Stock trading is an activity that is largely related to human emotions. When the share price of a stock that an investor bought increase above the buy point, the feeling is good and secured and of course when the share price fall below the price point, the reverse is true. An investor may experience fear or panic in the event the share price drops too much.
I have a previous article of Don catch a falling knife. The article discuss about one of the stock trading strategy is not to buy on a downtrend and this article will explain the human psychology behind trading on downtrend.
When a stock falls below the buy price too much and stays at the bottom for too long, the sequence of human emotions experienced by the buyer evolved from fear to panic to despair. The psychology of the investor is relatively weak at this stage and the tendency is to quickly get out of position and either to sell on break even point or take a slight loss.
When the stock price reverse the down trend and start on a uptrend, the tendency is for the investor to sell the stock near break even point. This is call the relieve effect. Hence, to purchase a stock on a downtrend weakens the buyer's mindset and reduce the tendency of the buyer to hold through the new upward move of the stock price to profit from the new trend. Therefore, it is advisable to trade with the trend and not against the trend.
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