Psychology of the Market Cycle: What is it and How Does it Work?

The psychology of the market cycle is one of the most critical factors in the market. A person with a deep understanding of market cycle psychology is likely to make more mature and informed investment decisions.

author avatar
Jay Crypto

Blogger

Last updated Oct 25, 2022 at 03:31 AM

Posted Oct 26, 2022 at 01:00 PM

Psychology of the Market Cycle

The financial markets are a contest of phases; all commodity price charts exhibit the same pattern of movement. When there is good news, they soar; when they hit their peak, they slide downhill; when the bottom is reached, they eventually recover.

Purchase the drop and sell at a peak, and consult market professionals frequently. Even though the sentence appears straightforward, selecting the choice in practice is challenging. A market's low point before a trend change is seldom certain. Understanding market trends is essential to success in any investing market; the key concern is who determines the trends.

Studying market dynamics and how they change over time in periodic stages is central to the study of market fundamentals. For an individual to be successful in the crypto or stock market, the data must be accurate. We'll discuss the psychology of market cycles, their various phases, and how traders might profit from them.

What is the Psychology of the Market Cycle?

Market psychology is the theory that currency market fluctuations mirror (or are influenced by) the investors' emotional reactions. One of the key areas of study in the multidisciplinary subject of behavioral economics, which looks at the different factors that influence economic decisions, is this one.

Many people think that the primary reason behind changes in the financial markets is sentiment and that the so-called psychological market cycles are a result of the generally changeable consumer sentiment.

Psychology of the Market Cycle 2

Investors' Psychology at different Market Levels

Market Psychology, to put it briefly, is the perception that buyers and sellers have of an investment's price movement. A positive trend is defined as one in which prices are increasing steadily and the market attitude is optimistic. When prices are continuously falling, the reverse is known as a bearish trend. Thus, the mood in a financial market consists of the unique opinions and sentiments of every trader and investor. It can also be seen as the average of how the market players feel overall.

But in any community, no one viewpoint is totally in control. According to ideas of market sentiment, the price of an asset frequently fluctuates in reaction to the changing market attitude as a whole. Otherwise, making a profitable deal would be far more difficult.

In reality, when the market increases, it is probably because traders are becoming more positive and confident. Favorable economic sentiment results in rising demand and falling supply. The resulting higher demand could result in an even more negative attitude, just as a severe decline tends to foster a negative attitude that lowers demand and raises the amount of supply available.

How does the Sentiment of Investors Change?

The sentiments of investors change in the following ways:

Uptrend

Every market experiences growth and decline phases. When a market is expanding (called a "bull market"), there is an atmosphere of hope, faith, and ambition. These are usually the primary feelings that trigger a strong purchasing activity.

During market cycles, it's rather typical to observe some form of periodic or retrospective influence. For instance, as prices rise, the feeling tends to be more optimistic, which makes the emotion even more positive and propels the market higher.

Psychology of the Market Cycle 3

 Uptrend

An economic bubble can occasionally develop when the market is overcome by a clear element of greed and optimism. In such a situation, many traders exhibit irrational behavior, losing focus on the underlying asset's true value and purchasing it only on the assumption that the market will increase.

Due to the market's movement and their desire to profit, they become unprincipled and overexcited. The local top is formed as the price becomes overbought on the upward. This is generally regarded as the area of greatest financial danger.

Psychology of the Market Cycle 4

  Sideways/ Accumulation Period

As the items are eventually disposed of, the market may occasionally go sideways for a while. The accumulation stage is another name for this. Some cycles, on the other hand, lack a distinct distribution stage, and the downtrend begins shortly after the peak is reached.

Downtrend

The upbeat attitude can soon give way to confidence when the market begins to move in the opposite direction because many investors do not think the upswing is over. As prices keep falling, the mood of the markets instantly turns negative. It frequently entails worry, rejection, and anxiety sensations.

Psychology of the Market Cycle 5

Market Downtrend

In this situation, anxiety may be thought of as the point at which investors begin to wonder why the price is falling, which quickly progresses to the denial stage. There is a feeling of refusal throughout the denial stage. Many traders are adamant about keeping their losing investments, either because they feel "the market will turn around soon" or that "it's too late to sell."

But as price levels continue to fall, a bigger selling storm develops. At this juncture, anxiety and panic frequently result in a phenomenon known as a market surrender. Ultimately, when fluctuation declines and the market stabilizes, the slump comes to an end. Usually, the market goes through horizontal motions before optimism and hope begin to return. This swaying phase is also referred to as the accumulating stage.

How Traders utilize the Psychology of the Market Cycle

Analyzing the psychology of the market cycle could enable an investor to initiate and quit trades at more advantageous moments, presuming the analysis is right. The wider market mindset is counter-intuitive: the best financial opportunities typically arise when many individuals are out of options and the market is at its lowest point. On the other hand, when the bulk of market players are ecstatic and confident, it is typically then there is the most financial liability.

Psychology of the Market Cycle 6

  Market Psychology

As a result, some market players attempt to gauge consumer sentiment to identify the various stages of its emotional phases. In a perfect scenario, they would utilize this data to purchase during times of fear (when levels are lower) and sell during times of excitement (higher prices). However, in reality, finding these ideal positions is rarely simple. There's a chance that the apparent local bottom (support) won't hold, which would result in even weaker lows.

Market Psychology Vs. Technical Analysis: What’s the Difference?

Looking back on market cycles, it is simple to see how the general psyche evolved. The most effective steps and decisions are clear after analyzing historical data. It is considerably more difficult to comprehend how the market is evolving, and it is even more difficult to predict what will happen next. Many traders try to predict the direction the market will take by using technical indicators.

Technical indicators can be thought of as instruments for gauging the emotional condition of the market. For example, the Relative Strength Index (RSI) indicator might indicate greed when an item is overvalued as a result of a very bullish market mood.

Another indication that can be employed to identify the various behavioral phases of an economic cycle is the MACD. In essence, the relationship between its paths may be a sign of fluctuating market momentum.

Bitcoin and Market Psychology

The recent bullish cycle of Bitcoin is the best example of the psychology of the market cycle. During the pandemic, the hype around the crypto market started to develop. The price of Bitcoin crossed the $60k price mark for the first since its creation. During this bullish/uptrend phase, a huge number of new investors entered the market and invested their money in the flagship currency. The excessive hype around the market pushed the price to the $69k price level until it started to fall. 

Many of the latter participants suffered sizable losses as a result of the subsequent correction. Many investors insisted on HODLing even after the decline had already started due to misplaced confidence and complacency.

A few months later, the market's mood drastically deteriorated as investor confidence plummeted. Many people who bought around the peak of the market and sold near the bottom as a result of FUD and panic suffered significant losses. Even though the technology behind Bitcoin was roughly the same, some people lost faith in it. In reality, it is always being enhanced. 

Psychology of the Market Cycle 7

Current Market Scenario

As of now, we are between anger and depression on the psychology of the market cycle. Bitcoin has been trading below the $20k level for almost a month now. 

Final Thoughts

The majority of traders and investors concur that psychology affects market trends and pricing. Despite being well known, psychological market cycles are not always simple to manage. Even seasoned traders have had trouble separating their own attitudes from the mood of the market throughout the centuries. So do your own research!!

Share on

  • Copy link

Tags