The psychology of market cycles

Market psychology is the aggregate emotional state (mood) of all market participants, which is reflected in the direction of market trend movement. There are many studies and articles on this topic, as market psychology is a parallel field of research in Behavioral Economics, which studies the factors that precede various economic decisions.

It is the emotional state of people that is the main factor influencing price fluctuations of assets on financial exchanges. In turn, mood fluctuations among investors create so-called psychological market cycles.

When the mood of the majority of market participants is positive, we have an uptrend, which is often called a Bull Market. If the situation is reversed, we have a declining trend, aka a Bear Market.

It all works very dynamically and in places resembles a chain reaction, like falling dominoes.

When we have a stable economic situation and the market is going up, it means that an atmosphere of optimism, faith and even greed prevails in the market. At this point, the degree of positive attitude of market participants is constantly improving, thus increasing demand and reducing supply, which also pushes the price up and convinces more and more participants to enter the market. In this way we have a snowball effect, which is constantly increasing, thus creating a bull market.
When there is a large amount of money in the economy and the feeling of greed and confidence in further growth overwhelms its participants, then there is "inflating", which causes a "financial bubble". In such a case, investors are lured by the thirst for profit and in the desire to earn the maximum profit they stop following their plan and detach themselves from reality.
Soon, as the price rises, there is a local top - the highest price of the asset. In some cases, the price may fluctuate at this level until a large holder sells out, this point is called the distribution phase. There are times when this stage is not clear or is very short, causing the decline to begin almost immediately after the local top is reached.

A downtrend also occurs when the economy is unstable, people start selling their assets en masse, there is an excess of supply over demand, which pushes the price down even more, thus a bear market occurs.
At the moment when the market reversal starts, the mood of most market participants changes, the state of euphoria is replaced by the stage of complacency - many traders refuse to believe that the uptrend is over. But as prices continue to decline, market sentiment quickly turns negative. This is usually crossed with feelings of anxiety, denial and panic. Likewise, traders can get into a stage of denial without recognizing the current situation. For this reason, many traders continue to hold their positions at a loss because it is too late to sell assets in the hope that the market will turn around soon.
As the price falls, the amount of selling constantly intensifies breaking support levels time after time, intense fear and panic often bring the market to the stage of capitulation - this is when market participants cannot withstand the pressure and sell their assets in the negative at an unfavorable price.

Capitulation is always in the long run the best entry point into the market.
Eventually the downtrend fades as prices stabilize and volatility decreases. At such a point, the accumulation phase begins, this is a fairly extended sideways movement when large volumes re-enter the market.

Uptrends and downtrends can last until resistance or support levels are encountered. These levels occur where people are confident of a change in price movement and begin to sell or buy back an asset. This is usually accompanied by a news and emotional backdrop that influences most uneducated market participants, often referred to as hamsters. Experienced traders and investors use a range of tools and knowledge to calculate price movements and build their strategy on their calculation.

You can understand the changes in market psychology by analyzing past market cycles, you can easily see what actions should have been taken at a particular moment, however, while living that very moment everything was not so obvious and simple.
The market can be extremely complex and incomprehensible and to predict future market changes most traders and investors use technical analysis (TA) and fundamental analysis (FA), as well as a number of other indicators, which each person selects for himself.

For every participant in the financial markets who wants to preserve and grow their investments, it is essential to understand general economic aspects, and the psychology of market cycles is one of the fundamentals. Of course, no one says that it is necessary to read all available literature on this topic, but it is necessary to know the basic principles and laws.
Any trader and investor also needs to understand the psychology of a trader (aka trading psychology). Before understanding the market, it is necessary to understand and educate yourself and in this case the best helper is a good book and a mentor who has already passed this way.

Investors and traders are faced with no small task to understand not only the psychology of the market, but also their own, as well as the facts and reasons that affect the decision-making process.
For this purpose it is necessary to develop constantly. It is necessary to learn to look at the situation from different positions and angles, and for this purpose it is necessary to be open to new opinions and ideas, they can be found in the financial literature from proven authors (I advise these books, as the list was collected for myself can be sure that the authors there have passed a rigorous selection).


Peaceful skies and good luck to everyone, dear Friends!
Your M.J.