Trading In The Zone PDF

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Chapte 1 The Road To Sucess: Fundamenntal, Technical, Or Mental Analysis?

In The Beginning: Fundamental Analysis

Who remembers when fundamental analysis was considered the only real or reasonable way to make trading decisions? When I started trading in 1978, technical analysis was used by only a handful of traders whom the rest of the market community considered crazy to say the least.

As hard as it is to believe now, it was not that long ago when Wall Street and most major funds and financial institutions thought that technical analysis was some kind of arcane hoax.

Now, of course, the exact opposite is true. Almost all experienced traders use some form of technical analysis to help them formulate their trading strategies. The “purely” fundamental analyst is almost extinct, except in a few small, isolated circles in the academic community.

What is the reason for this dramatic change in perspective? I’m sure it will surprise no one that the answer to this question is very simple: Money! The problem with making trading decisions from a strictly fundamental perspective is the inherent difficulty of making consistent money using this approach.

For those of you not familiar with fundamental analysis, let me explain. Fundamental analysis attempts to take into account all the variables that may affect the relative balance or imbalance between supply and potential demand for a particular stock, commodity or financial instrument.

Using primarily mathematical models that measure the importance of various factors (interest rates, balance sheets, weather patterns, and many others), analysts estimate what the price should be at some point in the future.

The problem with these models is that they rarely, if ever, take other traders into account as variables. People, expressing their perceptions and expectations about the future, drive prices—not models.

The fact that a model makes a logical and reasonable projection based on all relevant variables may not matter much if the traders who account for most of the trading volume do not know or believe in the model. Are.

In fact, many traders, especially those on the floor of futures exchanges that have the potential to move prices dramatically in one direction or the other, usually don’t have the slightest concept of the fundamental supply and demand factors that are supposed to occur. Is it going to affect the prices.

Furthermore, at any given time, most of their trading activity is driven in response to emotional factors that are completely outside the parameters of the fundamental model.

In other words, the people who trade (and consequently change prices) do not always act in a rational manner.

shift to mental analysis

If technical analysis works so well, why would the greater trading community shift its focus from technical analysis of the market to its own mental analysis, that is, its own personal trading psychology?

To answer this question, you probably have no more to do than ask yourself why you bought this book.

The most likely reason is that you are dissatisfied with the difference between what you see as unlimited money-making potential and what you end up achieving.

This is the problem with technical analysis, if you want to call it a problem. Once you learn to identify patterns and read the market, you will find that there are limitless opportunities to make money.

But, as I’m sure you already know, there can be a huge gap between what you understand about the market and your ability to turn that knowledge into consistent profits or a steadily rising equity curve.

AuthorMark Douglas
Language English
No. of Pages143
PDF Size1.5 MB

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