Price behaviour is about our perceptions. Share price movement is driven by perceptions and a shared view at any point in time of what a share is worth or more importantly what it is going to be worth in the future. If our perception is that is it cheap, we are going to buy it. If our perception is that it is expensive, we are going to sell it. Everyone has a (different) perception and basis for buying or selling.
As humans we take comfort in what others are doing (crowd behaviour – tulip mania, internet boom) and this can drive prices to excesses of fear – low points – and greed – high points. These excessively high or low values are often far away from what fundamental values would ever imply, but they occur. We can call this the X factor. (Fundamental value +/- X) = excess prices. Excessive prices offer great profit opportunities. Under these circumstances price moves far and fast.
Normal human behaviour easily attains the emotion that anything is possible and that the sky is the limit, and this is very much propelled by the crowd behaviour phenomenon.
At some stage when these excesses take share prices into the stratosphere reality comes crunching down on them and brings the price back to earth. This ‘bust’ is also a part of the normal cycle of human emotion that drives prices and we need to identify that change to ensure we capitalise on the price surges and make money from the excessive behaviour.
Identifying price patterns based human psychology can offer a unique insight into price movement and provide a special ‘edge’ when assessing and determining the likely force and direction of price movement.