How to Get a Handle on Mass Psychology in Global Financial Markets

Investors have historically followed the same psychological path “over and over and over”

by Bob Stokes
Updated: November 22, 2021

Mass psychology is always at work in the financial markets, where investment frenzies can build up then erase billions of dollars from investors' portfolios, like during the internet stock bubble of the 1990s and the real estate bubble of the mid-2000s.

The main reason why so many financial markets' participants lose money was expressed more than a century ago by Charles H. Dow, the creator of the Dow Jones Industrial Average:

There is always a disposition in people's minds to think the existing conditions will be permanent.

Yet, the only thing that's "permanent" in financial markets is change.

The key to navigating financial markets is to find a method which will help you to anticipate change. In other words, a method that will help you to recognize when a trend (whether up or down) will reverse.

Well, technical analysis, particularly the Elliott wave method, provides an unbiased framework for analyzing market trends.

Here's what Elliott Wave International President Robert Prechter said in his book, Prechter's Perspective:

The Wave Principle is a... description of the steps human beings go through when they are part of the investment crowd... The path they follow in moving from extreme pessimism to extreme optimism and back again is essentially the same over and over and over, regardless of news and extraneous events.

The basic Elliott wave pattern consists of impulsive waves (denoted by numbers) and corrective waves (denoted by letters). An impulsive wave is composed of five subwaves and moves in the same direction as the trend of the next larger size. A corrective wave consists of three subwaves and moves against the trend of the next larger size.

As the illustration below shows, these basic patterns link to form five- and three-wave structures of increasingly larger size:

CompleteMarketCycke

In a bear market, the five waves of the main trend would be down and the three corrective waves would be up.

It's important to note that the Elliott wave method does not provide certainty -- yet, it does provide a high-confidence way of assessing the market's future path.

This applies to any widely traded financial market in the world. Investor psychology is the same everywhere.

Learn what our Global Market Perspective has to say about 50+ global financial markets by following the link below.

Many Global Investors Are Caught on the WRONG SIDE of Major Markets Turns

Here's why: The news is always negative at major bottoms and positive at major tops.

Hence, many investors expect the negative news to lead to even lower prices, and positive news to lead to even higher prices.

BUT -- news is a reflection of the past, not an indicator of future prices.

Put yourself on the RIGHT SIDE of 50+ worldwide financial market trends by getting our latest Elliott wave analysis.

Follow the link below to get insights which will likely help you to protect your portfolio.

Global Market Perspective

$59

Gives you clear and actionable analysis and forecasts for the world’s major financial markets.

Get insights for the U.S., European and Asian-Pacific main stock indexes, precious metals, forex pairs, cryptos (including Bitcoin), global interest rates, energy markets, cultural trends and more.

EXCLUSIVE

Chinese Stocks: What Will the Summer Bring?

The Shanghai Composite fell sharply this year. What's next? Skip the "fundamentals" talk -- watch our Asian-Pacific Short Term Update editor give you a confident answer using Elliott waves and a couple of simple other technical indicators.

See the Chart That Predicted the College Enrollment Meltdown Years Before Covid

You may have heard that university enrollment plummeted during the Covid pandemic. What you may not have heard is that enrollment had been declining on a per capita basis for nearly a decade before the pandemic began. See a classic chart from 2011 that used the Wave Principle to foresee the enrollment bust in real time.

Why the Timing of the Next Economic Slump May Surprise – Big Time

Most professional observers of the economy were caught off guard at the onset of the two biggest economic setbacks of the past 100 years. Will professionals (and the public) be surprised again? Look at this diagram of the single most important "economic indicator."