PSY psychological line

Psychological Line

The psychological line can be used to test investors' bullish or bearish sentiments, enabling investors to understand the psychology of stock market investors. The psychological line is used to test the psychology of the investor's tendency to be a buyer or a seller. It determines whether the stock market is in an overbought or oversold condition.

1. Definition

The psychological line is a kind of popularity index, which is the ratio of the days in which the market index rises and falls. It aims to observe the psychological trend of investors as a reference for buying and selling. This method can accurately display the peak or valley of the market trend.

2. Formula

PSY = Number of Days When the Stock Price Rose in N days / N * 100%

PSYMA = M-day average of PSY 

Due to the prevalence of short-term investment in China, the 13-day psychological line is used as the benchmark for judgment indicators.

3. How to apply

1) 75 or more is an overbought area; below 25 is an oversold area.

2) 25-75 is a reasonable range of variation and belongs to the normal distribution area.

3) 10 and below is a seriously oversold area.

4) 90 or more indicates that investors are too optimistic and suggests a severe overbought condition.

5) When the PSY is higher than 92.31 (a continuous rise for 12 days), it indicates that investors are too optimistic and suggests an overbought condition.

6) When the PSY is lower than 7.69 (a continuous fall for 12 days), it indicates that investors are too pessimistic and suggests an oversold condition.

4. Features

1) The psychological line tests investors' bullish or bearish sentiment by the number of days the stock price rises to judge whether the stock market is in an overbought or oversold condition. The psychological line is a type of popularity index. 

2) China's stock market has a limit up/down of 7%, making the stock price up and down oscillation have a specific range to follow. The accuracy of the psychological line is also relatively improved. 

3) The combination of short and medium-term psychological lines allows investors to objectively judge whether the stock market is in an overbought or oversold condition. For example, the 13-day psychological line and the 25-day psychological line can be used together.

4) If the psychological line is used in conjunction with other technical indicators such as "VR" and "PUCU", investors can observe the bullish or bearish sentiment and the accumulation or dispersal of funds in the stock market, which helps judge whether the market is in the head or bottom zone.

5) The design of the psychological line is relatively simple, with only two variables, up and down. Therefore the psychological line does not fully reflect the changes in the stock price.

6) There is no clear trading signal in the psychological line. It can only show the high and low price areas of the market.

7) In the case of skyrocketing and falling, the number of days of ups and downs can't quickly reflect the fierce oscillation of the stock price, which makes the psychological line less accurate.

8) If the psychological line is used with the candle chart, it can better show whether the stock market is in an overbought or oversold condition.