For the average user, trading involves buying and selling products as the price fluctuates and market trends change. However, if you take a deep dive, you will discover other complexities originating from investors’ thought processes and psychology.
In fact, the psychology of a market cycle changes prices as powerful as news does, playing with the trader’s sentiment and behaviour before making a decision.
Let’s take a closer look at crypto market cycle psychology and why understanding it is critical before you place any order.
Understanding The Psychology of a Market Cycle
The crypto market cycle psychology analyses the traders’ behaviour and decisions alongside the price action and dynamics, such as emotions, overthinking, logical reasoning, and more.
These stages control how investors interact with market movements, news updates, and trends.
Price charts move constantly, and these changes can be tiny or significant, taking the trader on an emotional rollercoaster, contemplating the right decision, the right time to make the call, and the consequences of each move.
These stages are studied and analysed using a market psychology chart, which shows the ups and downs of a trader’s thoughts with every stage.
Using The Psychology of The Crypto Market Cycle
Rule number one in trading is not to trade with emotions. The second rule for success is understanding the market sentiment and using it to your benefit.
That said, expert investors do not follow the herd and do as everyone does. Instead, they analyse the overall attitude and use it to make decisions at the right time.
For example, if the market is facing a meltdown, most participants tend to sell their holdings of the subject asset. However, experienced retail traders do not succumb to this practice because they know that overbought instruments have a chance to recover, especially after conducting thorough research.
Stage of The Market Cycle Psychology
The market cycle is split between two phases, an uptrend and a downtrend, each of their markets with several stages in the trader’s psychology. This applies to most industries; you can expect these market fluctuations if you are trading stocks, currencies or crypto coins.
Reluctant and Disbelief
Since markets repeat themselves, this starting stage usually marks the end of a previous meltdown stage and the birth of a new cycle characterised by doubts and suspicions.
In this stage, traders mostly doubt the success of the trend this time, as they believe that it will fail just like the previous one. Investors tend to be careful before they start their trading journey.
Hope and Optimism
After denying and resisting the market temptations, some hope starts growing with the investors, as they start believing in the trend and that this time will be different than previous ones.
This stage is usually accompanied by hype and optimism among market participants, as the trend shows positive signs. Investors start putting a significant effort into technical analysis, making predictions and determining their investing strategy and scenarios.
Moreover, traders start calculating their risks and tolerance level as they fight their doubts with hopes that this risk will be worth its while.
Thrill and Euphoria
After investing and taking a market position, the trader starts feeling the thrill and excitement of the moment. This feeling is often combined with an overall bull market and increasing asset prices.
At this stage, buying orders increase as more participants respond to the general behaviour, and investors start calculating their money, filled with the joy of making profits.
This bubble expands as more buy orders are placed. The market price reaches or crosses its peak, and traders refuse to sell as they believe that they can capitalise more on the trend and increase their returns.
A prime example of this was in 2021 when Bitcoin reached new highs with more traders fueling the price surge, and the bubble kept on expanding before finally popping and sweeping the whole market.
Anxiety and Panic
The market price faces a drop because nothing lasts forever, even in the trading world, and traders start to question the trend. In this stage, investors usually split into two types: doubters and believers.
Doubters think this is the end of the market surge, and they are better off closing their positions and selling their holdings to realise their profits.
On the other hand, believers still have a slight hope that it is only a temporary setback before prices shoot higher to new levels. Usually, this is the mistake that costs thousands, if not millions, because overbought products are destined for correction after the bubble reaches its peak.
Anger and Depression
This stage marks the start of a bear market, where prices turn down and start a steep decline. Traders sell their holdings as they accept the profits they already made or the additional opportunities they might have lost.
Prices continue sliding as more selling orders are placed, fearing excessive losses, and investors face anger and depression due to the overall meltdown. Those who used stop-loss levels could profit considerably or break even, at least.
This sharp decline might be quickly overturned on rare occasions if the asset is proven to be oversold, representing an excellent opportunity to buy back and start a new uptick.
Recovery and Optimism
After prices hit rock bottom, a new hope starts growing as traders watch the smallest price recovery and analyse the potential of a new trend.
The asset price starts showing positive signs, and investors get ready to bounce back as they evaluate their options and potential movements.
However, this is a fragile stage, where a price trend can pick up a positive trend but can quickly drop if it gets overwhelmed with buying activity. Therefore, investors analyse investments in this stage with care.
Reluctant and Disbelief
At this stage, prices start to improve as market participants start doubting the possibility and continuity of a new trend. In other words, the market cycle returns back to the first stage, where investors doubt the price future and reliability of the trend.
Mastering The Market Cycle Trading Strategies
Traders approach the market cycle psychology differently. While it would make sense to use traditional stock trading strategies, experienced investors may follow these approaches.
- Execute contradicting market orders by selling growing assets and buying during devaluation. This strategy allows the trader to be one step ahead of the rest when the market flips.
- Trading with the RSI index to understand overbought and oversold assets. Thus, investors can tell if a market surge is caused by overvaluation, meaning that the price will soon settle down, and bullish investors may lose some of their investments.
- Position trading is a famous tactic entailing keeping a market for a long period of time, like months and focusing on the bigger picture.
Conclusion
The psychology of a market cycle in cryptocurrencies entails understanding the current conditions and sentiment and using this information to make the right trading decision.
The market cycle psychology consists of two directions, an upward and a downward destination, with various stages in each direction. These stages resemble the thoughts and emotions the trader goes through while investing in financial markets.
