Forex Guru

Technical analysis is the art of identifying crowd behavior in order to join
the crowd and take advantage of its momentum. This phenomenon is called
the bandwagon effect. Here’s how a bandwagon works:
A fresh piece of news comes out. Many traders (or a few with deep pockets)
interpret the news as favorable to the security, and buying overwhelms selling
so that the price rises. You profit by going with the flow. Then when everyone
is jumping off the bandwagon, you should jump, too.
Traders are people, and people often behave in predictable ways. When it
comes to emotions like fear and greed, people today are not so different from
people 100 years ago or maybe even 1,000 years ago. People become reckless
and irrational in a mania. They become overly cautious after a bubble bursts. A
mania is a situation in which traders buy an object or security without regard
for its intrinsic value or even whether they’ll be able to sell it again later at a
higher price. They fear being left out of an opportunity. They’re caught up in
the moment and temporarily irrational. A panic is the opposite — people can’t
sell the thing fast enough and will accept ever-lower prices just to get any
money back at all.
In economic history, a mania or a panic comes along only a few times in a
century. However, in the technical world, mania and panic happen every day,
in miniature. Emotional extremes lead to price extremes in the context of the
hour, day, or week — minimanias and minipanics occur all the time. Those
words aren’t used in technical trading lingo, but the emotion and the price
effects are the same as in big-picture manias and panics.