Hello my Crypto Gears, Welcome to the 5th week of classes. Today we will continue building our Portfolio, but we will do it with a little different approach, the psychological approach.
Although it may not seem like it, psychology plays a fundamental role not only in trading but in everything we do. So it's worth spending some time studying it... in the market of course!. Let's get started.
Image edited by me in Powerpoint
You may have heard the term trend is your friend, and that we can't trade against the trend. That's true, but there's a trick, a kind of small font in the contract.
Uptrends and downtrends are formed due to the interaction of people's orders in the market, with so-called whale trades having more impact. In turn, market movements generate feelings and emotions in people that lead them to make decisions and carry out certain types of trades that will ultimately... impact the market again.
So we can conclude, that we are in the presence of a kind of infinite cosmic dance, between market price and buy and sell orders; a kind of balance of forces between the two factors.
Guessing the outcome of that dance or the resultant of the forces has been the task that has left millions of traders sleepless over the years. Let's face it, the market behaves unpredictably, and no one can predict the future, but we can interpret certain behaviors and certain cycles to help us in our decision-making.
Cycle of market emotions
Thanks to the classes of my fellow Academy Professors I am more than sure that almost everyone knows that the market price moves in cycles that repeat every so often. But what if I tell you that during each cycle the same emotions are also generated in people repeatedly.
The trick to all this is to go with the trend, but also to go against the emotions that are generated in each phase or cycle of the market. Let's look at this chart for a moment.
Psychology of a Market Cycle chart. Image taken from Source
This is the Wall Street chart "Psychology of a Market Cycle. It shows a complete market cycle, from the beginning of the bullish phase to its peak, through the bearish phase to its lowest level. Sentiment appears as the market fluctuates. Needless to say, this is the repetitive market behavior of any asset, cryptocurrencies included.
Let's analyze this chart a bit:
- For the purposes of this example We will start at "HOPE": occurs prior to the start of the bullish rally, where after a long period of decline you start to see signs of recovery in the market.
- Optimism: Signs of recovery are more evident, the bullish rally becomes real.
- Belief: This is where some of those who were following the asset begins to invest motivated by the green candlesticks on the chart and the hope of increasing their money.
- Thrill: This is where people mortgage the house, sell the car, the dog, the mother-in-law, all in order to obtain more capital to invest. In turn, they spread the word with friends and neighbors about this wonderful cryptocurrency that is going to change the world.
Let's pause here, as I said before price and orders are intimately linked, this is why a bullish rally forms at the beginning of the cycle... when whales buy an asset, the price goes up, this, in turn, makes people seeing the value increase want to participate.
When the public gets involved, their buying drives the price of the asset even higher, this again makes people look to buy more... which in turn further inflates the value of the asset again. Do you follow me? it is a kind of vicious cycle. However, all rallies must come to an end. Let's continue.
- Euphoria: This is the peak of the cycle where people believe they are invincible and are driven by a single emotion: Greed. At this point, it usually marks the moment where whales and large institutions begin to withdraw their profits thus generating the beginning of the bearish phase.
- Complacency: It occurs right at the normal price retracement at the beginning of the bearish phase. At this point, the whales usually end up withdrawing their profits. Contrary to this fact, most people believe that the price will recover and therefore hold their position.
- All other emotions are simply the natural result of fear over the falling price.
Let's pause again here. When whales sell an asset, the price falls, this, in turn, causes people seeing the value fall to feel fear and want to get out as well.
When the public sells their positions, their selling causes the price of the asset to fall further, this again causes people who hadn't sold to do so... which in turn further knocks the price back down.
Finally, the price hits a low where the feelings that dominate are anger and depression.
The interesting thing about this chart is not the market cycle itself, (you already know it), but it shows the emotions linked to each phase of the cycle. If we are analytical, then we can interpret two things. The general sentiment of the public in a certain phase, which in turn can help us interpret what phase of the market is in and what movement is most likely to occur next.
This cycle is based on the theory that although the market is unpredictable, on the other hand, emotions and human behavior are very predictable. There are two basic emotions that define us: Greed and fear; and because of them, there are big reactions in the market.
It is evident from this chart that most people have the wrong mentality, as it is during the late stages of the bullish cycle that buy and accumulate sentiments predominate, and during the late stages of the bearish cycle that breakout and sell sentiments predominate, when it should be the other way around.
Let's look at these charts to understand a little better the concept I want to explain. (This applies for assets in which you invest for the long term) for intraday scalping trades other principles apply.
Image edited by me in Powerpoint
On the other hand.
Image edited by me in Powerpoint
As you can see, most people have a misconception about the market, which leads them to make the worst decisions. What leads people to make these decisions? Two concepts we know as FOMO and FUD.
It stands for Fear Of Missing Out. It is a mental condition where people feel that others might be having rewarding experiences from which one is absent. It is the fear of missing the train, which in turn results in you getting on the wrong carriage.
In other words, it is the feeling of anxiety caused by not participating in a bull market and seeing that other people are getting rich on a certain asset. FOMO makes us want to buy at the cusp of the bull cycle where prices are highest and usually on the verge of the beginning of the downturn.
It stands for Fear, Uncertainty, and Doubt. It is the opposite of FOMO and refers to the feelings we studied in the emotion cycle chart, which occur right in the middle of the bear phase.
FUD is the fear you feel when you are riding on the train and it doesn't seem to be going to your destination, which causes you to decide to jump out of the train at a speed of 100km/h.
In other words, it is the feeling of fear of losing more and more money in the down cycle. FUD makes us sell at the bottom of the bearish cycle, right where the asset price is cheapest and where the bullish cycles usually start.
Buy red, sell green
Finally, this phrase refers to a personal recommendation when trading long term. Buy Red means, buy on the red candles, which means the bearish phase and prices are low.
Never FOMO, or in other words don't buy FOMO driven, on the green candles at the cusp of the uptrend. If you missed the opportunity to buy at the start, you missed it, period, wait for your next opportunity... the market always gives second chances.
Sell green, refers to selling at the green candlestick, which means the bullish phase, just where prices reach their highs and you can make the most profit.
Never FUD, never let fear direct you. If the price fell and you weren't able to sell, don't exit your positions, it's not truly a loss until you sell your tokens. Right in the bearish and accumulation phases is when the whales take the opportunity to buy... be like the whales, not the little fish.
Remember, this is not about going against the market trend, but going against the general sentiment of people versus market prices.
Don't be one of the crowd, one of those who accumulate when there is a need to sell and one of those who sell when there is a need to accumulate.
Homework Task (Season 3/Week-5)
Before starting your answers this week, make sure you have read this publication at least twice and make your own research in order to understand the concepts.
1-Explain in your own words what FOMO is, wherein the cycle it occurs, and why. (crypto chart screenshot explanations needed)
2-Explain in your own words what FUD is, wherein the cycle it occurs, and why. (crypto chart screenshot explanations needed)
3- Choose two crypto-asset and through screenshots explain in which emotional phase of the cycle it is and why. Must be different phases
4- Based on the analysis done in question 3, and the principles learned in class, make the purchase of 1 cryptocurrency in the correct market cycle. The minimum amount of 5USD (mandatory), add screenshots of the operation and the validated account.
- Be Original!!! Refrain from copy any else posts and ideas. Be creative. The content is certainly the same, but the way of presenting it is unique.
- Your article should be at least 300 words.
- Refrain from spam/plagiarism, it won't be tolerated. This task requires screenshot(s) of your own experience. Use images from copyright-free sources and showcase the source, if any.
- This homework task will run from 00:00 July 26th to 23:59 July 31st, Time UTC. (7:59 pm hora Venezuela)
- Users having a reputation of 55 or above, and having a minimum SP of 250(excluding any delegated-in SP) are eligible to partake in this Task. (Must not be powering it down)
- Add tag #allbert-s3week5 #cryptoacademy among the first five tags in this order. You can also use other relevant tags like your country tag. Also, tag me as @allbert in any part of your post.
-Those who include the real examples/screenshots add a watermark on it with your username.
-Please don’t leave your homework link on the comment section unless your post hasn’t been graded within 48 hours.
Feel free to join the comment section if you have any doubts about Homework Task.