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Study Guide for The New Trading for a Living by Dr. Alexander Elder

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TWO

Mass Psychology

  1. Answer 2-1: D

    Prices are set by crowd members who place orders to buy or sell, or else stand aside. Each price tick reflects the latest consensus of value, hammered out by those orders or the withholding of orders. Ticks coalesce into patterns—the footprints of bulls and bears on our charts. “Supply and demand curves” are far removed from this sweaty reality of the market. Prices are connected to fundamental values in the long run but are governed by crowd psychology from day to day.

  2. Answer 2-2: C

    Bulls try to buy as low as possible, and bears try to sell as high as possible. Both know that they have to hurry before some uncommitted trader steps in and snatches away their bargain. Professionals aim to identify the dominant group and trade with it. The goal of a good technical analyst is to discover the balance of power between bulls and bears—in order to trade in the same direction as the winning group. The danger of forecasting is that it locks us into a specific mind-set instead of focusing on the current reality of the market.

  3. Answer 2-3: C

    Reading newspapers, watching TV, and surfing the net often lead to poorly planned and impulsive trades. Why trade, whether a large or a small size, when you aren't sure what to do at the moment? “When in doubt, stay out” is a sensible rule.

  4. Answer 2-4: B

    The profits you're trying to make can come from only one source—from other traders' accounts. The mirror image of that is that any losses you take will ...

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