Market Psychology - It's Not What You Think! 


Market Psychology

"Nothing is neither good nor bad but thinking makes it so." - Shakespeare (1564-1616)

"The more things change, the more things remain the same." - Voltaire (1694-1778)

Paraphrasing, "Whatever was will be; that which has been done will be done. There is nothing new under the sun." - Ecclesiastes 1:9 (931 B.C.?)

What does the above have to do with market psychology? In my opinion, everything.

What has the most effect on markets? Earnings (or lack thereof)? Events? Economics? No. It is the perceived effect of those things by the market participants.

Human nature. The reason market behavior never changes is due to human nature; and human nature never changes. It never has, it does not now, and it never will. Period.

And what characteristics of human nature are most present in the markets? Emotions. Specifically, Greed and Fear. And Fear is, by far, the more powerful of the two.

A man may, or may not, stay up all night figuring out how to make an extra buck but he will stay up every night for a week trying to figure out how not to lose a buck.

It's who we are. We're all human. We can't help ourselves. It's our nature.

Why else do you think mutual fund portfolio managers play the "window dressing" game at the end of each quarter? It's because they don't want to look bad in the quarterly reports that are about to be sent out to the investors. They Fear for their jobs.

The legendary stock trader, Jesse Livermore, made his fortune, in large part, due to his ability to understand human nature as it applied to the stock market.

His ability to read the ticker tape to interpret or confirm the reactions perceived by the crowd to the various events of the day was extraordinary. Market psychology: It's not what "it" is that matters, it's what "it" is perceived to be that matters.

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