How Does Psychology Drive The Market?

Technical analysis is one of the studies used in trading the market. The best part about using this study is that technical analysis can be used across the markets. The study works in the stock, commodities, Forex, bond and any other security that can be plotted on the chart.

There is a lot of use of technical tools too. Every time a technical analysis tool is used it calculates the balance between bullish traders and bearish traders. Learn more about it here.

Moving average convergence divergence – MACD

MACD or the moving average convergence-divergence is a tool that is used to measure when the trader’s mentality shifts from bullish to bearish and the other way around. The MACD histogram is the next level of the MACD and it helps to determine the short as well as the long-term consensus of the value of the security. The tool tracks the movement of the fast and the slow MACD line.

Average directional indicator – ADX

TheADX is used to determine how strong the current market trend is. This indicator was developed by J. Welles Wilder, Jr. and the main aim of using this indicator was to identify if the trend is strong enough to be useful to be used for trading. The directional line is used in order to find out if the trend is bullish or bearish. When the positive line is above the negative line then this means that the bullish traders are in strength. When the opposite happens it means that the bearish traders are in control.

When the difference between the negative and the positive line increases, then the ADX value increases. When the ADX increases in value then the trend of the security is more likely to continue.

RoC or momentum and rate of change

The momentum indicator is used to see any change in the optimism or pessimism. It is derived by comparing the value or the price today to an earlier price. The momentum and the RoCare used to compare against the actual prices. When the price tends to rise but the momentum of change falls then this could mean that the top of the move is almost near. When the price of the security moves to a new high but the momentum falls then this is an indication to sell. The rule is true in the opposite direction too. This is called divergence.

Conclusion

Each and every indicator is formed based on what the market psychology is. It is thus important that you understand the crowd behavior which is important for you to know the fundamentals of any particular technical analysis tool.