Efficient markets are based on the assumption that rational people enter transactions with the intent to maximize gains and minimize losses.

While this theory is sound, most investors are not the purely rational robots that efficient markets rely upon. Instead, emotions often cloud our decision-making and prevent us from acting in a rational manner.

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Knowing we can never conquer our inherent emotional biases, we should seek to understand the range of emotions we may experience as investors and how it affects our interactions with the market. A common market psychology cycle exists that shines light on how emotions evolve and the effect they have on our decisions.

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By understanding the stages of this cycle, we can tame the emotional roller coaster. The fourteen stages are:.

Individuals clearly follow this cycle in their decision making process. If we are aware of the stage of the cycle we are experiencing at a given point in time we will have a greater grasp of how our emotions are affecting our investment decisions.

This knowledge will help us manage our own investment portfolios as well as predict the next step for the broad market.

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The Importance Of Trading Psychology And Discipline

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