Market cycles are patterns or trends that often emerge over time in various marketplaces or commercial settings. They are the interval between a standard benchmark’s two most recent lows or highs. When trends develop in a given sector or industry as a result of significant innovation, new goods, or a regulatory environment, new market cycles often appear.
These trends have the drawback of being difficult to see until the time period has actually passed. It may be difficult to pinpoint a cycle’s starting and finish points while it is in progress, which can often cause confusion when evaluating trading methods.
Depending on the industry you’re examining, market cycles might span anywhere from a few minutes to several years. Examining various facets of the range will often result from looking at different occupations. For instance, although real estate investors tend to look at ranges up to 20 years in the past, day traders might examine at five-minute intervals.
How Does Market Psychology Work?
Market psychology is the idea that changes in a market are a result of the emotions of its players. Many experts think that what moves prices up and down are the feelings of investors. According to the theory, investor mood is what shapes a market cycle’s psychological makeup. It goes without saying that no one viewpoint will be entirely dominant. As a result, the price of an asset fluctuates often as a result of general market mood (which is also dynamic).
A bull market develops when prices increase and market sentiment is favorable. During this moment, an asset’s supply is reduced as a consequence of rising demand. The more favorable the atmosphere is due to the rising demand, the higher the price will go.
A bear market develops when there is a negative market sentiment. Supply grows as demand decreases. This rise in supply may lead to a downward trend, which would make investors more wary.
An explanation of a market cycle
Every Market Cycle Includes The Following Three Phases:
The cycle always begins with an optimistic outlook. Everybody is really optimistic when they make their first investment. We often anticipate favorable outcomes and receive compensation for our efforts.
When the market as a whole exhibits this mindset and many investors’ expectations are satisfied, it is simple to get optimistic about even bigger profits. Investors get to enjoy the excitement of trading at this time.
Investors start to feel exhilaration as the cycle reaches its apex. This stage of the cycle is the most perilous since we think we can do no wrong and outperform the market. Investors reach their point of maximum financial risk at this time because we believe we are immune to error and can accept larger amounts of risk. Excessive returns, in our opinion, are inevitable.
when the market abruptly ceased providing the enormous gains that we have come to anticipate. We continue to be optimistic and complacent some would even say conceited about the market’s resumption of its upward trend. In denial, the market begins to turn against us.
The fear starts at this point. We begin nervously monitoring the market in the hopes and prayers that it would rise again. That uneasiness swiftly changes into terror as soon as the value of our assets keeps falling. Many investors may concentrate on defense as a result of this anxiety by moving their assets to more defensive stocks or asset classes. Others may stick onto their failing investments in the hopes that the market would turn around.
Investors may feel frantic and begin to panic as the bull swiftly transforms into a bear. Investors are now attempting to limit losses as any last indications of confidence have vanished. Some people’s hopes will be completely dashed, causing them to doubt if the market can ever rebound at all.
Currently in the market cycle, the lowest low has been reached. Price increases are occurring once again, but investors continue to be cautious. They may be cautious when they consider reentering the market:
Typically, the market goes through a phase of sideways movement (insignificant rises and drops). Investors may have ample time to renew their optimism and hope as a result, perhaps repeating the cycle.
The mood might start to become more optimistic if investors have had time to board that investment train.
Market Psychology And Bitcoin:
The surge in bitcoin’s price in late 2017 serves as the ideal illustration of how market psychology influences an asset’s price. BTC was priced at around $900 at the start of 2017. Its costs rose steadily throughout the year, finally hitting an all-time high of around $20,000.
The mood of the market throughout the year increased as a result of this phenomenal surge. During this bull run, there was so much enthusiasm that hundreds of new investors joined in, expecting to benefit greatly. There was a lot of greed, overconfidence, and FOMO (fear of missing out). These were the factors that caused the price to spike quickly until it didn’t.
beginning in late 2017 or early 2018. Many persons who joined later suffered big losses as a result. Due to false confidence and complacency, many individuals persisted on HODLing, and others haven’t recovered since.
Benefiting From Market Psychology:
Understanding market psychology might help you position yourself better for market entry and exit. When the market is at its weakest, a buyer may have the best financial opportunity. Negative market sentiment may depress people, leading to low prices for the asset and a feeling of helplessness. However, when the mood is at its most upbeat, there may be the greatest financial danger.
Although the idea is simple, identifying these market cycle moments is difficult. Even if it may look like the bottom is in place, prices might yet fall further.
The main lesson to be learned is that emotions may sometimes overpower us. They have the power to transform sensible investors into irrational ones.
Keep in mind that the market is always changing and that assets will come into and out of popularity. We all have different coping mechanisms for when extraordinary circumstances affect our judgment, but that’s great because if investing were simple, everyone would be wealthy.
How Do Feelings Alter Throughout The Course Of Market Cycles?
Given that market psychology is not a science and you should always know whether it can meet your demands and trading techniques, cycles provide investors and traders a whole new view on what’s happening and they quickly develop a logical sense.
According to market cycle psychology, traders’ feelings while thinking about uptrends and downtrends are radically different.
Positive emotions predominate during an ascent. Good news often confirms the predictions of those who are optimistic about the market’s ascent, and the bullish stage of the market cycle continues.
Because of all the emotions that affect market behavior, as we’ll see in a little, uptrends and downtrends are obviously not straight lines.
All markets exhibit cycles, with the bullish and bearish periods being their most significant divisions. Even if the bearish phase, which is formed by downtrends, is as natural as the bullish phase, nothing about emotional trading is reasonable.
The Bitcoin example demonstrates unequivocally how various cognitive biases might affect less experienced traders or traders who just give in to their emotions while trading.
To name just a few that are popular (and nicely match our Bitcoin example):
Confirmation bias is the propensity to place more weight on news and information that supports our ideas than that which suggests we may be mistaken.
The endowment bias is the propensity to overvalue our own assets while undervaluing all other assets and sometimes even giving them an unjustified value. This might result in passing up excellent chances and hoarding worthless digital assets.
How Does Market Psychology Affect Investors?
Whether deciding when to join and depart the market, seasoned investors often employ market psychology.
In essence, they take on the role of observers who refrain from engaging in emotional trading yet take advantage of the sentiments of less experienced traders and investors.
Market psychology holds that individuals’ emotions drive all market movements, regardless of the kind of market.
If you don’t have much trading experience, emotional trading may be quite risky, but it can also be very successful if you understand the psychology of market cycles.
When examining markets and their visual representations, such as price charts, this concept leads to a distinct sort of analysis.