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“As bull markets roar to a top, it is relatively easy to see the emotional or psychological signs of an impending top. Virtually every source of news will provide coverage of the seemingly endless climb towards higher levels. Greed infests the public as the inexperienced flock to get a piece of the action. Finally, when it is “impossible” for a market to decline and everyone who wants to buy is in, the top will be struck. Buyers become sellers and a downmove ensues.
To an extent, the same sort of pattern unfolds at major bottoms. However, since the events surrounding the decline are not as exciting or newsworthy as those in a bull market, the signs are harder to see. Instead of greed permeating the atmosphere, fear becomes the emotion of significance. As the news becomes per- ceived as increasingly bearish, traders who had been bullish give up. The emotional stress of margin calls and “bad” news finally forces long liquidation…”

Revisit the Trader’s Toolbox Post: “Psychology Of A Bottom” here.

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