To be a successful investor, it is necessary to have a fundamental understanding of the philosophy that drives the stock market. The mass psychology of human nature is the biggest single factor you must comprehend if you expect to trade profitably on a consistent basis. This emotional and psychological ingredient has absolutely nothing to do with the state of the economy, but it does have an overwhelming affect on the movement of the market.
The first unwritten rule is that rumors are the prime movers of the stock market. It’s amazing how quickly speculation of upcoming events can change the character of the current trend. In recent weeks, just the mention of inflation causes investors to rush for the exits in order to dump their holdings. This type of activity will often precipitate a general market decline long before the economy actually changes into that state or condition. The market anticipates the movement of the economy and shows us in advance what we can expect with regard to corporate health, unemployment, interest rates and other financial trends. It is also said that a crash in the market is foretold by events that are mostly psychological, not economic.
When investors and analysts begin to discuss bearish trends, the market generally reacts negatively because the public believes it is destined for a downturn. In contrast, when a major financial report is rumored as favorable, the market erupts far in advance of the actual announcement.
The most important underlying factor is the power of human nature on the movement of stocks and other investment vehicles. When you understand the changes produced by emotional factors, you can begin to discern the broader, more technical movements in the market. The key is to avoid the impulse to buy at the height of the rally just because the market is up and everyone is talking about their successes. Learn to trade on your own terms, not the market’s.