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Identifying market reversal - Price behavioural analysis

Updated: May 6, 2021


What is behavioural science?

Behavioural science provide an explanations for why people make irrational financial decisions. It also refers to as studying into the market psychology and in the macro picture is called behavioural economics.

In short, we believe there is likely to have a reason for every price movement, especially in those significant ones.

To give you an insight on this topic, I developed these two questions. Try figuring them out, but take time and to inflect upon them:

Question1

Which investor’s behaviour process tends to take the lead?

Option A - Is it fear (first), follow-by greed?

Option B – Is it greed (first), follow-by fear?

Question 2

Which market behaviour tends to set a market trend?

Option A - A strong demand (first), follow-by an official announcement?

Option B - An official announcement being made (first), follow-by a strong demand?

I believe these questions have triggered some inner thoughts. If your answers are both option A, try supporting it with a reason or why as such?

Yes, market psychology is a 2 edged sword. Once you understand it, it helps us to identify the mass market behaviour, typically in 4 areas:

i) The Greed

ii) The Fear and

iii) The Pride

or we could be one of the above, being a typical investor or trader, the way we think and act in how we manage our money and emotion - Greed, Fear & Pride, creating an opportunity for those who reads into us.

Another study of behavioural science is screening for the unusual price behaviour activities or identifying the quite a common undertakings of the:

iv) The insider

I have been studying close to 2,000 individual and institutional investors and traders, it is interesting to see the consistency of these 4 behaviours happening around us all the time and in different markets. We could literally identify them when it happen, in the way they handle their money and emotions when too much of the greed, fear and pride is involved.

You can sharpen your investment skills, to identify the common faults of most investors and how investment opportunity can take shape because of it:



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