stock market psychology

Stock Market Psychology 101: Basics Covered

Table of Contents

Ever wondered what makes the prices move up and down throughout the market hours?

If yes, then you should read this post till the end. In the article, I will be explaining on how exactly the Stock Market works and its basics.

By now, we all know how we can access the stock market. If you don’t know then, you can get access to stock market with the help of broker. Please read Upstox vs Zerodha and decide which broker is good for you.

How Does Stock Market Works?

We all know, Stock Market works when there is buyer and sellers of shares of particular company in the market. There are various types of buyers and sellers, for example,

  1. Institutional Investors (Foreign/Domestic)
  2. High Networth Individuals Investors (HNI)
  3. Retail Investors (Like you & me)
  4. Employees of the company & Promoters too.

These are the three types of investor which triggers the buying and selling in the market and since Institutional Investors have access to all types of help and had lots of money, therefore, they are often quoted as “Smart Money”.

The Basics of Stock Market

When the above investers does the buying and selling everyday, there are patterns formed and there is some reason behind each buying and selling. The market when opens, there are every type of investors buying and selling, i.e, Long term, Short Term, and even Intraday.

Such buying and selling moves the prices up and down of the stocks.

What Is Support Zone & Resistance Zone?

I am taking an example, to help you understand the Support & Resistance in a very clear tone.

Assume A is one group of people and B is another group of people. Each group and its people have similar views on the market. Suppose we are trading in SBIN which is at Rs 330.

Group A finds out about SBIN which is trading in uptrend and is moving everyday and now wish to buy the stock. However when Group A, comes in to buy the stock, the stock was trading at higher levels and they missed the good buying point.

Group B on the other hand are the people who bought the stock at Rs 250 (good buying point) and are in good profits and they are looking to sell the stock to book the profits. Since Group A is not buying yet, the price movement slows down and Group B thinks it’s time to sell.

Group B starts selling and booking profits, and the price moves down now to Rs 300.

Now the prices fall to Rs 300, Group A sees a good opportunity to buy the stock now compared to 330, and Group A starts buying at Rs 300 which will eventually take the Stock back to Rs 330.

This buying create Support Zone. Here Rs 300 level is now Support.

Now again comes Group C, and these are the people who missed the opportunity to book the profits at Rs 330 along with Group B. Since, they again book profits the price falls back again.

This selling again at Rs 330 is Resistance Zone.

Similarly, when the price falls again, there will be again some group which is interested to buy and this will eventually bring the price up again.

However, in this whole scene there will be some Long Term Investors who bought at Rs 300 but didn’t sell at Rs 330, and the stock when it falls again, they added more. This will increase the buyers and the stock will break the resistance if the good volume is present.

Once resistance is broken, it will turn into next support and creates a new resistance at top.

If you reverse the case with sellers at the top and good volume, it will break the support and the price will fall more eventually.

The above concept was to give you an idea of what create the resistance and support.

If you see the chart below, it shows you the resistance & support.

Red is Resistance & Green is Support

I am sure, you got the concept of simple support and resistance zone. You always try to buy at Support and sell at Resistance in most of the cases unless you’re trying to hold stocks for longer term.

What Is Trend Line?

A trend line is just a line which goes below or above the price movement and indicates the price trend.

If the line moves up then it is basically an uptrend. When you draw this trend line, it acts as a support to the price.

However, if the line goes down from above the price, the trend line acts as a resistance to the price.

For example,

Uptrend, a trend line providing support
Downtrend, trend line providing resistance to price. Later trend line breaks and move updwards making new trend

This is how trend line are like. Many simple trades can be taken on the basis of Trend Line. Remember that you should never go against the trend. If you draw and you see the trend is downwards then go with trend. Try to Short Sell instead of buying.

I hope you can now relate to the price movement. Now let’s discuss some powerful patterns and strategies.

What Are The Powerful CandleStick Patterns?

In my experience of 2 years being in the market, I can fairly easily spot the Candlestick Patterns however, in my early days, I do remember that I couldn’t even spot one candle in the whole chart even though there are many.

All this leads you to one conclusion i.e, you need to practice spotting the candlesticks in your free time on any financial charts you want to and it will help you in improving your sight to spot the candlestick patterns.

The most powerful candlestick are,

  1. Bullish Engulfing
  2. Bearish Engulfing
  3. Bullish Harami
  4. Dark Cloud Cover
  5. Rising Sun
  6. Morning Star
  7. Evening Star
  8. Three Black Crows
  9. Three White Soldiers

and there are many…

However, the first five are the easiest to spot and work very well.

Well, hey let me tell you a secret. This candlestick chances of working are much more higher on longer timeframe i.e, (1 Day, 1 Week, 1 Month) etc.

Let’s take a look at how exactly are those first five candles looks like,

Courtesy of 5Paisa

I hope you got the idea of how these candlesticks look like. Now, let see their examples.

1. Bullish Engulfing

2. Bearish Engulfing

3. Bullish Harami

How to trade Bullish Harami Candlesticks with Example: FKnol.com
Courtesy of FKnol

4. Dark Cloud Cover

How to Trade the Dark Cloud Cover Candlestick
Courtesy of DailyFx

I hope you got to know about the candlestick patterns, however to sum it up, I am attaching the whole candlesticks below for your reference

What Is The Strategy To Trade?

The strategy is pretty simple and with practice you will be able to buy the stock at the very correct price and sell it off at correct price too.

However the key rules to follow before picking a trade,

  • Don’t pick weak financial stocks
  • Always follow the trend, draw a trendline and check what trend is it and in what timeframe.
  • The higher the time, the better the candlestick follows the pattern
  • Try to always buy the stock at Support & sell at resistance for swing and exception is holding.
  • Always keep a stoploss 2-3 points below the support level and target just below the resistance level

Coming to strategy, you need to make a watchlist of stocks and add them. You will need to open the charts and spot the candlestick patterns use indicators like MACD, RSI to come with better trade.

Always use two confirmations before going into the trade, here’s when indicators comes in.

You can use,

MACD – To get the buy and sell signals

RSI – To check if the stock is either in overbought or oversold zone

50SMA – Your trade will much and much better if it is taking support of this moving average.

Conclusion

I hope you really like the article and it is very time consuming to go on with each every detail to cover up in just one post. I will be bringing in lot more articles for the beginners to help them with their trading journey. Till then, stay tune to our blog and never forget to subscribe and share the blog.

Emad Iqbal

Emad Iqbal

He is sole writer and founder of this blog. He loves trading and reading. In his free time, he stargaze.

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