Lesson 1 - Introduction: Forecasting in the Grand Tradition of W.D. Gann
1.4 - 2nd Principle: Trading Opposite the Crowd at Strategic Turning Points
The second principle is the real key to understanding why you can be successful.
Since the vast majority of market participants are motivated by the same
three emotions, they tend to do the same things at the same time in the marketplace.
As a result, they demonstrate a herd mentality and move in and out of a market
as a "crowd." Their collective optimism carries prices to overbought levels
and their collective pessimism carries prices to oversold levels. Quantifying
the extent to which the crowd will do this in a given market situation is
where W.D. Gann's analysis comes to life. By defining the degree to which
culmination points have carried prices historically, we can harness wealth-building
moves like at no other time in history.
The old Wall Street maxim states, "Buy on rumor, sell on fact." In general,
we must sell when good news comes out and buy when bad news is out. The market
almost always discounts the news in advance, except when it is sudden and
unexpected.
he extremes of optimism and pessimism are described in the classic volume, Extraordinary Popular Delusions and the Madness of Crowds. The madness occurs anytime the thoughtful reasoning of the individual is replaced by the unthinking crowd. In the markets, when these emotional extremes occur, opportunity is at its greatest. Such emotional extremes coincide with great culmination moves followed by dramatic turning points.
go to section 1.5
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