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Wrestling psychology is rather difficult to explain, but the best way to put it is simply knowing how to make the best out of what you've got. It's being able to take all things considered in a match (you and your opponent's moveset, staying in your gimmick, what's going on in the angle, what kind of crowd you're performing for, etc) and string together an entertaining and unpredictable match.
An example of using good ring psychology is, say, the heel taking advantage of a face's injury. By exploiting his weaknesses, the heel puts the outcome of the match into uncertainty, and motivates the crowd to root for the face.
As for "telling a story," that's a common analogy used to describe psychology. It usually means tying in the match itself with the angle that's going on.
Good psychology does not necessarily mean a technical wrestling masterpiece. You'd never mistake Jake Roberts or Raven for Chris Benoit or Dean Malenko, but both have had their share of classic matches. Why? Because they knew what moves and stunts to use at the right times. A wrestler with good psychology can make up for limited abilities by playing off of other strengths.
Anyway, that's about as well as I can put it. Hope that helped.
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