Talking points on this podcast:
- What is market psychology and how can you use it to assist your trading?
- How can you work out where a market is topping out?
- Are charts a good visual representation of market psychology?
This time on Trading Global Markets Decoded, our host Martin Essex is joined by Brett Steenbarger, Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, New York. Brett is a performance coach for hedge fund portfolio managers and traders, a regular trader himself, and a published author of several books on trading psychology.
In this edition, we cover market psychology – what is it, how does it influence speculation, and how can it be applied to help improve trading processes? You can listen to this podcast by clicking on the YouTube link above or by using one of the alternative platforms listed below.
Market psychology: what is it and how does it influence trading?
The podcast kicks off with the definition of market psychology. Brett points to two areas of relevance, the trading psychology of the individual, and the psychology of the wider marketplace. In regard to the first: “We know that our emotional states, our cognitive states, impact how we process information and how we make decisions.
“When we are under conditions of risk and uncertainty, we can make decisions in some rather biased fashions, and psychology helps us reduce that bias and remain focused [and] in our best decision-making modes.”
When it comes to the psychology of the wider marketplace, Brett discusses how as traders we are continually trying to gauge the participation of others in the markets and determine when they are inclined to buy and sell, and when those patterns are shifting. “There are things we can look for in markets that give us clues as to the psychological leanings of other market participants, that help us structure sound trading ideas,” he says.
So if we know traders previously sold EUR/USD at 1.1000, then we can surmise they might sell again at the same level? “That’s exactly right; we can look actually at the price action itself for some clues as to whether participation is waxing or waning on the long side or the short side.”
With the S&P 500 futures contract, for example, Brett will look at each transaction that is made and ask, is that trade occurring at the market offer price, or is it occurring at the market bid price? “Which tells us, is…the buyer being more aggressive, or are we seeing the sellers hitting bids; are we seeing sellers being more aggressive?
“Imagine aggregating all of those transactions over time, so that we can see the flow of aggressive buyers and sellers; shifts in that flow will often precede and alert us to shifts in market direction.”
How to know when a market is topping out?
Discussion moves to how to know when a market is topping out, and Brett again discusses looking at how much volume is occurring at the market offer price and how much is happening at the market bid price. “At a market top, we see significant buying activity; market participants lifting offers, being aggressive, and yet the price cannot move meaningfully higher.
“Eventually sellers see that and come in, and now everyone who’s been buying has to exit; they can’t take the heat. And that’s what creates the next move. So we’re looking for ways in which buyers and sellers can no longer move the market, become trapped and create a movement in the opposite direction.”
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