Previous Posts in This Series:
Reading Market Psychology Through Volume and Price
Identifying Historical Patterns in Markets
Market Structure and Adapting to Change
Implicit Learning and Somatic Patterns
Mirrors and Corrective Emotional Experiences
Solution-Focused Change
Changing Problem Patterns
Trading as a Performance Activity
Introduction to Trading Psychology
Reading Market Psychology Through Volume and Price
Identifying Historical Patterns in Markets
Market Structure and Adapting to Change
Implicit Learning and Somatic Patterns
Mirrors and Corrective Emotional Experiences
Solution-Focused Change
Changing Problem Patterns
Trading as a Performance Activity
Introduction to Trading Psychology
One of the most fundamental indications of market sentiment on a day to day basis (and over time) is the degree to which traders favor riskier assets over safer ones. If traders are anticipating economic weakness, they will tend to place their money into the more stable currencies and stock markets of developed nations, and they will tend to retreat to the relative safety of high quality debt (Treasuries, AAA rated corporate bonds). If traders are anticipating economic strength, they will tend to place their money into the faster growth regions of the world (developing nations' stock markets and currencies) and will seek out the higher yields of lower quality debt. In an expanding world, traders expect demand for commodities to rise and will be buyers of oil and metals; in a world of anticipated economic contraction, commodities become relatively unloved assets.
Market psychology also plays out in traders' preferences for particular sectors within the stock market. If they anticipate economic expansion, they will want to own growth oriented sectors: small cap issues, tech stocks, and consumer discretionary shares. If they are betting on economic contraction, safer large cap stocks become attractive, as do sectors that can sustain demand during hard times: health care, utilities, and consumer staples stocks.
In the shifting patterns of relative strength and weakness, we can infer market psychology. We tend to forget the denominators when we look at stock prices: everything is valued in dollars. By changing the denominators, we can see what is relatively strong and weak: a great deal of perspective comes from shifting denominators.
When we integrate sector and intermarket themes with the earlier mentioned shifts in volume and sentiment, we can develop a rich understanding of how traders and investors are feeling and where they are placing their bets. This is valuable information for shorter and longer time frame traders alike.
.
Posts
