Today's Quote: “There are two kinds of people in the world, those who believe there are two kinds of people in the world and those who don't.” Robert Benchley

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

WE TRADE PEOPLE, NOT STOCKS

The astute trader must never forget that we, as traders, really trade people, not stocks. So many novice market players fail to comprehend this critical point. As a result, they stay forever confused as to why stocks often contradict rationality and all sense of reason. Stocks can do nothing in and of themselves. Their prices are determined by the perceptions of people. And as you well know, people's perceptions are entirely controlled by their emotions. It is these emotions, primarily greed and fear, that often cause stocks to extend too far in both up and down directions.

When the world seems peachy and very comfortable, greed dominates the landscape and stocks tend to move well above reasonable levels. This is when many traditional Wall Street analysts will become confused, frustrated, and sometimes irate. They don't understand why stocks are not behaving according to their neat little mathematical measurements of value. If they fully realized that stocks have no life of their own, they wouldn't be so perplexed. When the dominant attitude or emotion changes from greed to fear, stocks, driven by these same people, tend to drop well below reasonable levels. This is when the eternal market optimists become frustrated and confused, as they can't understand why stocks are not turning back up so quickly. This wide but frequent vacillation from overdepressed states to overextended ones has never stopped, and it never will. It is what creates trading opportunities in macro, as well as micro, time frames. It is what keeps the new people coming in, and the old beaten people leaving. The astute trader, understanding this, builds his or her skill around knowing when one emotional state is about to give way to another. That's it. That is trading in a nutshell. Not knowing when a stock's earnings will be better than expected or trying to guess when a company will announce a new product. It's all about people and their emotions, which is why chart reading is so important to us. Balance sheets and income statements present a picture of the past, a past to which people have already emotionally reacted. Charts, on the other hand, serve as a living map, built trade by trade, of the players' current emotional state. It is the ultimate tool for the active trader in our view, and those who play the market short term without them are at a huge disadvantage.

It is an inescapable fact that we, as market players, trade people. We don't trade stocks. Of all the realizations we have ever made, this one stands as the most significant in our minds. The traders who see the market as people, as opposed to numbers or binary impulses on a computer screen, have a much better chance of reaching the state of trading mastery. They will better understand the reasons behind sudden price movements, which will put them in more viable positions to take advantage of those price movements. The true masters never forget that each time they place a trade, someone else is on the other side of it betting in the reverse direction. But because these master stock traders are really master people players, those poor souls taking the others side of their trades are usually the patsies. Recognize that you trade people, and you have the potential to soar. Fail to recognize this, and you may be the next patsy.