Richard W. Schabacker, financial editor of Forbes Magazine with previous experiences at the Federal Reserve Bank of New York and at the Standard Statistic Company (today Standard & Poor’s), wrote three important books (1) on how financial market works. He described the first price models (patterns) that can be identified on charts, to better understand the sequence of underlying psychological relationships between buyers and sellers.
Hence is the psychological aspect that drives in many situations the movement of market prices. Professor Lo of MIT, is the author of a theory related to financial markets that combines the rational aspect with the psychological aspect (2).
Whenever the Dow Jones Industrial Average reaches a new milestone the investors are used to cheer. It happened last week, when the most famous of the stock indexes broke the 20’000 mark, after flirting with this significant level for about two months. Is this new record so important for the market? To be honest, it looks difficult to find a rational reason for all this excitement, 20’000 is just a number, as they were all the round numbers that the index had reached in the past years. Psychology is important at this matter: a close above 20’000 feeds optimism and confidence, especially among retail investors, and translates into new purchases.
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