Trading Psychology Drives Market Fluctuation

Warren Buffett is often quoted as having said “be greedy when others are fearful, and fearful when others are greed.” The words of the investor magnate were not accidental, but reflect rather one of the greatest—albeit often overlooked—aspects of stock market movement: psychology. Stocks, prices, and charts, of course, have no psychology of their won, but since humans are the ones selling, buying, and recording the markets behind the instruments, trader psychology can play a significant role in how the market moves. Understanding trading psychology can help you trade binary options successfully, and we have prepared a basic guide to help you understand the two most vital feelings that can shift the charts.

Greed

The release of positive market information, especially when it comes in the form of surprising news or unexpected events can create a buying frenzy in the market. Investors see prices increasing and don’t want to be left out of a winning bet, so they jump in the trade with both feet (or both pockets) without first calculating the situation to see whether it’s worth the trade. The high demand created by mass buying in a short period of time can drive prices to much higher levels than the real value of the underlying asset. Such rash behaviour is known to cause speculative bubbles in the market, which burst just as unexpectedly as they are created, leaving investors counting losses instead of profits.

Fear

Fear in the markets is the opposite emotion of greed. When unexpected negative news hit the market, panic takes over the trading room and investors tend to react out of fear of what might be lost, momentarily disregarding all the information provided by their technical and fundamental analysis skills. When traders begin frantically selling, they can cause specific assets or even entire markets to sink to unsustainable lows, creating the crashes they so eagerly try to avoid. Once the storm subsides and the fear retreats, prices usually move back to levels that reflect the real market value rather than the fear of investors.

You can see then, that Warren Buffett wasn’t in fact advising anyone to allow emotions to control his trading; he warns us rather to be wary of mass market mood swings. The key to binary options trading is good emotional balance, and Banc De Binary we advises you to keep your cool at all times. When you see the markets moving suddenly on a spark of greed or fear, keep your distance and assess the situation rationally before attempting to join the frenzy.