+1: History has an uncanny ability to repeat itself. Whether it's the rise and fall of an empire or the rise and fall of a stock, there are clear cycles that are prevalent throughout history.
People may change, but human nature, and our ability to act, react and
overreact is simply an innate part of our being. This predictability is
what forms the basis of technical analysis and provides a trader with
an edge with which to trade upon. When we are analyzing cycles we
really are analyzing emotions, trying to gain insight as to how market
participants are behaving.
John Maynard Keynes is often quoted for suggesting that "The markets
can remain irrational longer than you can stay solvent." This is a
harsh reality and puts great emphasis on the importance of discipline,
risk management, and a keen eye for price action.
Emotions are what separate the successful traders from
those that lose money. They can be regarded as a relentless opponent,
often showing up without warnings and striking you at inopportune
times. The successful trader is able to recognize their presence and
maintain objectivity, constantly assessing their own strengths and
There will ultimately be times where you can't control
your emotions; however you can always control how you respond to them.
Any time you recognize that your emotions are influencing your
outlook you are already one step ahead of the average market
participant. It is at this point that you step back, refocus your
perceptions, examine the price action, and then take the appropriate
An understanding of herd or mob mentality is important in
trading and can provide you with an edge over the average participant
who doesn't contemplate what is happening around them. In a mob or
riot, we never know what the feelings and motivations are of all the
There are however certain emotions that seem to appear at
distinct times and a certain predictability in their development. A
stock's price action is no different. While we never know the
underlying feeling and motivations of all participants, there are
distinct emotions that are shared by the herd at various stages of a
stock's life. An understanding of these emotions and their
implications on the price action of a stock is an advantage that the
profitable trader maintains.