Investor Psychology
misinterpretation and mental compartmentalization. The most common form of try-
ing to resolve dissonance is to simply ignore the issues and hope that the market will
rebound. Traders also choose to perceive only information that agrees with their view
that the trend is still intact and any retracements are merely temporary or insignificant.
We have, in this chapter, seen how various behavioral biases affect trader and
investor decisions with respect to trends, consolidations, and market reversals. Be-
sides observing how trade and investment decisions are affected by such psycho-
logical and emotional biases in others, every analyst or trader should also strive
to observe the degree that such biases affect their own view and decision making
process. With a deeper understanding of oneself and the factors that influence
one’s actions and decisions, analysts will be able to offer a more objective view of
market action and traders will be able to trade what they see instead of what they
want or expect to see unfold in the markets.25.6 Chapter Summary
In this chapter, we learned that the market is essentially a consequence of human
reaction to market action. Hence it behooves the practitioner to be familiar with
the various human traits and biases that drive the market. We have seen how
breakouts, retests, and various chart patterns are the result of human psychology
and emotion in action.Chapter 25 Review Questions
- What are the behavioral elements associated with market tops and bottoms?
- What are the behavioral elements associated with consolidations?
FIgUre 25.5 Behavioral Elements Associated with Market Tops and Bottoms.