- Personal Finance
How To Go Into The Mind Of Other Traders
How To Go Into The Mind Of Other Traders
Trading is becoming more and more of mind’s game.
And many trading tools have been used to go into the mind of other traders. Pitchfork trading tools, Fibonacci retracements and projections tools, the pivot tools and the Bollinger bands are few of these mind’s game trading tools. Trading has always been a tough competition between the bulls and the bears and the relative strength index (RSI) indicator has been one the most effective trading tool, to compare the bearish pressure to the bullish pressure. Recently, many traders who understand the mind’s game trading are relying more and more on the RSI indicator. It is now important to know what is the relative strength index indicator and how we can use the relative strength index indicator (RSI) to go into the mind of other traders.
The relative strength index indicator
The relative strength index (RSI) is a momentum indicator developed by J. Welles Wilder. It oscillates between zero and one hundred. The RSI is considered overbought when above 70 level and oversold when below 30. It also measures the speed of the financial instrument and compares the magnitude of recent gains (bullish pressure) to recent losses (bearish pressure). This comparison allows traders to look inside the price, so to speak and to recognize quickly the overbought and oversold zones. Naturally like every other trading tool, the RSI indicator must be used together with the price, the number one indicator. It is important to understand, at early stage that we are trading the price not the indicator. Therefore, our focus must remain on the price. When the RSI is overbought above 70, the market is considered as overbought. However, it is one thing to be considered as overbought and another to be accepted as overbought. We do not sell because the RSI is overbought but we will sell when the financial instrument is accepted as overbought meaning that the trend line is broken and retested and the bearish pressure continues after the retest of the trend line. On the other hand when the RSI is below 30, the financial instrument is considered as oversold but we will confirm the oversold condition with the broken, retested trend line and the continuation of the bullish pressure. There are various ways to use the RSI indicator, such as buying at valid support levels when the RSI is clearly sloping up and selling at valid resistance levels when it is sloping negatively. Traders can perfectly use both bullish divergence and bearish divergence trading method with the RSI indicator. It has been proven that combining both RSI bullish and RSI bearish divergence with the “Elliott wave” theory is a very effective trading method. However, it does not matter what trading method is applied, when one is buying, another is selling. When one is closing a trade at a “hot spot trading zone” another is opening a new trade. It is no more enough to “trade like a pro” but to understand and to master the mind’s game trading. With the RSI indicator, it is not only possible to understand the mind’s game but it is also simple to go into the mind of other traders.
How to go into the mind of other traders?
It is well known that more than eighty per cent of traders are losing consistently and abundantly. The main cause of this painful truth is that traders are trading the indicators which are derived from the price instead of keeping their eyes wide open and trade the price, the number one indicator. This involves both understanding of the language of the price and the language of the momentum indicators. Many indicators are used but the price remains the same and it is the universal language of all traders. The interpretation of the indicators may vary but the language of the price remain the same. When the RSI period fourteen is overbought, more than 80% of traders will be very enthusiastic to sell or will immediately place orders to sell. On the other hand when the relative strength index (RSI) is oversold below thirty (30), the majority of traders will be happy to buy straight away. As you can see, the RSI indicator is a very popular indicator but also one the most misused indicators. However apart from its popularity, it is also a very excellent trading tool, to go into the mind of other traders. The key to successful winning trades is knowing the place and the time of the trade. When you receive a signal to sell, you will ask the questions: Is it the best time to sell? Is this the best place to sell. This two questions will allow traders to avoid rushing into the trade and to take the right steps for perfect entry. When the RSI is overbought, smart traders will step aside and observe the unaware traders, who will quickly place orders to sell because the financial instrument is considered as overbought or is at resistance zone. Very often the price will break the overbought zone (resistance zone) and take the position of the aggressive traders. As these bearish trades are blown apart, the price will rise very fast creating a volatile bullish momentum that can last few days. On the other hand during the oversold RSI condition, many ordinary traders will quickly place orders to buy without any other considerations. However if the financial instrument is not accepted as oversold, the price will break below the oversold support zone. Buyers will have to close their bullish trades and by doing so, they too become sellers. Consequently the bearish pressure will increase, forcing the price to drop down very fast or gap down. As you can see, using the RSI to go into the mind of others traders can be very rewarding in a very short period of time. It is perfectly OK to use the slow stochastic or the commodities channel index (CCI) to go into the mind of other traders. The RSI indicator has been a better tool in this function compare to other indicators.
Using the RSI indicator to go into the mind of other traders
On the 16th September 2010, looking at the daily chart of Google (GOOG), we have noticed that the RSI period 14 was overbought (above 70). When the RSI 14 is above 70, very often it is highlighting a resistance zone. However, it is not because the price is at resistance zone or overbought that we should quickly sell. Equally, going into the mind of ordinary traders, we know that, very often, many will quickly place orders to sell because the RSI 14 is overbought without any other considerations. These are traders who are sadly trading the indicator instead of the price. They will learn but they need to learn very fast. On the other hand, a smart trader with more experience, will switch from the daily chart to the a lower time frame, two hours chart may be and monitor carefully trading activities in this “hot spot trading zone” and wait for the resistance zone to be broken and to be retested. Once the resistance is broken and validated as a support level, he or she can perfectly enter the trade with a reasonable stop loss. On the 21st September 2010, the price did break the resistance zone and continue the movement to the upside the following day. On the 23rd September 2010, there was a pull back, allowing the smart trader to place a stop buy order 20pips above the high of the pull back candle and placing the stop loss 20 pips below the low of that candle. On the next day, 24th September 2010, the buy order has been successfully filled, but the following days were bearish. The stop loss was safe. The smart trader remained in the trade. There was no need to pack up yet. Few days later, on the 15th October 2010, mighty Google did gap up and the reward for this trade was exceptional. A total gain of 10000pips was recorded in the space of twenty two days. This is a serious gain which does not happen very frequently.
“Trading the market” is also about going into the mind of other traders and to analyse what is likely to be their next move. This is not about spying on other traders but to understand their mindset as a trader. It is always unfortunate when traders lose their hard earned money. However there is not doubts that trading offers excellent reward but also serious losses. The advantage of going to the mind of other trader is the unfair advantage to be rewarded when others lose. Traders must recognize that, the price is the number one indicator and their attention must be first on the price but also on other traders in order to go into their minds. Can a mind reader become a better trader?
That remains to be seen.
This article is written by Georgetrio (www.stochastic-macd.com)