Mass psychology in markets and psychological analysis

Dear readers, in this thread we're going to have a look to the market from it's psychological point of view.

Mass psychology in markets:
The markets, are a virtual place where a collectivity of entities meet each other and buy or sell contracts within themselves, as a collectivity, their ideas and feelings and emotions blend together creating what can be defined a crowd effect.

For example, sometime we can have an overall mass euphoria, price is going up, foundamentals are very bullish, everything seems to suggest that market can only go more up and the right thing to do is buy. These ideas are shared among the community, everybody agree that the market must and will go up, .
In this case, we would surely see a nice uptrend, this is what crowd psychology can create, trends.

Another example, a community with many dissenting views within itself, somebody think market is cheap and buy, as price goes up , somebody other think market is high and sell, there is not a strong idea shared among the community, market chop up and down, this is also what crowd psychology create, ranging periods.

A single trader cannot move the markets, only a community of traders can.
In today virtual markets the community is virtual, at any given time, the information shared among this community is the same for everyone (the various informations shared by the medias and agencies about the economies, the economic data, etc.), therefore their ideas are similar for the most part as everybody looks at the same information.

The problem with the financial markets is that they are traded by way more than one community, as the world is soo big that there are different time zones, and when the asian community sleep, the europeans and americans trade, then while the europeans sleeps, the americans and asians trade, etc.

Different communities, different ideas, different interests, this makes the financial markets tricky and unpredictables.
However, once we start to look at them from a multi-communities mass psychology perspective everything seems to make more sense, and the markets can be understood.

More to come

Why it's the problem? forex is an international market, "Different communities, different ideas, different interests" and... differect possibilities of earning.
>>>> somebody think market is cheap and buy, as price goes up , somebody other think market is high and sell, there is not a strong idea shared among the community
price is equal for everybody, the point is in your funds (enough or not)

Second Post.

As we said in our first post, today financial markets are a place where not one but at least three large communities of traders meet everyday and trade within themselves.

We have infact the asian session, where traders from asia trade actively in the same time and share the same information, traders from new zeland, australia, malaysia, vietnam, thailand, china, korea, japan, etc.
During this timeframe, also other traders from europe and america do partecipate in the market, however the number of european and american traders is small compared to the asian ones, and most of them are only private traders as european and american banks and hedgefunds are closed during that time.

Then we have the european session, where traders from around europe, russia, africa and middle east are the active community, once again there are at this time also a small number of private asian and american traders actively trading, but the number is small.

The final session of the day is the american one, where traders from the american continent (south america and north america) are the active community, especially the u.s.a. ones.

These 3 distinct communities share the same markets but trade them at different times, therefore there is a sort of relationship between such communities.

To analyze this phenomenon we are going to use an indicator on our charts, as shown in the below image.

The trading day (24 hours) is divided by 3, giving 8 hours precisely to each community.
This doesn't coincide with the official trading sessions, but we don't care, we just need a relatively simple graphical representation of the 3 communities phenomenon.

As we will learn, each of these 3 groups have his own particular personality and "power", each of them take seriously in consideration what the other 2 feelings are in order to decide their own feeling, these groups are strictly connected, and they play together.

In the image below we can see clearly such communities, the first one, the pink, is the asian, followed by the yellow, the europeans, and then the blue, the americans.

More to come

Below an image of Eurusd, on Moonday 20 July 2015.

How to read it:

Asians: As we can see from the green curve, the asians was very bullish, they bought the market all the way up.

Europeans: European traders didn't shared the same bullish feelings of the asians, they sold the market immediately and bought again soon later, only to sell it again soon later.
Overall, they was bearish at the beginning but they changed their mind, however they was not confident enough for a real upmove.

Americans: Seeing the european confused feelings, americans didn't push up too, they sold instead, however they started buy again before the end of the session, making what looks like a U bottom.

What we can get from this image:

1) Asians are bullish.
2) Europeans are confused, important to notice that the previous day (friday 17 july 2015) europeans was very bearish, but on moonday they was not bearish anymore. Their feelings have changed, from bearish to "thinking about it".
3) Americans are similar to europeans, on friday they was bearish, but on moonday they ended the day actually buying the market! (U-style bottom)

So, Asians are bullish, Europeans are undecided, americans are bullish.

Guess what happened the day later (tuesday 21 july 2015)?

We'll see in the next post.

Eurusd, Tuesday 21 July 2015.

1)The day start with the asians, we know that they are bullish (they were bullish moonday), and with the indecisions of europeans (that from bears have become neutral on moonday) and the blessing of americans (that from sellers becomed buyers on moonday), they will surely buy the market.
As expected, the market go up around 40 pips during the session, ending at the highs of the session.

2) Europeans see the bullish feelings of asians, and knowing that also americans are bullish, they go with the flow, buying too during their session.
Market go up 85 more pips during european session.

3) Americans join the party a little bit late, they are surely happy as they have bought on moonday lows (the U shape bottom), so what they do during their session is mainly take their profits.
Market go up at the beginning of american session following the eurasia euphoria, however the americans are now saying "Calm down, you've gone too far.", ending with a "reversed U" shape TOP.
We can say americans are sellers now.

Eurusd, Wednesday 22 July 2015.

The previous day (tuesday) ended up with americans saying "We're gone too much up, calm down!".

1)Asians know that americans are not with them anymore, and this have a strong impact on their own feelings.
The asian are undecided now, they first buy, then sell, then buy, then sell again, market stay in a small range and end up flat for the session.

2)Europeans now see the indecision of asians, that from buyers becomed neutrals, they also see americans that said "enough!", at this point what they do is abandon the bull wagon and sell the market, perhaps instinctively, but they sell hard.

3) Americans join the market, and they don't really understand all this bearish-mania, tuesday they said "enough! calm down!", but their feeling wasn't surely a strong bearish one, it was just a "take it easy" feeling.
Europeans have bought too fast on tuesday, and now they are selling too fast, like a kid on heavy coffee, they are just being stupid.
With the market pretty low now americans decide that it's the right time to start buying again, against the europeans interests (that was hurried and stupid anyway). Market go up during the whole session, ending at the top of it.
Americans are now saying "we buy, fuck you europe".

Summary at the end of wednesday:
Asia: neutral
Europe: bears
America: bulls

The asians was bullish just a day ago, but the "calm down" of american have made them neutral.
But now that america is on the buy side again, what will the asians do next?

(buy of course)

Eurusd Today, Thursday 23 july 2015.

1) As expected, asians have bought the market (up 80pips on the session) during their session, with the blessing of americans they just couldn't resist.

2) Europeans was heavy sellers yesterday, they surely didn't liked the americans and asians actions, a bear stuck between two bulls, they may as well change their mind and become bulls too, but all the sellers of yesterday would probably feel better if market go down a little bit first, just to avoid to take big losses.

European session is undecided, confused, still ongoing but i guess it can end up neutral.
They don't want to buy, and are too scared to sell.

Now they are the ones saying "Calm down please, everybody calm down".

Eyes now on the incoming American session, with europe not interested in buy, and the market already higher than two days ago when americans said "enough", americans may help europe and push market down again.

Eurusd Friday 24 July 2015

Update from yesterday:

Europeans:
Yesterday europeans was highly against the bullish momentum, they didn't want to go any more up, saying "no more up please".

Americans:
Americans got the europeans message, and formed a "reversed U" top.
They said: "ok europeans, no more up. Time to go down now".

Asians:
Asians have received the messages of europeans and americans, and promptly pushed market down 50-60 pips on their session.

Now the ball is in the europeans hands again, they are way more happy than yesterday, with the market at current levels they can close their previously accumulated sells.


Will they continue the down-push or will they make a bottom?

We'll see

Moonday, 27 july

On friday europeans didn't continue the bearish action of the asians, making a bottom and saying "Up we want to go".

Later on the same day, americans was ok with the situation, mainly accumulating orders without letting market move in any direction.

Today moonday, asians have taken the chance and made the move, buying hard as expected, ending their session at +140 pips.

Now it's europeans turn, will they continue the push or will they calm down the situation?

Edit:
We can say that it's quite a few days where asians always try to front-run europeans and often they push the market too much and too fast in doing it, quite funny.

Intraday update

After the heavy buying of asians, europeans have initially got shy but then bought again, ending the session around the highs of the day.

Now it's americans turn, with both asians and europeans on the bullish vagon, americans still have the power to call an end to this euphoria.
Or they may as well join the party..

What a day!

Hi tunera,
Thank for starting this thread. While this is all very interesting and enlightening, a real test of this approach would be to try to predict the market participants' behaviour in the following session. One way of testing would be to scroll to a random 10 weeks of the price history and just try to see how frequently one can get this to work.
What would your thoughts on this be?.
Cheers,
k

Yes of course, i actually do predict next market sessions feelings and trade them, i just don't share my predictions and trades for various reasons.

The idea of this thread is to show the way, and let the readers build up their own understandings, opinions, ideas and predictions.

But your post is very interesting, there are a few things that i've noticed by observing the market this way:

1) Asians direction is highly affected/decided from the previous americans and europeans sessions.
Asians tend to follow what usa and europe do, and try to front-run them, for example if europe buy and usa don't sell (agree with europe), asians will surely buy big (like happened today).
This is because asians have a very small power compared to europe and usa, so their best bets are to go with europe and usa flows.

2) Europe don't really care about what asians do, europe have a good power and they don't care to go against asians if necessary, and they don't care about americans too. Europeans are strong enough to go against asians and americans, we can say europeans are the big players. They don't care about others but they have their own interests, so it's good idea to keep an eye on past european sessions to predict the next european session.

3) Americans are more conservative, they tend to sell if the market is up for the day, and buy if the market is down for the day.
They act as a cap peacemaker, and they are extremely important for asians (that comes right after them).

By keeping in mind these 3 points, and by observing what each of the 3 communities are doing, it is not difficult to understand what is coming next.

Thanks for the detailed answer.
Another question I had was about the instrument vs. session. You are observing here EURUSD, and of course one would expect the European and American players to dominate, with Asians looking to grab the opportunity. I could imagine that for, say, USDJPY or EURAUD, for example, the Europeans and Americans respectively, take the more opportunistic role. From your experience, would you agree with this view, or would you maintain that Europeans and Americans have the most impact in all markets?
Cheers and thanks once again!
k