Many investors react to market conditions like lemmings:
Stampeding up the high mountain when markets are rising and down into the cold deep sea when markets are falling!
This "herd" mentality can be extremely dangerous to your pocketbook.
Why?
Because investors often get into the market too late and get out too early!
You should never let emotions cloud your trading judgment. But you can turn the crowd's fear and greed to your advantage! To exploit market psychology, you must act in a contrarian fashion, taking the contrary course when the crowd falls prey to its emotions.
Extreme optimism can coincide with market tops. People think the sky's the limit and send stock prices flying. Savvier investors sell into this frenzy and run to cash. The market tanks soon afterward!
Extreme pessimism can be bullish. Toward the end of a big decline, the last bulls throw in the towel and sell with a vengeance. Cooler heads smell a fire sale. They dive into the market and buy equities with both hands to launch the next rally!
Studies by economists and psychologists have found that investors are most influenced by recent events --market news, political events, earnings, and so on-- and ignore long-term investment and economic fundamentals.
Furthermore, if a movement starts in one direction, it tends to pick up more and more investors with time and momentum.
The impact of this lemming-like behavior has been made worse in recent years because financial, economic, and other news affecting investor psychology travel faster than ever before.
Capital can also flow now between nations with surprising ease, so that international markets respond more quickly to sudden changes with a domino effect in the direction of investor buying and selling.
