Market Psychology: Keys to Trading Success Learned in 3 Phases

There are three phases in the market where participants' psychology influences prices. First, the initial phase is the “technically driven phase.” At this time, the people participating in the market (hedgers, speculators, arbitrageurs) are all facing the same direction. In this phase, even beginners have an easier time winning.

Next comes the “phase where technicals and fundamentals influence each other.” Technical analysis involves analyzing charts using indicators. Fundamentals, on the other hand, refers to information outside the charts, such as U.S. Treasuries, stocks, and commodities, and considering how that information might affect the charts. In this phase, technical analysis alone becomes less reliable for winning.

The final phase is the “phase where real demand is very strong.” This happens when the market is in a state of panic or when attention is focused on a certain market. For example, during a massive crash like the Lehman Brothers collapse, speculative money can be dumped rapidly, leading to a flow of real demand and cashing out. Or when markets for stocks, bonds, or gold are rallying, speculative money concentrates in specific areas, making other assets harder to understand with technical analysis alone.

Most traders only win in the initial “technically driven phase,” so in the end, about 90% of people end up retreating.