One of the most interesting parts of trading is the role of the human brain as an interface between you and the market. Having a complex filtering mechanism that is the repository of all your emotions sitting between you and the raw sources of information you need presents a complication. Consider the image below.
This image contains no red yet your brain perceives the can as having the traditional Coke colour. This is probably an intermix of your brains’ expectations but also your brain lying to you as it is fooled by the various patterns of light and shade. That complex organ that sits between your ears has a hard time telling reality from fantasy.
Once you understand that this is a problem you start to see why traders take trades that exist only in their mind. Traders have a habit of trading their expectations and emotions rather than the reality in front of them. You can see this in the sentiment data released for instruments.
Consider the image below taken from IG Markets which represents their client’s current sentiment towards natural gas.
Most of their client base is currently long natural gas – with only 21% being short.
This is the current chart of natural gas.
There is no compelling reason to be long this instrument at this stage. Traders are trading what they want to happen rather than what is happening. What is happening is that natural gas has been hammered for over a year, has congested, tried to breakout and the breakout failed. My guess is that traders are concentrating on the first part of the last sentence – “natural gas has been hammered for a year” Therefore it must go up – they are trading what they want to happen.
This is why traders have systems and rules. Rules override feelings. Without a cohesive congruent system, there is no hope for success in any market. Your brain will always defeat you.
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