I am working on a psychological horror with an extra element. Monsters, and I don’t mean ghosts. My characters will face suspicions, distrust, paranoia and emotional disturbances. They will deal with these issues while trying to stop and survive these monsters in an empty city where no one (other than the main characters) will save them. My questions are: Can a story still be a psychological horror with physical monsters? What additional guidelines are needed to keep within the parameters of psychological horror?
I would highly recommend you watch the Twilight Zone as a good number of the stories are Psychological. For example, the classic "The Monsters are Due on Maple Street" could be entirely done with out the threat of UFOs and not lose any of the impact (in fact, a 2002 remake was entirely plausible with a very timely threat). One of my favorite episodes, "The Obsolete Man" has no scifi or fantasy elements attached to it, with the threat produced entirely by the fact that two different men are locked in a room with a bomb. "The Eye of the Beholder" is a commentary on standards of beauty and specifically points out that the place where the story takes place is just as likely the real world as it is a place in the Twilight Zone. The Monsters of "The Shelter" are very real threats to this day. "The changing of the Guard" features a mysterious element, but the plot is a lesson about how one man's simple life still made a world of difference.
It's a difficult setting, but it could be done.
The point of psychological horror is showing emotional disturbances, psychologic disorders, and provoking a certain feeling of anxiety in the readers. Monsters can be there, but they can't be your focus, or they must be clearly simbolic in nature.
For example, the film Babadook a monster scares the main characters for most of the movie, but in the end it's clear that
the monster represents how difficult it is to come to terms with the loss of a loved one.
The golden rule is that conflict and fear must come from psychological sources. So, while is fine adding a physical monster who represent those sources can be done, it's a little risky.
Having a physical, external and even supernatural menace can make your story look more like an action movie or another kind of horror. For example, you could write a character struggling with depression, and portray depression like a looming creature that physically blocks that person on the bed. It may be effective, but you risk shifting focus from the psychological stress to a physical, much more tangible menace.
Arguably, all the classic zombie movies leverage our modern fear of repetive, mind-numbing, consuming urban lifestyle. Zombies could be seen as a metaphor of the modern workforce, shuffling step after step while rotting away. Yet most zombie movies aren't played as psycological horrors, but survival ones (aside from being their own subgenre).
So, while your concept is viable, I'd be careful to put forward the psychological struggle of your character rather than shifting the focus on the monsters themselves. Again, I believe it would be rather difficult, but that's my opinion.
"Psychology" in horror works to foil the possibility of "monsters" with a rational, non-paranormal explanation. It's a competing theory used to prolong the story, and to keep characters wandering around an obviously haunted house long after they should have gotten the heck out of there.
When characters and reader have different information, it gives the story tension. The character clings to a psychological explanation long after we know they are doomed, or a character keeps screaming about monsters but we haven't actually seen convincing evidence so we allow that the character may be unreliable.
Once you show the monster as a literal corporeal being with claws and fangs, psychology isn't an alternate possibility anymore.
As Liquid said, literal monsters that leave nothing to the imagination stop being horror genre and become something else, typically bullet fodder for action movies, and boyfriend material for dark fantasy.