Market Cycles - How Does it Work

in LeoFinance2 days ago

We are all aware of the fact there's a force driving the market cycles, and for the most part, it's really hard to determine what exactly led to such an outcome. Countless theories have been used to track how the market behaves, while market psychology being one of the most fundamental starting points.

Market psychology is the idea that the market movements reflect the emotional state of its participants, where's completely irrelevant if we're referring to the investors or traders.

It is one of the main topics of behavioral economics - an interdisciplinary field that investigates the various factors that precede economic decisions.

Many believe that emotions are the main driving force regarding the shifts of the financial markets. There are quite successful traders that trade only when they notice changes in sentiment. The sentiment is abstract to some extent as it represents the overall feeling that market participants have towards the price actions of a particular asset.

During the bull run, the overall sentiment is positive, while during the bear markets the sentiment is negative. Of course, just as with any group of people, no single view is completely dominant, making the market more dynamic.

In practice, when the market goes bull, it's likely due to increased demand and decreased supply, while during the bear market it's the opposite.

Uptrend

All markets, including crypto, go through cycles of expansion and contraction. When the market is expanding there's a positive sentiment eventually turning into greed. I will use Bitcoin as an example.

When the sentiment becomes bullish, a lot of traders, investors, retailers, etc slowly start entering the market. There's a huge dose of optimism and belief that leads the market to a point where the buying pressure outperforms selling activity. When the price starts increasing it adds additional hype pushing the price further than expected. In such phases, a strong sense of success becomes irrational, the price starts reaching the sky, thus forming a bubble.

In such a case, the actual value of the underlying asset doesn't match the price. And while it's hard to make a clear distinction regarding how real the price is, sometimes even the blind can see how absurd and irrational the market behaves. Don't get me wrong, we all love the bull market, however, it's important to stay cool-headed and rational, otherwise, you're risking everything.

Downtrend

On contrary, once the downtrend occurs the phase of the bear market begins. Some like to refer to it as an accumulation stage, however, I don't quite think that's accurate. The accumulation phase can be a result of the bear market, not the other way around. Nevertheless, when the market turns the other way, the euphoria, optimism can completely turn into skepticism, negative sentiment, and disbelief. It's actually stunning how fast can market go from positive to negative.

When the price starts dropping, traders and investors are unsure and start exiting the market. When you have more such traders and investors the climate changes fast and the market starts collapsing. The problem is that most people don't make the fundamental analysis and actually don't know how to deffer real demand from speculation. That creates an environment in which the majority doesn't even know when to exit while selling everything with a lot of collateral.

When the prices fall 20% in a matter of days, there's a high chance of an asset dropping further. The fud and uncertainty are in charge now and every percentage can trigger a massive sellout. Everyone's afraid of liquidity crises, trying to save what is left. It often happens after an exhausting downtrend accelerated by a few bad news.

Once the bottom is reached the prices are often undervalued and from there the real investors start building. Of course, we don't actually know where the bottom is, but there are some resistance and support levels to take into account.

How to Use It into your Advantage?

The best way is to do your research properly and determine for how long are you willing to wait until you reach a point of having sustainable life out of your investments. The sentiment plays a vital role as well, so being on track with the latest news can help you when making a decision.

Going further, it's your responsibility of finding the support and resistance levels, thus adjusting your strategy according to the data. The dollar-cost average would be a perfect fit when it comes to crypto as the market caps are too small to build a better macro, especially if the projects are new.

I have made countless mistakes when both trading and investing, but It's part of the journey, and being demotivated ain't gonna help. There are always ups and downs in life, shit happens but it's important to have a higher goal other than getting rich. It's actually so shallow to think that way.

Of course, we all wanna lead a great life without a financial burden or debt, but if wealth is the only thing that drives you, it's likely you'll get lost along the way.

Keep hustling, our time is coming, and this time we will be ready!

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@ocupation, In my opinion one thing we can say for sure and that is, in everything "Human Emotions" are invested and every trend is driven by it. Stay blessed.