Brett Steenbarger, one of the world’s most-renowned experts on the interplay between psychology and trading, outlined five guiding principles of trading psychology, concepts that attempt to delve inside the minds of traders.
These principles – outlined below – are important concepts when it comes to understanding trends in short-term trading.
Number One: Markets are guided by their largest participants.
Number Two: Trends are created by shifts in supply and demand, and generated by global or macro relationships.
Number Three: Market movements on strong momentum will persist in the short run, whilst moves on weak momentum tend to reverse.
Number Four: There are only three kinds of trades, and these are breakout trades, trend-following trades, and reversal trades.
Number Five: It is useful to track market activity at the bid and offer in detecting shifts in short-term demand and supply.
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