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and 2) the trade will influence other traders in this market. they might also enter stop loss orders below the market at A to limit their loss. they also have no vested interest in the market’s direction.” They neither fret nor rejoice as the market moves. too. But they. their influence in the market is spent . by the same token. They may even enter stop orders to buy at B to add to their position if they should get some confirmation the trend is higher. They are awaiting a confirmation of their market views. Recognizing the sideways price movement. If the price advances above the recent trading range. The “shorts” have exactly the opposite reaction to the market. may add to their position if the price should decline below point A. whichever the direction. the seller feels prices will decline. Thus. The impact of human nature on futures prices can perhaps best be seen by examining changing market psychology as a typical market moves through a complete cycle from price low to price low. since their market impact is still in “reserve. many of them might enter stop loss orders to buy above point B to limit losses. Classic price pattern Assume prices trade within a relatively narrow trading range (between points A and B on the chart on page 2). the “longs” might buy additional contracts if the price advances above the recent trading range. Traders in the third group have mixed views on the market’s probable direction.except for the opposite reaction they will ultimately have when they close the trade. But. their particular market bias is either strengthened or diminished. Once the buyer and seller make their trade. 2) those who hold short positions. It is this group which yields the greatest power. Each trader’s reaction to price movements can be generalized into the reactions of three basic groups of traders who are always present in the market: 1) traders who have long positions. The most important aspect of the psychology of this group is they want to go with the market. there are two aspects to every trade: 1) each trade must ultimately have an opposite reaction on the market. but a lack of positive conviction has kept them out of the market. The buyer believes prices will go higher.THE PSYCHOLOGY OF COMMODITY PRICE MOVEMENT The price of a futures contract is the result of a decision on the part of both a buyer and a seller. Some are bullish while others are bearish. Therefore. with orders to sell additional contracts on a stop below point A. . recognizing prices might decline below the recent trading range and move lower. but soon will. and 3) those who have not taken a position. These decisions are represented by a trade at an exact price. But as it moves.

the price trend would begin to indicate an upward bias if point B were penetrated. and this results in a stream of market orders. where some support could be expected from all three groups on dips. Assume the market advances to point C. Then.The third group is not in the market. but they are watching it for a signal either to go long or short. In any case. the market once again advances toward point C. This group may have stop orders to buy above point B because. Psychologically. as the market advances. Part of the first group that went long between points A and B did not buy additional contracts as the market rallied to point C.) As this support is strengthened by an increase in market orders and a raising of buy orders. the psychology again makes a subtle change. another distinct attitude begins working in the market. Those not yet in the market will place price orders just below the market with the idea of “getting in on a dip” or a “setback. The second group of traders with short positions established in the original trading range has now seen prices advance to point C. Their hopes fade as their losses mount.” The net effect of the rally from A to C is a psychological change in all three groups. their enthusiasm grows and they set their sights on higher price objectives. presumably. . Their general attitude is negative because they are losing money and confidence. Also. If they did not cover their short positions on a bus stop above point B. they may be willing to add to their position “on a dip. buy orders trickle in from these traders as the market drifts down. If the trading range between points A and B has been relatively narrow and the time period of the lateral movement relatively long. They may also have standing orders to sell below point A for converse reasons. The result is a different tone to the market. then decline to move back closer to the price at which they originally sold. As this flurry of buyers becomes satisfied and profit. (Support on a chart is defined as the place where the buying of a futures contract is sufficient demand to halt a decline in prices. the accumulated buy stops above the market could be quite numerous.” Consequently. Now. brokers contact their clients with the news.taking from previous long positions causes the market to dip from the high point of C to point D. as the market gathers momentum and rallies above point C toward point E. as the market breaks above point B. they have the market advantage. they may be more than willing to “cover on any further dip” to minimize the loss. The first group of long traders may now have enough profit to pyramid additional contracts with their profits. The original group who went short between A and B and who have not yet covered are all carrying increasing losses.

” Remember that even if a number of traders have not entered the market because of hesitation. This decline signals a new tone to the market. Some reverse their position and go long. the market should find the support of 1) traders with long positions who are adding to their lack of support on a dip that “carries too far to be bullish. And perhaps they are even kicking themselves for not getting in earlier. The decline from point I to point J is the classic example of such a dip. They are no longer a supporting element. it should appear as an upward series of waves of successively higher highs and higher lows.” When the market demonstrates a notice. eagerly waiting to buy the market on dips. Resistance on a chart is the price level where selling pressure is expected to stop advances and possibly turn prices lower. They may also be among those who are looking to buy or re-enter on any further dip. In fact. and a more two-sided market action develops. The support on dips becomes resistance on rallies. As for those who sold out previously-established long positions at a profit only to see the market move still higher. at some point.) . They consider the risk on the downside too great when compared to the now-limited upside potential. This rationale results in price action that features one prominent high after another and each prominent reactionary low is higher than the previous low. The first group with long positions and fat profits is no longer willing to add to its positions. their attitude still favors the long side. So with each dip. (Resistance is the opposite of support. 2) traders who are short the market and want to buy back their shorts “if the market will only back down some”. But. The group which has still not entered the market either because their orders to buy the market were never reached or because they had hesitated to see whether the market was actually moving higher .begins to “buy at the market. In a broad sense. the psychology again subtly shifts.Some of this group begins liquidating their short positions either with stops or market orders. and 3) new traders without a position in the market who want to get aboard what they consider a full-fledged bull market. they may be looking for a place to “short the market and ride it back down. they are looking for a place to “take profits.” this is the first signal of a reversal in psychology. their attitude is still bullish.” The second group of battered traders with short positions has finally been worn down to a nub of die-hard shorts who absolutely refuse to cover their short positions. The third group of those who never quite got aboard the up-move become unwilling to buy because they feel the greatest part of the upside move has been missed. In fact.

so they add no significant new buying impetus to the market. the attitudes of the traders would be reversed. With this basic understanding of market psychology through three phases of a market. The first rally that “carries too high to be bearish” signals another possible trend reversal. But. this failure is quickly noticed by professional traders as a signal the bull market has run its course. Traders not in the market who were perhaps unsuccessfully attempting to short the market at higher levels will begin to find the long side of the market more attractive. A major bear signal is flashed if the market penetrates this prominent low (support) following an abortive attempt to establish new contract highs. it is important to understand how the psychology of the market action at different points causes the market to respond as it does. the next critical point is the reactionary low point at J. But rather than simply explaining away price patterns with names. it is another sign it was not new buying that caused the rally. As the market begins to advance from point J to point K. As profit-taking and new shortselling force the market to decline from point K. In fact. at some point. but development of a . In the vernacular of chartists. having witnessed the recent long decline.The Downturn Now. the bears become unwilling to add to their previously established short positions. a head-and-shoulders reversal pattern has been completed. but short-covering. With the psychology diametrically opposite. If the open interest (see page 9) also declines during the rally from J to K. the picture has changed. Most of the hard-nosed traders with short positions have covered their shorts. they may be adding to their short positions. Each decline would find the bears more confident and prosperous and the bulls more depressed and threadbare. This is even more true if the rally carries only up to the approximate level of the rally top at point G. No one expects to establish short positions at the high or long positions at the low. a trader is better equipped to appreciate the significance of all technical price patterns. the pattern completely reverses itself to form a series of lower highs and lower lows. Those who were already long the market and had refused to sell higher would eventually be reduced to a hard core of traders who had their jaws set and refused to sell out. It also explains why certain points are quite significant. traders with previously established long positions take profits by selling out. In a bear market. If the rally back toward the contract high fails to establish new highs.

There are many reasons for this that I will not cover at this time. A NOTE FROM GARY KAMEN: While even though the above was written over 30 year ago it still has relevance today. There were position limits and checks and balances which are no longer there. That is why for over 20 years I have always kept an eye on the older COT report and now the newer reports. as well.feel for market psychology is the beginning of the quest for trades that even hindsight could not improve upon. When you analyze charts. You’ll sometimes need a good imagination. but I will say this. We have seen more money come into these markets than in any other time in history. Gary Kamen . Unexpected occurrences can change price trends abruptly and without warning. However over the past 10 years we have seen commodities and futures move from an alternative investment to mainstream. Read my e-book and my educational videos on these reports. some of the chart formations may be hard to visualize. Also. If you have any questions for me feel free to email me at Gary@TrendsinFutures. approach them with the idea that they reflect human ideas about prices that are the result and the struggle between supply and demand forces. Your attitude and ability to judge market psychology will determine your success at chart What I see today was not legal 15 years ago. Wishing all of the success you wish yourself.