In financial markets, individuals, sellers, and buyers alike tend to align with common sentiments, like a crowd following a shared mindset. Joining a larger group can influence behavior, often due to the perceived pressure. As a trader, preserving your individuality allows you to discern changes in crowd sentiments, offering opportunities for profit. Understanding the psychology of the trading crowd unveils patterns, providing insights for successful trading.
First, to understand the motivators of the traders, we should study who they are. According to Wall Street slang, we can divide all traders into four groups:
• Bulls are traders who bet on price increases, aiming to buy low and profit from upward movements. Like a bull charges from the bottom up, bullish traders drive the market upward, promoting price growth.
• Bears are traders who profit by selling during price drops. Similar to a bear attacking from the top down, bearish traders work to push prices lower.
• Pigs are traders driven by greed, risking substantial volumes. They often incur losses due to price shifts. These traders, seeking maximum profit, delay positions, making them vulnerable to both bullish and bearish market forces.
• Sheep are the uncertain traders who follow the crowd taking the side of the bulls.
All these traders, known as market participants, influence prices with their transactions. Price direction is determined by the prevailing sentiment of either bulls or bears, who engage in intense competition.
The price is a psychological balance between buyers and sellers, influenced by their conflicting goals. The market's countless players watch, forming opinions, and making participants more adaptable. Each price level is an agreement, reflected in deals, shaping price charts and volumes. Traders, embodying diverse roles, turn the price into a kind of idol, rewarding correct forecasts and penalizing mistakes. This dynamic agreement continually evolves, ranging from calm changes to emotional price jumps. Seasoned traders enter during calm periods and capitalize when the market becomes volatile.
Technical analysis delves into crowd psychology, deciphering price movements. The goal is to identify the dominant trading group, placing bets on the stronger side for profit. In times of equilibrium, a cautious trader remains on the sidelines. Similar to a public opinion poll, technical analysis blends science (using statistical methods, indicators, and advisors) with art, interpreting and applying results.