Basics of Market Psychology in Crypto Trading
From the very first coins invented in the ancient Lydia to modern cryptocurrencies, people use the money for trading. And basic market laws of demand and supply haven’t changed since the first deal was made. However, now we understand the psychological basics of different human actions a bit better. In crypto trading, they are powerful forces that drive your decisions, as well as decisions of millions of other traders.
Superorder team knows how important market psychology can be. That’s why we want to talk more about our emotions, their consequences, and ways to control them. Let’s go!
Emotions and Market Cycles
Adepts of behavioral economics believe that all price movements regardless of the market are influenced by the psychology of traders. Thus, emotions become the main driving force. Combined personal feelings and expectations create the market sentiment — an average of all emotions at the given moment.
For instance, when the majority of participants expect rates to rise, the sentiment is positive. In trading, we know this state as a bull market or an uptrend. On the contrary, when investors expect the target asset to fall, negative pattern forms and we enter a bear phase or a downtrend. These moves are interlinked as they succeed each other.
To understand emotions better, let’s check the following examples.
Bull Market
This positive market phase is based on strong buying activity. Investors expect prices to go up and up so they purchase more assets. Here, key emotions are as follows:
- Euphoria.
- Greed.
- Optimism.
- Trust.
Often, uptrends are powered by retroactive effects. Say, the market sentiment becomes positive when traders see that prices rise. This bullish pattern affects prices and they increase even more as bulls get extra power. However, a too strong uptrend may form a bubble when demand is overstimulated. Traders become irrationally greedy. As a result, the local price high is created — and it’s the most riskier position.
Note: psychology doesn’t work as a white-and-black picture. Sometimes, markets experience periods of horizontal movement after the local high instead of an immediate downtrend. These movements are known as distribution stages.
Bear Market
The cyclic nature of trading leads to downtrends, anyway. As rates start decreasing, people tend to face feelings similar to the Kubler-Ross stages of grief. Initially, traders deny believing that a bear market is formed so they keep assets. Later, anger, bargaining, and depression may appear. Finally, the market sentiment becomes negative as the majority accepts new conditions and sells funds. It’s known as a market capitulation.
Sadly, a lot of traders refuse to sell at the best moment but get rid of their coins close to local lows. Then, the market stabilizes and gathers power for the next uptrend. Also, accumulation stages with horizontal moves may precede rises.
Emotions during bear trends are as follows:
- Anxiety.
- Denial.
- Fear.
- Panic.
Understanding Psychology with FA and TA
If we accept that markets are affected by global psychology, it may be easier to understand them. Firstly, fundamental analysis is a must-have for all traders. Remember the golden rule: buy when others are fearful and sell when others are greedy. Try to understand the current market sentiment to place the best deals. Ideally, you should catch local highs and lows. Need info? Read more about fear and greed in our article.
Secondly, technical analysis can help, too. You can analyze previous market cycles to understand how psychology patterns work. The most iconic example is the BTC/USD pair in 2017. From $900 in January to $20,000 in December, Bitcoin skyrocketed because of extremely positive sentiment. But then it crashed. To grasp cycles, you can use technical indicators like MACD and RSI. We also have a guide dedicated to these tools!
Get Control!
While it’s not an axiom, the majority of investors agree that market psychology exists and that it affects trading actions greatly. Still, it’s not an easy task to fight the influence of emotions even if you understand them. Even professional traders struggle to deal with their own psychology, not to mention market cycles and global sentiment.
Automated trading is a viable tool that helps people to overcome their emotions. When you have a strategy executed automatically, it’s more difficult to make impulsive decisions. Superorder offers such tools. Don’t forget that we have strategies, bots, and even a Chrome extension! And also don’t forget to clap & share if the guide was useful.
