By Karthik Rangappa
Zerodha
Have a look at the chart below, a typical chart you’d find on any technical analyst’s desk. There are quite a few things happening here in this chart –
1) Candlestick chart for price action
2) Bollinger band to track volatility
3) Fibonacci retracement to identify retracements
4) Pivot points for support and resistance
5) Volume chart
6) ATR
7) Stochastic indicator
I’m certain, at least 8 out of every 10 technical traders would have a similar setup while analyzing charts. Clearly, for someone not familiar with charts or technical analysis this chart would look quite intimidating. After all, there are so many things happening here.
Each element on this chart gives out a unique insight to the trader. Along with these so-called insights, the chart does something else to the trader at the subconscious level.
Because of the complexity of the chart, and the fact that not many people can relate to it – it somehow makes the trader believe that he is dealing with a complex subject – and he is in total control over the stock by virtue of all the ‘important insights’ he seems to be deriving out of it.
This is often called the ‘illusion of control’ - one of the biggest trading biases for a technical trader. Traders who are heavily influenced by the illusion of control often make statements like ‘this stock is not going to go above 500’ or sometimes they make super confident statements like ‘go ahead and buy puts’, you question them why, and they will be quick to say ‘boss, I’m telling you just buy Puts’.
Why do they do this?
Well, traders have this tendency to get attracted to complex things. It just feels very nice to be looking at complex charts and making sense out of it.
This is like fighting fire with fire – markets are so complex, the default notion is to fight this complex beast with complex analysis. Further, the fact that only you can make sense of it and others cannot give you that additional kick.
This physiological behavior can be attributed to the illusion of control.
Remember, no matter how many indicators you load or how many numbers you crunch, there is no way you can control all the outcomes.
End of the day, there are several different outcomes possible for every possible situation in the market. You cannot control them all.
The only way to overcome this behavior is to stay focused on results and statistics. If you are dealing with a trading strategy, then you got to know the odds of the next trade being profitable.
When you start looking at market opportunities this way, you will start being truthful to yourself (and others around you) and will always remain humble. If not for anything, you not get carried away by noise.
From all my market experience I can tell you one thing with conviction – the best analysis is done when things are kept simple. Complex does not necessarily mean ‘better’.
Hence, you as a trader need to be completely aware of this and work towards building a data-driven approach and not get swayed by superficial inputs.
Disclaimer: The author is VP, Educational Services, Zerodha. The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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