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Introduction of trading psychology

Psychoanalysis is an analytical approach about the impact of "market psychology on price".

It is a method of predicting the future direction of the market based on the speculation of psychological price and capital flows of institutional or dominating investors in the market, when the market direction is about to reverse or maintain the original direction at a critical point.

Undoubtedly, the leading direction of the market determines the trends (i.e., the direction of capital flows). Capital flows are reflected by the psychological expectations of participants. Thus, the direction of markets is controlled by human psychological factors. Capital is controlled by people, so the common psychology of investors can have a huge impact on market trends.

The principle supporting psychoanalysis lies in the fact that price fluctuations begin with the inconsistency of investors' psychological prices and the breaking of the equilibrium.

When you buy a stock in a chaotic market, its price will be suppressed or overvalued until an acceptable price is formed for the majority investors, when the bull and the bear reach their new equilibrium. At that time, a round of rising (falling) is near to the end, and the market comes to a consolidation period, which means it's time for profit-taking and grasping next trend.

Investors are both emotional and rational at the same time. The cause of price fluctuations is a process of integration between investors, based on their different psychological expectations.

The advantage of psychoanalysis is that it is subjective but also objective. Combined with both advantages of technical analysis (subjective) and fundamental analysis (objective), it could improve the accuracy of market predictions based on investors' expectations and a rather neutral attitude toward market changes.

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