Forex Candlestick Tutorial — Part 9 — Emotions the Hidden Ingredient

This is part 9 of the tutorial. In this video, you will learn about emotions, the hidden ingredient.

The equation of demand and supply, the battle between bears and bulls, is what creates the market. When the bulls are in control, demand and consequently price increases. When the bears are in control, supply increases while price decreases. Even though the market equations are made of the two elements of supply and demand, there is an additional ingredient that has an even greater influence — Investors’ perception and emotions. It almost does not matter how well a company is performing, no debt, balance sheet, strong past earnings, etc.

What matters the most is the investors’ perception of how strong or weak the market is, how well a company does or not. If a company is perceived to be doing well, investors want to own shares of that company, so that they buy shares and the price goes up. If a company has good fundamentals, but investors perceive that they can make higher profits somewhere else, they will sell the company shares causing the price to drop. We will consider an example below.
Looking at the monthly chart of Apple, from 2010 to 2013. Each bar represents one month. Apple is an excellent company and yet in the period between October 2012 and May 2013 (about 8 months), the price of their shares dropped almost 50% from $100 to just above $50. If you have owned Apple shares during that period of time, what would you have done? Perhaps you would be thinking Apple is a great company. I am going to hold onto my Apple shares, thinking the price is going to go back up again. One month passes (-15%), two months pass (-30%), and four months, etc. The shares have now lost 40% of their value. What are you going to do? Are you buying more shares to compensate your losses? What if the price keeps going down for another four months? Is the pain of losing more money so great that you can’t take it anymore? Are you going to sell all your Apple stocks? This is exactly what emotions do when dealing with market trends and market reversals. A price that goes up must come down. A price that goes down must come up. Knowing when to get in and out of trades is the job of the trader.

Candlesticks show us just that. Supply and demand are the obvious elements of the market equation. Emotions are the hidden one. Finding that hidden element is the key to successful trading.

© Prabhu for Forex Videos, 2016. |
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