Have you asked yourself why you trade? You need to make money? Or are you curious to learn about the dynamics of the trading world?
Whatever answer or reasoning you have may not be good enough if you didn’t know why people trade, and how it actually works. The reason I say this is because there are far too many trading programmes and systems being promoted that don’t provide ample education and understanding of how trading actually works.
This post will start off with some basic concepts, then we will explore some psychological aspects of trading.
Money is the medium or system that allows us to exchange goods and services by attaching a value to them. In general academic terms, the value of goods and services is determined by the rules of economics. Well you might be thinking ‘i know this is easy’, ‘it’s supply and demand’, well, yes – but have you thought about ‘what actually drives demand and supply’?
Market conditions, availability, and what the buyer is willing to offer, fair price etc. and so on….
But, for the most part:
Imagine, if you were selling a product and a bunch of other companies sold the exact same product at a standard price. What are the chances that people would come flocking towards your product? Unless, you offered an amazing discounted price. Now think the opposite; if you were the only seller of a product and the customers were numerous – what bargaining position would you then have? Can you now imagine the fear of not being able to sell the product or in the latter; the position of power (greed) to dictate your own price. All human behaviour is a form of expression – of our fear, greed and hope etc.
We often define prices from an ‘economics’ perspective – however if we start looking at the psychological aspects, we can learn the factors that truly ‘govern’ or ‘drive’ the rules of economics. Given the above example of demand and supply. Whenever there is a sudden shortage of supply for a commodity – people will panic, and be willing to pay more money. Traders will anticipate that prices will rise. Traders will also anticipate that other traders will think and feel the same way about a stock. The public or end-user will be willing to pay over and above the current market price. Their fear will compel them to take action – as the consequence of not having the commodity is far worse for them. Money therefore represents freedom of expression.
Every action we take at any given moment, we are expressing ourselves. We are also expressing indirectly; our needs, wants or desires. Some of us take actions to satisfy necessities and some of us do it for desires beyond the basic needs – that difference – makes a difference in the mindset and even the necessity to take frequent actions. The needs, wants and desires that surround us – make us who we are.
The individuals who can focus their time and energies beyond these basic human needs either possess a higher level of consciousness, or they have already achieved beyond their basic needs.
Now let’s look at the same situation of ‘supply and demand’ from a trading perspective. Given the situation, a smart trader will not buy something that is oversold, or they will divert their attention to other trading opportunities or even wait for the possibility of the price to come down.
Since the sole aim of all trading is profit seeking, trading itself is a tool for accumulating wealth, and everyone involved in trading has the exact same goal. This also means that the people trading (buying/selling) have to have the opposite belief at all times – or there would be no trading left for anyone. For example, a seller would not sell a stock unless they have given up on the possibility of the stock value to appreciate over time, and the buyer will not buy a stock if they didn’t anticipate a gain on their investment.
There is no real need for anyone to predict what the market is going to do next. The market can go either way, so we must have an open mind for trading, but knowing where the market sentiment is heading has real value. You don’t need to pay too much attention and invest too much of your energy trying to decode what the market did and why it did it, but instead if you try and learn the perception of the traders and what’s driving them, whether it’s scarcity, fear, greed or hope is where you can find lucrative trading opportunities.