Why Price Action Trading Works? Mysteries of Human Behavior

Apr 16, 2018

Part 2 of the 3 part series on "Why Price Action Trading Works?".

Apologies in advance, this is a little more negative than Part 1, but it is also very important for understanding how people and the market behave.

Do you ever go to buy something, let's say an iPhone, and the asking price is $600 so you offer and buy it for $800?

No, I didn't think so (or at least I hope not).

So why do we let the rules change in the market? Why do people not care about paying a higher price in the market?

It's emotion...

We imagine what we could have made if we took the trade early. We think it's going to keep rising and feel the pressure to get in on the action.

But what do we really expect to happen here?

Do we think that it's going to keep going up? Is it going to rise by 1000 pips or 2000 pips? And even if by some freak chance it does, will it happen again tomorrow?

No, it won't, so it's not the right way to think and it's not a good strategy to take as even if it does work once on some strange occasion.

Mysteries of Human Behavior

Navin and Lucille made some interesting observations from some real-life scenarios that will probably sound familiar to you:

Rich dude in a fancy hotel gets a coffee, costs $20. He drinks it, gets his bill and sees a 10% service charge - pays it and leaves.
A middle-class guy gets the coffee but for some reason, this guy feels the need to impress the hotel or feels the need to justify himself being there. So even though there is a 10% service charge he will probably also throw in an extra $10-$15 tip.
This same middle-class guy will later that day or that week be buying something off of a street vendor and he will negotiate, bargain and argue to get $5 off the cost of what he's buying.

In the hotel the waiter has no risk, he doesn't have products that he needs to sell or else he goes bankrupt. On the street, the vendor has all the risk. It's the street vendors lively hood, he needs to sell his products to live.

Bargaining with people you shouldn't be and tipping because you feel you need to or so you look good.

These are just some small examples of how strange the world works and how strange human behavior can be.

College is another example. I went to college. I graduated with a Bachelor of Business Studies from the University of Limerick in Ireland. I had a great time there.

But did I learn much at college?

I learned a little, sure! But, I didn't learn enough to justify the fees that I paid.

I don't use very much of what I learned in what I am doing today.

I didn't need my degree to get my current job.

College is great for meeting people and having fun but realistically unless you are sure of what you want to do with your life and find an appropriate course that you can only do in college, it is not the best place for education.

The idea of sending students who have just finished high school to go straight to college and get covered in debt when they don't really know what they want to do is mind-boggling.

Yet, it's the norm.

So what's the relevance of this?

It's to show you that the market is the same as all these situations.

People who really care about making and saving money have all these social habits that lose money and they barely realize it.

In the market people also pick up bad habits based on mismanaged emotions or FOMO (Fear Of Missing Out) which results in them losing money, even though they are there to make money.

Have you noticed yourself having any of these bad habits?

OK, so that's the negative stuff out of the way.

In Part 3 of the Why Price Action Works series, we will take a look at the magical Money Spot while in case you missed Part 1: Understanding the Big Players you can go back and check it out here.

With Pip Love,

Garry at Urban Forex