Guellord MbusaLike us, you have already wondered at least once why the cryptocurrency market is so volatile. Better yet, have you wondered why there are up and down cycles? Why do some traders call themselves bullish while others are bearish?
If yes, then you are at the right place to understand better what is called market psychology. Nothing comes out of nothing (nothing comes from nothing) as the philosopher Parmenides said earlier, there must be causes behind untimely fluctuations in the price of cryptos.
Experts have grouped them into what they call market psychology. If you are interested in theinvestment in cryptos , then it will be very useful for you to know what it means
What is the definition of Market Psychology?
The term "market psychology" refers to the idea that prices in a financial market reflect or are influenced by the emotional state of the parties participating in it. This is one of the main topics that behavioral economics, an interdisciplinary field that studies the different factors that precede economic decisions.
In this universe, many experts agree that emotions are the main cause of changes in asset prices in financial markets. In other words, it is the average of investors' sentiments on a given asset that sets its price. This is made up of the individual opinions and feelings of all traders and investors within a financial market.
Market psychologists believe they fluctuate because in the market, as in any group, no one opinion is completely dominant. Thus, the price of an asset tends to change constantly in response to general market sentiment which is also dynamic. In practice, positive market sentiment leads to an increase in demand and a decrease in supply. Which causes its price to rise and vice versa.
The Fear & Greed Index
By the way, the “fear and greed” index is also supposed to give us the sentiments of traders at a given moment. It is an index increasingly used in the crypto trading community in order to have an “idea” of the sentiments of traders. Sometimes, it can be relevant in certain circumstances.
Some people will rely on this index to be able to trade and/or invest on crypto trading platforms.
->Discover the best trading platforms in 2023.
How do emotions change during market cycles?
During the uptrend
All markets go through cycles of expansion and contraction. When a market is expanding (bullish), there is a sense of optimism (and sometimes greed) among investors. Typically, these are the main emotions that lead to high purchasing activity. It is quite common to see some sort of cyclical or retroactive effect during market cycles. For example, sentiment becomes more positive as prices rise, which makes sentiment even more positive, driving the market even higher.
From time to time, a strong sense of greed invades the market in such a way that a financial bubble can form. In such a scenario, many investors become irrational, lose sight of the real value and buy an asset only because they think the market will continue to rise. They become greedy by market dynamics, hoping to make profits. As the price extends higher, the local top is created. Generally, this is considered the point of maximum financial risk.
In some cases, the market will experience stable movement for a period of time as assets are gradually sold. This is also known as the distribution stage. However, some cycles do not have a clear distribution stage and the downtrend begins shortly after the peak has been reached.
During the downtrend
When the market begins to turn in the other direction, the euphoric mood can quickly turn to complacency as many traders refuse to believe that the uptrend is over. As prices continue to fall, market sentiment is quickly shifting to the negative side. It often includes feelings of anxiety, denial and panic.
In this context, we can describe anxiety as the moment when investors start to wonder why the price is falling, which quickly leads to the denial stage. The period of denial is marked by a feeling of refusal. Many investors insist on holding on to their losing positions, either because it is too late to sell or because they want to believe that the market will turn around soon. But as prices fall further, the selling wave strengthens. At this point, fear and panic frequently lead to what is called a market capitulation (when holders give up and sell their assets near the local bottom).
Eventually, the downtrend stops as the volatility decreases and the market stabilizes. Typically, the market experiences sideways movements before feelings of hope and optimism begin to emerge again. This lateral period is also known as the accumulation phase.
How Do Investors Use Market Psychology?
Assuming the theory of market psychology is valid, understanding it can help a trader enter and exit positions at more favorable times. The general market attitude is counterproductive: the time of greatest financial opportunity (for a buyer) usually occurs when most people are desperate and the market is very low. In contrast, the highest financial risk often occurs when the majority of market participants are euphoric and overconfident.
As a result, some traders and investors try to read market sentiment to identify the different stages of its psychological cycles. Ideally, they would use this information to buy in panic (lower prices) and sell in greed (higher prices). In practice, however, recognizing these optimization points is rarely an easy task. What might appear to be local bottom (support) may not hold, leading to even lower lows.
Today, more and more traders use trading bots to be able to systematize this type of trading via automated trading.
–>Read the article: Top 5 Crypto Trading Bots
Bitcoin and market psychology
Le Bitcoin bull market from 2017 is a perfect example of how market psychology affects prices and vice versa. Over the course of a single year, Bitcoin rose from around $900 to its first all-time high of $20. During the rise, market sentiment became increasingly positive. Thousands of new investors joined the community, caught up in the euphoria of the bull market. THE FOMO, excessive optimism and greed quickly drove prices up until the descent does not begin.
The trend reversal began to occur towards the end of 2017 and the beginning of 2018. This correction left many laggards with significant losses. Even when the downtrend was already established, false confidence and complacency caused many people to insist on Hodling.
A few months later, market sentiment turned very negative as investor confidence reached a new low. THE FUD and panic over some of China's bans have pushed many who bought near the top to sell near the bottom, incurring big losses. Many people then made so-called irrational decisions.
–>Read the article: Why does FUD sentiment make bitcoin ever stronger?
What psychological explanation for the bitcoin market?
There are common thought patterns that often lead humans to make irrational decisions. These are called “cognitive biases.” These patterns can affect both individual traders and the market as a whole. Here are some common examples:
Confirmation bias: It is the tendency to overvalue information that confirms our own beliefs, while ignoring or rejecting information that contradicts them. For example, investors in a bull market may place more emphasis on positive news, while ignoring bad news or signs that the market trend is about to reverse.
Loss aversion: the common tendency of humans to fear losses more than they enjoy gains, even if the gain is similar or greater. In other words, the pain of a loss is usually more painful than the joy of a gain. This can cause traders to miss good opportunities or panic sell during periods of market capitulation.
Endowment effect: It is the tendency of people to overvalue the things they own, simply because they own them. Thus, this type of traders will then hold on to their assets rather than trying to get rid of them even when all the signs are there to sell.
Final word
You may agree with us that user psychology and investor psychology impact prices and market cycles.
In more technical and financial language, we call this “speculation.” Although the psychological cycles of the markets are sometimes known, they are not always easy to manage. Investors are faced with the difficult task of managing not only the psychology of the market, but also their own psychology. Indeed, if you want to become a good trader, remember that the most difficult part will be mastering your emotions.
See as well:
- Understanding the law of supply and demand (in crypto)
- Understanding the supply structure in cryptocurrencies
- The golden rules to follow when investing in cryptocurrencies
- Shrimpy: The platform that simplifies the management of your crypto portfolio
-
Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.
Our affiliate links:
To buy cryptocurrencies (simple way):
To generate interest on your cryptocurrencies:
- Public chat Youhodler (Earn up to 12% interest)
To secure your cryptocurrencies:
To have fun and play
- The best for Esport and Bitcoin sports betting : CloudBet
- Discover the reliable bitcoin casinos
