The stock market is probably the most unpredictable of all financial markets. It has some things to do with the economy and some to do with the psychology of the investors. The investor who makes money from the stock market has to learn how to recognize the psychological factors that affect market behavior.
You have to look at the way the market behaves in order to determine whether it is behaving according to its own rules or not. The stock market is certainly more complex than people make it out to be.
Psychology influences how the market operates. The behavior of the market can be influenced by human psychology, changes in the economy, and other causes. Understanding the human psychology that affects the market behavior is important in learning how to trade.
In order to understand the stock market psychology, you need to understand human psychology. There are three kinds of human psychology:
Emotion: This is the first type of human psychology, the kind that is influenced by your emotional state. When you feel optimistic about the stock market and when you feel pessimistic, it reflects the emotions that are associated with this state. The market is a very interactive medium.
Positive and Negative Thinking: The second type of human psychology is the thinking or feeling that you should buy or sell a stock based on your previous experiences. This is very different from the thinking that you should invest according to its intrinsic value. Positive and negative thinking can lead to higher or lower expectations of future returns. Investors should be careful because they can confuse themselves.
You should not rely only on financial indicators. In fact, the financial indicators should not be used alone, because these indicators depend on people’s decision-making process, which will also influence the stock market.
The third kind of human psychology is the feeling that you should wait for the market to make a move, rather than investing on the basis of financial indicators. If the market is going to go up, the investor should be in it; if it is going to decline, then the investor should be out of it.
While these three types of human psychology can influence stock market behavior, none of them can guarantee that the market will react to any change in the financial environment. You should learn to recognize the common patterns. For example, there is a trend towards rising prices for the market over a short period of time.
You need to see whether this kind of stock market behavior is a precursor to the beginning of another upswing. Do you see rising prices and a falling trend over again? If so, this could be a signal that the market is about to have another big upswing, a one-time spike, which could last a week or two.
The lesson is this: you cannot totally rely on stock market psychology. Sometimes you will need to rely on a combination of financial indicators and human psychology to see whether the market is likely to follow its own rules or not.