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One of the most frequent questions I get about The 10-Minute Millionaire system is, "What makes this work?"
And I always start with one of the most overlooked aspects of financial markets.
Despite all of the automation in the process, that stock market is still just a big, old-fashioned auction.
A sophisticated multitrillion-dollar auction, but an auction nonetheless.
And anytime human beings are involved, emotions will arise.
And those emotional reactions give rise to the cornerstone of our strategy – extremes.
The fact that market participants get emotional shouldn't come as any surprise. We see emotional reactions pop up in lots of places – even in our hobbies.
Take football, for example.
This week marks the start of the professional football season.
And while there are plenty of tried and true emotional fans out there, emotions show up in a big way this time of year in a related, but very different, place…
Fantasy vs. Extremes
Fantasy football has become a cottage industry of its own.
The Fantasy Sports Trade Association estimates that more than 53 million people play fantasy sports in the United States and Canada.
In traditional, season-long fantasy football, individual players manage a team of players that they assemble in the pre-season draft. And it is in this team drafting process where emotions come to a head.
Some fantasy leagues make a social evening out of the draft and get together at a league member's house. Large sports-oriented restaurant chains like Buffalo Wild Wings (Nasdaq: BWLD) even have special draft party packages.
Other leagues have members scattered throughout the country or globe and hold their drafts online.
But regardless of where the draft is held – the full range of emotions and human psychology are on full display.
Before league drafts, some players spend loads of time studying and preparing. But when the draft starts, unusual things inevitably occur.
One of the common things that happens is a run on a single position. If a couple of tight ends are taken earlier than usual in a particular draft, players may throw their plans out the window and draft a remaining tight end much earlier than warranted.
Sometimes talented players are overlooked and can be drafted at a bargain position. And some big-name players who are past their prime may be overvalued and picked too early, just because of name recognition.
In a similar way, emotions surface in the stock market.
Most of the time, people act rationally in the financial markets.
And most of the time, stocks are fairly valued.
For decades, the academics in economics and finance held that all market activity could be explained by rational decision makers.
But enough data was finally digested to show that there are distinct, even frequent, times when markets don't move in a rational fashion.
In common terms, there are times when people get crazy. I call them manias.
In fact, a new academic discipline has sprung up to describe crazy actions in the markets.
Here's how Investopedia describes the new area of study:
Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.
In short, there's a whole new field trying to explain why people experience manias.
For us, understanding why people make emotional decisions at times is not as important as understanding that they do overreact and that we can repeatedly find prices at unsustainable extremes.
Traders and investors will always continue to overreact to news, sector strength and weakness, and a myriad of other events.
Here are two perfect examples…
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.