Micropsychology of the Markets

Micropsychology of the Markets - Micropsychology of the...

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Micropsychology of the Markets Brett N. Steenbarger, Ph.D. www.brettsteenbarger.com Like the Roman god Janus, trading psychology has two faces: one turned toward traders and their processing of market events; the other gazing upon the market and the sentiment of the crowd. In one incarnation, trading psychologists analyze the trader; in the other, they evaluate the market. While many traders in the stock indexes are intraday participants, closing out positions by the end of the day, the majority of sentiment/market psychology tools are computed at best on an end-of-day basis. Here I’m thinking of such standards as put/call ratios, surveys of investor/trader sentiment, and money flows into various market sectors. By the time such macro measures of trader psychology are disseminated, the trade is over for the active participant. My experience is that successful traders are exquisitely sensitive to moment-to- moment shifts in market psychology. They seem to be able to identify the ebb and flow of greed and fear within the trading day by attending to subtle market cues. What micro events could they be looking at? Are there measures of market micropsychology that could inform decision-making among active traders? Let’s consider an analogy from my book. Psychotherapists pace themselves by “markers” of client emotional processing, timing when they will comfort an afflicted person and when they will afflict that individual’s comfort. I might notice, for example, that—in the midst of discussing a humiliating incident from the past—the client makes a pained face and shifts positions in her seat. Later, when I call attention to the woman’s
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This note was uploaded on 08/11/2009 for the course FINANCE Fixed Inco taught by Professor Proflim during the Three '09 term at University of Adelaide.

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Micropsychology of the Markets - Micropsychology of the...

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