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What is market psychology and how does it affect trading?

What is market psychology and how does it affect trading?
  • What is the difference between market psychology and trading psychology?
  • How can you use market psychology to your advantage?
  • How does market psychology help technical analysis?


Market psychology is one of the important and influential factors on the formation of financial market trends, which may be in line with fundamental analysis or act against it. There are different definitions of market psychology, which include:

1. Market psychology is a general feeling that dominates the market at a certain time. Fear, greed, hope, expectations and conditions are among the factors that affect people’s investment thinking.

2. Market psychology is one of the topics of behavioral economics, the main topic of which is to examine the contrast between the behavior and emotions of market participants.

3. Market psychology is an interdisciplinary subject between economics and psychology that studies factors influencing economic decisions. Many experts believe that the main factor in the price fluctuations of the financial markets is emotions, and the change in investors’ emotions is the cause of the psychological cycle of the market.

4. The emotions and behaviors that dominate financial market participants in a certain period of time are called market psychology. In other words, market psychology describes the general behavior of the market based on the emotions and feelings of market participants.

Mainly, financial media and financial market analysts use the term market psychology to describe market trends.

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The need to understand market psychology

Market psychology is a powerful force that sometimes follows certain principles and frameworks and sometimes there is no psychological factor to justify it. The financial markets are strongly influenced by this force and some may benefit and others may suffer under the influence of such a force in a certain period of time. Therefore, in order to trade successfully in the financial markets, it is very important to understand market psychology. “Fear”, “greed” and “group instinct” are among the terms that are heard a lot in the psychology of financial markets and are very effective in creating the spirit of “risk-taking” or “de-risking” or periods of market boom and bust.


Sometimes the conditions of a company’s shares may be quite favorable in terms of fundamental and technical analysis, but due to pessimism about the country’s economic situation, market participants refrain from buying shares and sell the shares in their portfolios. In this case, the pressure caused by the sale will cause the stock market index to drop and as a result, the price of the companies’ shares will decrease. Meanwhile, many companies have had significant performance and profitability. In fact, due to the negative atmosphere prevailing on the market, the stocks of strong and weak companies have experienced a sharp drop in price, regardless of their performance. In fact, it can be said that market psychology complements the analytical methods of financial markets, and in order to have successful transactions, special attention should be paid to this principle.

The difference between market psychology and trading psychology

Note that market psychology should not be confused with trading psychology. Trading psychology describes the behavior and feelings of each person separately. Trading psychology shows different dimensions of a person’s feelings and behaviors that affect his trading strategy. While the purpose of market psychology is to examine the feelings and behaviors of market participants, to describe the overall market trend.

Why is market psychology important?

Sometimes, if you look at the market technically, it seems easy to compensate for the mistake; For example, suppose you bought a stock and sold it before the appropriate exit point. In such cases, you can realize your mistake by examining the factors that convinced you to sell, and with the help of technical analysis and strategy change tools, try to fix it and choose the exit point in a better place. But this is when you only have a technical view of the market. Many times, despite having the right trading strategies, you still fail to make a profit. This is where you realize the importance of market psychology.

Market psychology teaches us that any particular trend that happens in the market, rather than showing the profit or loss caused by the change in the stock price, shows the prevailing atmosphere in the market. With the help of market psychology and knowing ourselves as an investor, it is possible for us to avoid emotional investment and act professionally in our capital management.


Of course, solving intellectual and psychological problems that prevent wise decisions and adopting correct strategies is not an easy task; Because these mental problems are caused by prejudices and obvious things within us, which can lead to serious injuries in sensitive situations. Note that our behaviors arise from our inner feelings. In other words, there is a close connection between our emotions, psyche and behavioral patterns. Therefore, people can have more reasonable and successful transactions by controlling their emotions. In reality, the success of market traders depends on controlling their emotions.

The impact of market psychology research on investment

Perhaps this question has been raised to you, who first proposed market psychology and trading psychology?

Many studies have been done regarding market psychology and its effect on investment returns. Meanwhile, Amos Tversky (Amos Tversky) and Daniel Kahneman (Daniel Kahneman) were the first to challenge the “efficient market” hypothesis and the idea that people in financial markets make rational decisions based on public information and prices. They accept, they rejected. They focused on systematic errors in people’s decisions, which are mainly caused by cognitive biases such as fear of missing out, biases, and fear of wrongdoing. Their actions are widely accepted and used in trading strategies today.

The reason for rejecting the efficient market hypothesis in terms of psychology

The “efficient market” hypothesis refers to a state of the market in which emotions play no role. In fact, supporters of this hypothesis believe that the only thing that affects the market trend is real information and data. This hypothesis has been criticized by many supporters of market psychology; Because in it, the market is described in such a way that all members of the market have a logical function and there is no emotional aspect in it. Meanwhile, the theory of market psychology believes that sometimes the market trend may change in a way that cannot be predicted by any basic principles of psychology.

Although the basic principles guide the stock price, sometimes the psychology of the market overcomes these basic principles and changes the movement of the price chart in an unexpected direction.

The behavior of investors in financial markets

If we ask the investors of the financial markets, with what purpose did they enter the market? Maybe they all have the same answer to this question: that is, to earn more profit. But each of these people may be drawn to activities that are in conflict with their goals under different circumstances, under the influence of inner tendencies. Desires that sometimes we not only do not express, but maybe we are unaware of their existence. If you don’t have full respect for these tendencies, you may experience great financial losses.


It can be said that the behavior of financial market investors is affected by 6 internal emotions, which include fear, greed, hope, anxiety, despair and fatigue. For example, the fear of incurring more losses makes the trader make a quick and emotional decision that will lead to more losses. Or in another example, consider a trader who keeps shares in his portfolio due to greed despite recognizing an acceptable profit and suffers losses due to the drop in stock prices.

Examples of investor behavior in financial markets

Since the psychology of the market is influenced by the psychology of investors’ behavior, we mention some examples of these behaviors so that you can get to know the environment of the financial markets more.

1. Active investors

These people have a trading strategy that includes constant buying and selling. Active investors aim for short-term gains, so they usually ignore long-term trends.

2. Active investors

The trading strategy of these people is based on long-term buying and holding. Therefore, they are not looking for volatility or profit in the short term.

3. Emotional investors

Emotional investors can be seen in both of the previous categories. These people usually follow the news and show quick and emotional reactions upon hearing negative news. Sometimes they are even afraid of checking the stock price or happy with the thought of unrealized profits. These people do not make successful investments and usually suffer losses.

How to use market psychology by investors

Being aware of personal behaviors and their emotional roots helps people to better analyze their behaviors and make better decisions in sensitive situations; That is, they enter profitable positions or exit from losing positions in better times.

At the same time, there is another general attitude in the financial markets that works exactly the opposite of the above article. Based on this view, the best time to enter is when the market is down and most people are discouraged from buying. On the other hand, the risk of transactions reaches its highest level when most market participants have high self-confidence and are optimistic about the future of the market. The existence of such an attitude has made investors more willing to understand the general sentiments of the market. Although in practice, it is not easy to recognize the correct positions, but by examining and understanding market sentiments, traders can more easily recognize the stages of the psychological cycle and enter or exit the market in better positions.

Market psychology with the help of technical analysis

Technical analysis, by examining and analyzing the price chart, seeks to find patterns that show the continuation of the trend or a change in the current trend. Financial market analysts believe that these patterns are the result of market psychology. In other words, the price chart is a graphic representation of emotions such as fear, greed, hope, despair and human behavior such as group instinct. Price charts show how market participants react to future market expectations. In fact, the principles of market psychology are the basis of technical analysis. This analysis provides you with a trading strategy that is obtained by analyzing price trends and trading volume.


In general, traders of financial markets have a strong tendency towards price trend levels. They believe that these prices have been noticed in the past; So it is possible to support these price levels again. For this reason, support and resistance lines are very important in technical analysis. In fact, support and resistance areas are used to examine past prices and predict future prices. These areas can be identified with the help of technical analysis tools such as trend lines and Fibonacci tools. Since traders predict the future of the market by looking at the stock’s past and reacting to changing conditions, it can be said that market psychology plays a major role in market trends.

Frequently asked questions about market psychology

What do we learn from market psychology?

Success in financial markets is not possible only with fundamental and technical analysis; Besides these two methods, we must also master market psychology. Because traders’ emotions are very effective in determining the market trend and the controlling role of these internal emotions and emotions on having successful transactions is undeniable.

In which markets can market psychology be used?

Since market psychology studies human emotions and behaviors, in any market, the main actors are humans, so this principle is used in all financial markets with any type of asset, including stocks, securities, digital currency, etc.

How can you use market psychology to your advantage?

By continuously studying, you can identify situations where emotions such as fear or greed create conditions of selling pressure or buying pressure, and you can trade against the trend of the market. That is, when the selling pressure is high, you buy and sell when others are buying emotionally.

In which analytical method of financial markets has attention been paid to market psychology?

In general, there are two common methods for analyzing financial markets, which are fundamental analysis and technical analysis. Fundamental analysis is based on the analysis of companies based on real data; Therefore, market psychology has no place in this type of analysis. But technical analysis is a method that seeks to find patterns that show the continuation of the trend or the change of the current trend by examining the price and volume chart. Experts believe that these patterns are derived from the principles of market psychology. That is, emotions such as fear, greed, hope, etc. have caused traders to react to their expectations of the future of the market, which leads to the formation of the market trend.


Market psychology is among the parameters that are very important for financial market participants. Because one cannot deny the influence of emotions such as fear and greed and the behaviors resulting from them on the formation of financial markets. Financial market traders may suffer significant financial losses if they ignore this principle. While, if they are familiar with trading methods and capital management, and have knowledge about market psychology, they will make better decisions to make successful transactions. One of the most important views of market psychology is to move against the general market trend. For example, when the market trend is bearish and everyone is in despair, you buy. It is possible to gain knowledge and knowledge about the topics of market psychology by reading related books and participating in training courses.

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