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the charts to help them assess a position, and then call on their feelings to augment the decision process. This is where knowing your personality type is useful, as some types would not be comfortable without letting some feeling be part of the process. |
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Perhaps the best example of trading without emotion is not done by people at all, but by the computers that are used for trading by institutions. This programmed trading, which is a strong influence on the market because of the large share size of the trades, is all done by technical indicators, so that emotion may be kept completely out of the equation. |
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The closest individual online traders can get to this type of programmed trading is by using various charts and technical indicators to help in deciding buy and sell points and then locking in what the charts tell them by setting limits on their trades. But, as we said, this method is not for everyone, since not all investors have the personality to dedicate themselves to charts. |
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In addition, technical indicators, no matter how precise, tend to create a false sense of security that the formulas the indicators are based on will always be correct in predicting moves in a stock or the market as a whole. The reality is that everyone makes the wrong bet more than half of the time, no matter what they rely on to help them beat the market. |
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Popular opinion, for example, is that specialists on the New York Stock Exchange and institutional money managers make between 70 and 350 percent gains per year. Market makers on the NASDAQ make between 60 and 150 percent gains per year. And yet 65 percent of all trades even for these most experienced professionals are losers! |
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Now, just to keep a balanced perspective on the role of rational decision making through strong reliance on technical and fundamental indicators, here is what James Cramer has to say on the nature of trading, from his column at "The Street.Com" on September 30, 1999: |
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It wasn't me that turned it into a casino. It was just me willing to admit what market professionals won't do because it savages the veneer they have cultivated all of their lives. Maybe it's because I used to play the horses. Maybe it is because I used to bet large on Sundays. . . . I can smell betting when I see it, and when we are out there taking Amazon up six points, we are gambling and we should just own up to that. We are assessing the odds and making a wager. I can't stand the sanctimonious people out there who would call this something else in a vain attempt to dignify what they do for a living. The worst ones are the ones who think there is a science behind it. |
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