What is Market Psychology?

Market psychology is the collective emotional and cognitive state of investors, influencing their trading decisions. It plays a key role in driving market trends, often causing asset prices to rise or fall based on prevailing sentiment rather than fundamentals.

Explanation

Investors’ emotions like fear, greed, and optimism lead to phenomena like bubbles or market crashes. Understanding these psychological trends helps traders predict market movements and make informed choices. Developing a strategy that balances logic and emotion in trading is key to consistent success.

Practical Example of Market Psychology

During a market rally, positive market psychology can drive prices higher as investors become increasingly optimistic. Conversely, during a downturn, negative psychology can lead to panic selling and further declines.

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