Most experienced traders will tell you that trading any financial asset (including crypto) is not for the faint hearted. If you miscalculate, misjudge or miscall at any given time, you are experiencing a loss that can be directly tied to your hard-earned income. If you want to be a successful trader, it is important that you know more than just trading. You also have to understand the psychology of the market and what drives it to behave the way it does. Most traders find it hard to read the market and that is why they make more losses than profits. They rely on technical analysis to tell them what to do every time and they can sometime overplay their position. When everything goes up in smoke, they tend to make emotional judgements and this leads to even more losses. In this article, we want to break down the psychology of the market and how you can begin to play it to your advantage. Enjoy!
What is Market Psychology?
Before we go into the details on market psychology, let us take a close look at the what market psychology means. Market psychology is the general sentiment of the marketplace based on the average trading decisions of individual market participants. Market psychology is a powerful thing in any financial market and it can be influenced by many factors at any particular time. The major emotions that drive market psychology are greed and fear. We want to take a look at them in detail.
For more insight into market psychology, you can see our data backed article on BitQT trading software. The best in vovering cryptocurrency articles.
Greed cycle
When the price of a particular crypto asset starts rising due to any factor, people become interested. If there are clear indications of profits and the price keeps growing rapidly, investors will want to jump in on the train and this will force the price to go up even further. When this goes on long enough, the price of the financial asset eventually reaches a level where bubbles are created. When the bubbles burst, the price will go down rapidly. This cycle is known as the greed cycle because investors are looking for a quick buck. For example, early in the 2021, Tesla announced that it will be buying 1.5-billion-dollar worth of bitcoin and that triggered a greed cycle. Investors kept buying bitcoin until the price hit 60,000 dollars. Doge coin also gained support from popular billionaire Elon Musk and investors bought a lot of Doge hoping to make huge profits.
Fear cycle
Fear cycle is the other coin side of the greed cycle. When a particular crypto asset receives negative feedback from any trusted source, it can trigger a fear cycle where investors sell their assets at an undervalued price. The sell off is always massive and it is done in a bid to avoid further losses. Once the fear cycle passes, you begin to see the price of the asset rebound and investors will be willing to buy back the same assets they sold at giveaway prices. For example, when Tesla announced that it will no longer consider transacting in bitcoin because of the climate effect, investors started selling their assets due to fear of bitcoin losing value.
We see the greed-fear dynamic play out in the market every now and then and it is important you remain calm in stormy trading days like these ones. The market will always retrace and come back to base.
Summary
When you are trading any cryptocurrency of financial asset for that matter, it is important that you interpret between the lines and see the emotions that is currently driving the market. The technical analysis and fundamental analysis can allow you to get the overall view and directions of the market. However, you have to be adept and seeing how people will respond and placing your trades in a way that will bring you profitability.
