In our everyday lives, there are some numbers that hold significance. When we turned 16 years old, for example, we could earn a license to drive. When we turned 18, we were allowed to vote. When we turned 21, we could purchase alcohol. The list goes on and on. When we finished 12 years of school successfully, we were granted a high school diploma. Although it is often treated as a guideline rather than a rule, the speed limit on most highways is 55 miles per hour, and if we are unlucky enough to be caught speeding, the fine of the ticket is based on the extent to which we broke the posted rule. We are used to locating key numbers in our everyday life. It is adaptive to identify consistency and rules, and it is often to our advantage to follow them.
We need to make enough money to meet our living expenses, and so each of us has a significant dollar amount that represents breaking even, versus accumulating debt. This is true for people as well as countries. For example, we are familiar with the idea of a “balanced budget.” In science, there’s a notion of “statistical significance.” A study finding is statistically significant if it occurs less than 5%. Every few years, folks ask, “Why 5%? Why not 6% or 8%?” There is no logical reason; 5% sounds nice and even. Humans have a need to simplify things. The mind has a limited amount of psychological energy. We can only process a fixed amount of information before we become “overloaded.”
We search for regularities and seek out certainty because it reduces confusion. It makes information processing manageable so we could focus on meeting an objective rather than focusing our energy on trying to figure out what the actual objective is. Although it is useful to break things down into its most simple terms, it is important to remember that when it comes to reading the markets, we often somewhat arbitrarily impose a false structure onto an unstructured entity and that there are times when the imposed structure reflects a need for simplicity rather than a cold, objective account of reality.
When it comes to trading, there are key points, and numbers, that hold significance. For example, the price where you enter a trade is personally significant. It is the break-even point, the point where you know that should the price of the stock you are trading fall below it, you have a losing trade. Support and resistance levels are also significant points. A price level that was at one time a ceiling can later act as a floor.
These levels do indeed often seem to have both a personal significance and a structural significance. Certain price levels do seem to follow rules and show some regularity. Such regularities help us navigate the market. The markets are truly chaotic and it often helps us deal with the sense of uncertainty to impose some structure. At the same time, however, it is also vital to realize that the structure and regularities may not always hold up. It may not matter in the end. The market behaves consistently only when it does.
Sometimes it is useful to remember that our perceptions are just guidelines, rather than hard and fast rules. When we accept that our perceptions may be arbitrary, it can ease some of the pressure. In the end, we are merely trying to do our best to meet the challenge of trading. Sometimes our perceptions are right, other times they are wrong. But whether we are right or wrong, we shouldn’t let it bother us too much. Our inaccurate perceptions tell us nothing about our self-worth. We aren’t inadequate because we can’t read the markets successfully all the time. It is better to take things in stride, and hope that we can build up the requisite trading skills to read the markets accurately enough to trade profitably and consistently.