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It’s all about greed and fear. The point of maximum financial opportunity, shown above, is when the "uneducated" players are gripped with fear and sell in panic. When the mood is one of greed it is the point of maximum financial risk but that is when the "uneducated" players buy! These are the two extremes the markets reach. These emotions are what we need to conquer. Never let your emotions get the better of your trades. Instead learn to exploit the markets by 'knowing' the psychology of the market. When the market is fearful, then we should buy and when the markets are euphoric we should sell .In other words we should be a contrarian. Once you have understood the psychological aspect, you will be able to make unemotional decisions to beat the market, with the help of technical analysis.
Easier said than done!! Just sharing with you that even now we sometimes tend to get greedy and fearful. It is indeed very difficult to sell a stock which is going up day after day. You tend to think that what if I sold now and the stock went higher? I would miss a large part of the profits. And then one fine day the stock takes such a vicious turn, you are caught unawares and sometimes the price of the stock goes even below the price level when you had first thought of selling it ! Remorse , if you sold it earlier and remorse when you didn't. whew! Trading in stock markets will be very emotionally draining, unless you discipline yourself to such an extent that emotions have no place in your trading.
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Reading Dr. Jean Paul Rodrigue's Chart;
Stealth Phase - "Smart money" gets in often quietly and cautiously. Prices gradually increase, but often go completely unnoticed by the general population. Larger positions are established as smart money investors start to understand the well-grounded fundamentals and realize that this asset is likely to experience significant future valuations.
Awareness Phase - Realizing the momentum many investors start bringing in additional money in and pushing prices higher. There can be a short lived sell off phase taking place as few investors cash in their first profits (there could also be several sell off phases each beginning at a higher level than the previous one). In the later stages of this phase the media starts to notice.
Mania Phase - Price rise catches everyone's attention and the public jumps in for this "investment opportunity of a lifetime". Floods of money come in creating even greater expectations and pushing prices to stratospheric levels. Fairly unnoticed from the general public caught in this new frenzy the smart money as well as many institutional investors are quietly pulling out and selling their assets to eager future bag holders. The market gradually becomes more exuberant as "paper fortunes" are made and greed sets in. At some point statements are made about entirely new fundamentals implying that a "permanent high plateau" has been reached to justify future price increases the bubble is about to collapse.
Blow-off Phase - A trigger arrives and everyone roughly at the same time realizes that the situation has changed. Confidence and expectations encounter a paradigm shift. Many try to unload their asses to a greater fool but there are few takers; everyone now expects further price declines. Prices plummet at a rate much faster than the one that inflated the bubble. Many over-leveraged bag holders go bankrupt, triggering additional waves of sales. The general public at this point considers this sector as "the worst possible investment one can ever make". This is the time when the smart money starts acquiring assets at bargain bottom prices.
