Market psychology is the overall sentiment or feeling that the market is experiencing at any particular time. Greed, fear, expectations and circumstances are all factors that contribute to the overall investing mentality or sentiment. While conventional financial theory describes situations in which all the players in the market behave rationally, not accounting for the emotional aspect of the market can sometimes lead to unexpected outcomes that cannot be predicted by simply looking at the fundamentals. Technical analysts use trends, patterns and other indicators to assess the market's current psychological state in order to predict whether the market is heading in an upward or downward direction.
The state of the psychology of the market can be largely attributed and influenced by the mind of traders. Any arena that rides and falls on decisions made by people is going to be heavily influenced by the mind of these people. Almost all market players have access to the same economic numbers, same data as well as same information, yet it lies with each individual mind's how to interpret these information on making their trade decisions. Besides being a "monetary" investment, it becomes an "emotional" investment as well. Being "right" becomes important and being 'wrong' will not only cost investor's money but also pride. Hence there is a tendency for one to hold on to a losing trade in the hope that it will bounce back. Being human, it is impossible to keep emotions out of the picture while trading. Importantly it is to learn not to let emotions control our trading decisions. Learn How to Trade smartly.
