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What is Market Psychology?

Market psychology refers to the manner in which the market reflects its participants' collective emotional state.

How Does Market Psychology Work?

Peoples' perceptions of the market directly impact price movements and trends. Market psychology is the overall feeling among market participants that impels them to buy or sell. For this reason, an upward -- or bullish -- trend is associated with feelings of positive expectations expressed by optimism and hopefulness. By contrast, a downward -- or bearish -- trend correlates with feelings of pessimistic expectations expressed by anxiety and fear.

Why Does Market Psychology Matter?

The nature of market psychology suggests that any given trend may be more indicative of market sentiment than of fundamental gains or losses in the value of stocks.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.