Educational Post

What is Capitulation?

Capitulation refers to a period of high selling activity, where investors exit their positions and sell their holdings as quickly as possible. It is often referred to as panic selling because during a period of capitulation, sell orders reach a much higher level than average, causing the asset price to rapidly decline until a bottom is eventually reached.

Capitulation can be described as the point at which investors lose hope - accepting losses and giving up their previous gains. When the period of panic selling is over, marking the end of capitulation, it may be followed by either a period of consolidation (sideways price movements) or an upward trend that would potentially indicate the start of a bull market.

The reason why periods of capitulation often lead to price reversals and strong uptrends is that these episodes are usually marked by FUD and panic, so that selling pressure exceeds normal levels, reaching oversold conditions. The more violent and abrupt the price decline, the more likely it is to be followed by a strong rebound.