Riding the Emotional Wave of a Market Cycle
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This blog post includes:
- What a Market Cycle Looks Like
- Bulls and Bears
- FOMO, FOJI, Regret, Disassociation
What a Market Cycle Looks Like
Any asset that is traded has a market cycle. A market cycle is a natural cycle in the shape of a sine wave that occurs when money flows in and out. Value cannot go up forever, and anyone who says so is usually trying to sell you a coin or commodity that is not legit. Everything that goes up must come down at some point⸺the question is how far down. You may be familiar with the following picture; take a good look at it now, because this cycle and the emotions that go with it happens on every time frame.
Here is another chart to consider, which looks less dramatic but has the same wave cycle.
Now I want to show this cycle within some charts of my own, with a few different coin pairs.
Here we have BTC in the middle of a cycle loop on a 4-hour time frame and chart. You can spot each part of the market cycle in the wave. (Click on the link below for a bigger version.)
https://www.tradingview.com/x/q8kPTTHE/
We can break this 4-hour time frame loop into a 30-minute time frame as well. (Click on the link below for a bigger version.)
https://www.tradingview.com/x/H67SMT6x/
As you can see, the labels and shape are the same. The top chart goes from Capitulation to Capitulation over the course of three months; the bottom, Capitulation to Capitulation over the course of one week. The swings in trade involve different percentages, of course, but the point is that this cycle happens on every time frame, nested inside of each other.
Consider this as well: if I invert the last chart and relabel it, the cycle looks similar. (Click on the link below for a bigger version.)
https://www.tradingview.com/x/yQTgnxgA/
Each emotion has its mirror: Greed upside-down is Capitulation, and vice versa. There can be many other feelings at each level, and you can rename each emotion as you like, but in my version of a market cycle, here’s how it generally goes.
Optimism: Trade is going well.
Euphoria: Trade is going really well. I should take profit here, but what if it keeps going up?
Greed: This is the easiest money ever! I already have plans for my future cash.
Anxiety: This is just another minor set back before we continue upwards.
Denial: I told everyone this was fine. I am down from before but things are still good.
Fear: Maybe I should have sold higher. I am down so far already! Let me just get back to that number I saw before.
Panic: I should have sold! I should have sold!
Capitulation: The market is dead, my coins are worthless⸺I should cut my losses here.
Hope: Maybe it will get back to where it was OR I just entered a new trade.
(Rinse and Repeat)
Knowing where we are in a market cycle will give you an indication of where it can go from there. Since cryptocurrencies are highly volatile and can be affected by many sources, there could be black swan events that interrupt the flow of a market cycle, but they could also temporarily increase the tempo of the market cycle. A black swan event could be something catastrophic, such as an exchange getting hacked or the company that created the coin going bankrupt. It also could be something euphoric such as a major breakthrough in progress or a company or government supporting the project or coin. Make sure to double-check a longer time frame along with the one you want to look at. This will give you an indication of whether the cycle should be sloping downwards, upwards, or sideways.
Bulls and Bears
If you look across the internet for clues on which way the market is headed, you will likely come across talk of bulls and bears. The idea of bulls and bears is based on how they attack; bulls lift things up and bears beat things down. This metaphor is applied to the market to indicate if a trend is up or down. And just like the the wave of the market cycle described above, there could be mini-bulls and-mini bears on different time frames. The idea is that bulls lift Capitulation to Greed and bears beat down Greed to Capitulation.
When someone is “bullish,” they talk about a coin pair going up. When someone is “bearish,” they talk about a coin pair going down. Remember that there may be emotions in play if you talk to someone who opposes your view, or you may get confirmation bias if you talk to someone with the same view as you. Consider both bulls and bears in your analysis when trading. See both sides so you don’t get blindsided.
People also refer to the market cycle as the bull and bear market. They can get very literal, referring to bulls and bears as actual beings. When the price is fluctuating, the bulls and bears are fighting. If the market goes up after a fight, it means the bulls are in control, and vice versa for the bears. It is an interesting analogy that I personally don’t use, but it’s important to recognize that people refer to the market cycle in their own ways, often talking about bulls versus bears in their analysis.
FOMO, FOJI, Regret, Disassociation
Continuing in the theme of emotions and markets, here are a few final concepts.
FOMO — Fear of Missing Out
FOJI — Fear of Joining In
Regret — Feeling like you’ve made the wrong decision
Disassociation — Being unresponsive to the current situation
There are many emotions in trading, and they each take a toll on a trader’s well-being both in the market and personally. Many traders try but fail to maintain a level and clear head. Having the mindset of a machine, with no emotions behind your trade but recognizing others’ emotions, is what gives the best success. The following emotions correspond to different zones of the market cycle.
The best way to explain FOMO as a group phenomenon is that it starts off small and gets increasingly parabolic. It will look more natural than a random wick, and it happens on every time frame. Remember, everything to do with a market cycle happens on all time frames, and can be applied to all time frames.
Example of FOMO on a longer time frame:
https://www.tradingview.com/x/yXEmBwxZ/
Example of FOMO on a shorter time frame:
https://www.tradingview.com/x/PNvbT3n0/
This is not FOMO, but it looks similar. This is slippage and it doesn’t have a natural parabolic curve.
https://www.tradingview.com/x/xPylx7El/
The next concept is FOJI, which is the fear of jumping in, or making a trade. This inevitably happens to all traders, especially after a big loss. You start by thinking, logically of course, that you don’t want to continue losing money. Many people start switching strategies and try to brute-force the market into going their way to make gains again, like continuing to double down on a trade to try to make it go their way, overtrading by trading too much, taking on too much risk, etc. Once you have FOJI, it can affect your entry and exit points and the market may take off without you, causing you to feel the FOMO described earlier.
Regret is when you enter a trade and it begins to go south. Many people panic at this point and exit, or they begin to hold or invest more than they planned in a trade. This can lead to a disassociation between your money, the numbers, and the odds. It is hard to not feel regret as soon as you enter a trade, because the moment you enter, you are likely already at a loss because of fees. The market doesn’t turn around on a dime, and it will usually dip more than you planned. The best way to avoid regret is to define your entries, targets, and stop loss, and have your plan laid out in front of you from the start.
Disassociation is a common emotional element that usually happens after a loss. You begin to feel numb to losses, thinking “I am down so far already, so what’s another 5%?” Unfortunately, this is where people get stuck into a holding mode, and say things like “Holding till 1 million or 0,” or “The coin is down 90% from what I remember⸺it will get back there.” When infected by disassociation, many look to blame others for their actions. They might blame an exchange, a certain group of traders, manipulation, the bears or the bulls, or even some poor Redditor.
Of course, there may be manipulation, impact from random news, or other traders waiting for people to lose so they can take their money. However, you cannot blame them for your lack of a stop loss or because you got emotional. It is all part of the game, and you need your own trade plan. If your trading plan is not working because of these factors, including them in your trading style might actually make you part of their horde and able to make gains with the flow.
Takeaways
In this article we looked at the emotional side of trading with three main points to consider: the market cycle, bulls and bears, and emotional terms that accompany market trends. All of these belong together in the crypto trading universe.
- A market cycle (and the emotions that go with it) is like a sine wave, from Capitulation to Capitulation and Greed to Greed.
- Market cycles happen on every time frame.
- Bulls lift the market up, and bears beat the market down.
- Emotions like FOMO, FOJI, Regret, and Disassociation can affect you, discouraging or hurting a potentially good trade or your portfolio.
