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.

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

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