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XV. Trading Psychology

Updated: Mar 31, 2021

Psychology has more of an impact than you would think in a market. Most people think its all just math, timing, and picking the right stocks. But a lot of market moves have to do with market perception, sentiment, and the psychology of the person behind the trades. It also of course, is a factor in your own personal trading journey, but I will talk more on that in the next section.

  • Market Perception is the outlook active traders and people who follow the stock market has. This can range from bullish, bearish, pessimistic, optimistic, to just plain uncertain. You’ll notice this perception when you start to trade. Some days, even though nothing has really changed fundamentally, no news or data, the market will just trend in a direction. This is the market perception pulling the market along. So if the overall perception is optimistic, open interest is leaning bullish, then on a daily basis the market will just rise slightly up. On the contrary, if all the opposite are true the market is just pulling along. When times are uncertain or people are waiting on bigs news to unfold, you’ll see the market go sideways where the is no volatility or movement and your chart will just drag flat across the screen. This perception is a good think to note when you are coming into a trade, as it might lead to a greater push when a fundamental hits.

  • Market Sentiment is a bit different than perception as I categorize the sentiment as the overall feeling your average joe sitting at home with no market insight but still has a 401k perceives about the current economy and market. Gauging how these people are feeling about the market is another psychological variable that can have market sway. Is Joe worried that the market is becoming too risky as he watching Jim Cramer on TV? If so, he may be starting to switch towards cash ( a common broad opinion given on tv) and thus you will see him sell out of his index, mutual funds and ETFs. Since ETFs and mutual funds make up such a large volume of the market, you will start to see these pull the market down as joe shmo liquidates his life long position, causing a huge market correction.

When it comes to day trading explicitly , these psychological market effects have less of an impact , as your trading time frame is much much shorter. That is why your personal psychology usually comes into play more. But for those who are not looking to trade as often and have a longer term goal, this is definitely another variable to add to your view when trading. And if you are adding day trading to blend into your portfolio, it is just as important.


I hope you found this helpful and maybe as a bit of an epiphany , as this topic is touched on, but never truly dwelled into with a great importance. In my more advanced guides , I will elaborate more, but this is a good food for thought introduction. My next section will talk about personal psychology when it comes to your trading.


As always, feel free to message me with questions and positive comments. Check out my other guides, blogs, and videos for further advice. And if you are feeling productive and itchy for a journey, check out the travel section of my site.

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