Introduction
People participate in the stock markets of the world for a variety of
reasons.
When a company's share price rockets upward, or dives downward, it is
because enough of the market participants have a strong enough view of
the stock, or of the market generally, to cause the share price to
move.
Prices of financial instruments (such as shares, commodities,
currencies, etc.) move up and down based on people's perceptions of
value (perhaps using fundamental analysis), and because of the
underlying emotions of fear, greed and hope.
If only the market participants could understand more about these
underlying emotions, it would help to make more sense of the market
movements.
And if the market participants can be more in control of their own
emotions, then their investment decisions can be made more calmly, with
a cool head, without undue influence, and with a greater chance of
success.
A test for you...
How observant are you?
How much detail do you actually observe when you "see"
something?
Here is a "Selective Attention Test" short video on YouTube (less than
2 minutes).
Watch the video and follow the instructions.
Cognitive Bias
Without realising it, many investment decisions are influenced by a
variety of cognitive biases.
Here are just a couple of cognitive biases:
- Confirmation
bias - The tendency to look for information that confirms
our existing preconceptions, making it more likely to ignore or neglect
data that disconfirms our beliefs. For example, when we compare
ourselves with others we are more likely to remember other people's
mistakes and less likely to think of our own.
- Herd instinct
- Most people don't like to go out on a limb and do something different
to everyone else, so they tend to follow the decisions of the masses.
- Overconfidence
effect - Excessive confidence in one's own track record,
and answers to questions. This can lull us into a false sense of
security, and overconfidence in our ability.
Emotion - Greed
When we see a company's share price running higher, we can easily feel
overwhelmed by greed, and by fear of missing out, so we
buy shares, only to see the price fall away. If only we had
have stayed cool-headed, and not got carried away.
Emotion - Fear
Many investors have experienced that feeling of
fear in our investing. Maybe it was the fear of suffering
a loss, ot
the fear of missing out or the fear of being wrong.
[More information on this topic is coming very soon...]
The emotions are in the charts...
Many people don't realise it, or refuse to accept it, that the
underlying emotions of market participants are reflected in the price
charts.
To understand more about how to read the emotions in the charts, and
how to more accurately anticipate future price movements,
see the details on Technical Analysis...
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Share Market Terminology
See Brainy's eBook Articles, and the Master
Index list for details.
Or, search
the
eBook Articles.
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Robert
Brain provides various support to both new and
experienced traders and investors.
Who
is Robert Brain?
The toolbox is an arsenal
of weapons to help you tackle the share market.
See a list of contents on
the Toolbox
Gateway page.
The Share Market
- more information about the market and investing and trading.
And whatever you do,
beware of the sharks in the ocean!
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This is one of the
many tools in Brainy's Share
Market Toolbox.
The information presented herein
represents the
opinions of the web page content owner, and
are not recommendations or
endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor
should be engaged.
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Copyright 2012, R.B.Brain -
Consulting (ABN: 52 791 744 975).
Last revised: 7 June, 2012.
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