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. Furthermore, if a movement starts in one direction, it tends to pick up more and more investors with time and momentum. The impact of this lemming-like behavior has been made worse in recent years because financial, economic, and other news affecting investor psychology travel faster than ever before. Capital can also flow now between nations with surprising ease, so that international markets respond more quickly to sudden changes with a domino effect in the direction of investor buying and selling.