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Crowd Psychology (Behaviour)

Don't get emotional and never fall in love with a stock

Crowd psychology is what we actually study in technical analysis. As we know, we always say that the crowd is always wrong during major market reversals. But what happens during trends? During an uptrend, for example, the crowd is usually right: people are bullish, the economy looks good, the fundamentals of the companies get stronger, and there is strength in market breadth. This makes people more rational in their decisions, especially that their realized gains are justified and that the market did not reach its extremes yet. Despite this non-irrational behavior from the crowd, this does not mean that the brain of the crowd is rational during uptrends. What happens is that the “effect” of the brain of the crowd on market participants diminishes significantly during trends and increases during market reversals when markets reach extreme measures. The brain of the crowd is by definition irrational, but its effect magnifies during market reversals, which leads to the irrational behavior that we see during these market extremes.

Charts can never replace fundamental research!

You get the idea…but here is the important point:

“Analysis is not about trying to PREDICT future outcomes, but simply the ANALYSIS of ‘possibilities,’ (things that might happen,) versus ‘probabilities,’ (things that will likely happen.)”

Without understanding what the various outcomes “might be,” action can not be taken to reduce the risk of capital loss over time.



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