| | and quickly jumping on. This can very
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| humans are very emotional, they often
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| | often be observed by novices who listen
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| make rash decisions that end up being the
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| | to tips from friends and TV, where so
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| wrong decision.
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| | called experts or shall I rather say,
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| Every day theres huge struggle being
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| | opinion makers speak up trying to
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| waged in the markets. A struggle between
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| | sweet-talk you into a trade.
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| the bulls (buyers and the bears
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| | A trader sees the market go up rapidly
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| (sellers). Bears want to get top dollars
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| | and confirmation is all over the news.
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| for their equity, while the bulls want to
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| | The excitement of a rising market is in
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| pay as little as possible. In order for a
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| | full swing. Afraid of missing out, the
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| transaction to be completed, one has to
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| | trader makes a hasty decision and dives
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| give into the others terms. If a greedy
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| | right into a trade.
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| bull gives into a sellers terms because
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| | Greed:
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| he feels he just has to own XYZ stock,
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| | Becoming euphoric when you hit a winning
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| the price goes up. If an eager bear gives
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| | trade is almost as detrimental as
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| into a buyers terms, the price goes down.
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| | becoming depressed when you have a losing
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| This is nothing new. Its basic economics.
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| | trade.
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| Its supply and demand.
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| | In this case a trader is actually afraid
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| Because both buyers and sellers are, more
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| | of losing a profit. He holds on to a
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| often than not, basing their buying and
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| | winning position for too long. His trade
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| selling decisions on emotions, eventually
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| | is doing so well that he just cant get
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| these emotions will culminate and a trend
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| | enough. He may have made a 100% profit
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| will reverse. For example, when a stock
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| | and now expects to make another 100%. And
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| is in an uptrend, there will be a point
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| | when his position goes down below this
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| when the trend will become apparent to
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| | magic mark, he still holds on hoping for
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| everyone. At this point there will often
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| | his trade to go back to 100% again before
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| be one last buying frenzy as greed takes
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| | he sells instead of accepting say, 90%,
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| over in fear of missing the boat. It is
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| | which is darn good too!
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| precisely at this point that the trend
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| | But what was a 100% profit can easily
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| will often reverse.
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| | become a total loss if you let greed take
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| The same is true of a downtrend. Before a
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| | control!
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| stock hits bottom, there usually is a
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| | Ive seen traders that have watched their
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| panic-kind-of-selling as fear takes over
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| | profits erode without doing anything
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| and the weak run for cover. Once all the
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| | about it. They held on to their positions
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| weak have thrown in the towel, the stock
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| | right up to an almost total loss. Very
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| is free to rise again. This behaviour can
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| | often they then say: Oh well. my trade
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| be observed time and time again.
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| | has gone down so much now, whats the use
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| Often a stock doesnt just drop because
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| | of selling? I wont get much out of it now
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| everyone starts selling. It begins to
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| | anyway, so I might as well keep my
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| drop because everyone stops buying, at
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| | position. Well, I guess in a way hes
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| which point the price has to come down to
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| | right because by this time his stocks may
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| entice more buyers. As the price begins
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| | have more value being used as wall-paper.
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| to decline, the selling begins to pick
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| | In another case, fear of losing out on a
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| up, forcing the price even lower. It isnt
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| | profit may even cause a trader to sell a
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| until all the sellers are flushed out of
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| | winning trade too soon. As soon as his
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| the market that the selling stops. Now
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| | position went up a few percent, he bails
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| the demand for the stock becomes greater
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| | out.
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| causing it to rise again and attracting
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| | So watch out for fear and greed. These
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| more and more buyers.
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| | two guys arent good advisers and theyre
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| If you have ever looked at a significant
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| | not the way to trade!
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| market bottom like the one after
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| | And so. As traders we have to be rather
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| September 11, 2001 (9/11), you will
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| | impartial.
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| notice that the selling pressure
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| | We have to accept that there will be
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| increased significantly due to the
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| | losses just as there will be wins in any
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| emotional insecurity of what might happen
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| | ones trading career!
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| next. Once the selling became exhausted,
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| | Reaching the stage where you can
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| prices stabalized and the crowd began to
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| | comfortably accept losses, and knowing
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| buy the market in droves.
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| | that you have a good trading system that
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| Getting A Grip On Emotions
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| | will also produce profits most times in
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| As individuals we have to realize and
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| | the longer term is the state we all have
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| accept that we have no control and
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| | to aspire to.
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| influence over the market nor the
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