Market Cycle Psychology

What is Market Psychology?

Market psychology posits that market trends reflect the emotional states of participants (and are influenced by them). It is one of the main topics of behavioral economics. Behavioral economics is an interdisciplinary field that primarily studies the various factors prior to economic decision-making.

Many people believe that emotions are the main driving force behind changes in the financial markets. The overall fluctuations of investor sentiment create what is known as the market psychology cycle.

In short, market sentiment is the overall feeling of investors and traders regarding asset price behavior. If market sentiment is positive and prices continue to rise, a bullish trend emerges (commonly referred to as a bull market). The opposite situation is known as a bear market, where prices continue to decline.

Thus, sentiment is composed of the individual viewpoints and feelings of all traders and investors in the financial markets. Another way to view sentiment is as the average of the overall feelings of market participants.