You should never let emotions cloud your trading judgment. To exploit market psychology, you must act in a contrarian fashion, taking the contrary course when the crowd falls prey to its emotions.
Extreme optimism can coincide with market tops.
People think the sky's the limit and send stock prices flying. Savvier investors sell into this frenzy and run to cash. Extreme pessimism can be bullish. Toward the end of a big decline, the last bulls throw in the towel and sell with a vengeance. Cooler heads smell a fire sale.