The Psychology of Market Cycle is an important concept in the world of investing and trading that describes how investor emotions affect market price fluctuations. Every market, especially financial markets such as stocks, commodities, and cryptocurrencies, tends to move through predictable cycles that are influenced by the collective emotional changes of market participants. These cycles consist of several phases, each of which reflects the dominant mood or feelings of investors at a given time.
Phases in the Market Cycle
1. Optimism
The initial phase of a market cycle is usually marked by optimism. Investors start entering the market with the expectation that prices will rise. At this stage, investors are confident that their investment decisions are correct, so they start buying assets with the expectation of future profits. Asset prices start to rise slowly as demand increases.
2. Belief
After optimism, confidence begins to grow. Asset prices continue to rise, and more and more investors begin to believe that this trend will continue. In this phase, more people enter the market, and prices begin to rise more sharply.
3. Joy (Excitement)
Here, the market starts to show strong momentum. Existing investors in the market start to see big profits and feel that "this is the best time to invest." Many people who previously did not invest also start to get interested in entering the market, driven by the fear of missing out (FOMO). Asset prices can experience significant increases at this stage.
4. Euforia (Euphoria)
Euphoria is the peak of the market cycle. Investors believe that the market will continue to rise indefinitely. At this stage, almost everyone is optimistic, and the market reaches its highest point. Unfortunately, during the euphoria, many new investors enter the market in hopes of big profits, even though the asset price is already too high or "overbought". This is often a sign that a reversal is imminent.
5. Anxiety
After the peak of euphoria, signs began to emerge that the market could no longer sustain its gains. Prices began to fall slightly, and investors began to feel uneasy. Some may have started selling assets to lock in profits, but the majority still believed that the market would recover soon.
6. Denial
As prices continue to decline, investors begin to deny that the market has peaked. They believe that the decline is just a temporary correction and that prices will soon rise again. At this stage, many investors hold on to their assets in the hope that the bullish trend is still in effect.
7. Fear
As prices continue to fall, fear begins to spread. Investors start to worry that they have made the wrong decision. They start to think that the market may not recover anytime soon. At this point, many investors start to sell their assets to avoid further losses.
8. Desperation
At this stage, the asset price has dropped significantly from its peak. The remaining investors start to feel desperate, and panic selling begins. People who bought the asset at the peak feel lost, and most investors start selling their assets at a huge loss.
9. Capitulation
Capitulation is the stage where most investors have given up. Asset prices have bottomed out, and most people no longer believe that the market will recover anytime soon. They sell their remaining assets, even at very low prices, just to get out of the market.
10. Depression
This is the lowest point in the market cycle. Investors are devastated, and trading activity drops drastically. Asset prices are at rock bottom, and very few people are interested in buying. The fear and trauma of big losses make investors hesitant to re-enter the market.
11. Harapan (Hope)
After the market bottomed, some of the more astute investors began to see an opportunity. They began buying assets at very low prices, and the market began to recover slowly. Optimism began to grow again, although many remained cautious.
12. Relief
As the market begins to show clearer signs of recovery, investors start to feel relieved. Asset prices start to rise again gradually, and more investors start to enter the market. At this point, the market starts its cycle all over again.
Why is it Important to Understand the Psychology of Market Cycles?
Understanding the psychology of market cycles is key to becoming a smarter investor and avoiding costly emotional decisions. Emotions are often the root cause of investment mistakes, such as buying on a high or selling on a panic. Investors who understand these cycles can:
- Identifying opportunities: Market cycles offer opportunities at different stages. Buying during a capitulation or depression, for example, can yield big profits when the market eventually recovers.
- Avoid emotional decisions: Knowing that markets move in cycles can help investors avoid FOMO when prices are soaring or panic when prices are falling.
- Managing risk: By understanding the psychology behind market cycles, investors can better manage their portfolios, such as diversifying or adjusting asset allocation based on market phases.
Real Examples in Crypto Market
In the cryptocurrency market, this psychological cycle is very evident. For example, in 2017, Bitcoin experienced a euphoric phase when its price reached $20,000, followed by a capitulation phase in 2018 when the price dropped drastically to below $4,000. When the price recovered in 2020–2021, the cycle repeated itself, with many new investors experiencing euphoria and eventually capitulating when the market crashed again.
Conclusion
The psychology of market cycles is an essential guide for investors who want to manage their emotions in the face of market volatility. By understanding these emotional phases, investors can make more rational decisions and take advantage of the opportunities that exist in each market cycle.
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