Greed

As prices rise, they naturally attract more attention. As more and more people jump onboard the rally, its climb accelerates. But in all the excitement, there is a tendency to confuse account balance (the amount actually on your account) with account equity (the total value including the sum of your open positions). People begin to treat their potential profits as if they were already realized. This expectation can sometimes cause basic reversal signals to be overlooked.

Additionally, those who missed out on the opportunity early on, when the trend was still young, are becoming hypnotized by the length and size of the rally. Jumping onboard late is a risky game, however, as those who got in early will eventually need to take their profits. There is also a bit of the “greater fool” factor, as anyone who is still buying is now buying at a higher price, and from a seller who has reason to believe the move may soon be over. The idea then is that hopefully someone will keep on buying after you, at an even higher price, when you eventually decide to become a seller yourself.

Fear

When prices start falling, they awaken fear and panic. Fear is one of our most primal emotions, which explains why prices often fall faster than they rise. People holding longs run for the door trying to sell as quickly as possible, and short sellers motivated by the falling prices add their own orders to the mix as well. When those short orders are eventually covered in order to realize profit, there are temporary rallies which can give false hopes.

This crowd mentality frequently creates moments of market imbalance which can be capitalized upon, once one can learn to recognize the signs and interpret them correctly. Above all else, the key to developing this skill is practice.