Hey guys! Does anyone else find human psychology interesting?
When cryptocurrencies fall, we spend a lot of time analyzing, trying to predict the exact bottom, always being very cautious.
But when the market goes up, we become confident and buy in with little to no analysis. We click the green button as if tomorrow doesn't exist.
Why are we like this?
Why are people bearish at bottoms and bullish at tops?
Fear and greed, these are the two emotions that seem to drive most of our actions in the crypto markets.
When fear takes over, everything feels apocalyptic. Twitter/X is abuzz with doomsday warnings of further collapse and calls for surrender.
"It's over. Goodbye everyone. It was nice meeting you."
But when greed takes over, euphoria takes over. Suddenly, everyone becomes an expert, confidently predicting that new highs are just around the corner.
“If this coin goes up another 10,000%, I can retire. Go LFG!”
So, why does this happen?
Why are we so cautious at market bottoms, but throw caution to the wind at tops?
This is largely due to loss aversion, where we feel the pain of losses much more strongly than the pleasure of gains.
We are also social creatures, and the fear of missing out (FOMO) is very strong. It is hard to sit on the sidelines when everyone around us is getting rich fast. The herd mentality takes over, and we jump in, often right at the top of the market. It is hard to stay calm when you hear about others getting rich overnight every day.
On the other hand, when prices plummet and everyone is fleeing, our instinct is to follow them. Holding on feels like fighting a losing battle. The prospect of further losses overshadows the potential for future gains in our minds.
Yes, predicting bottoms and tops is foolish for most people.
When sentiment reaches extremes, the ship has usually sailed away. When your Twitter/X feed is all bullish at the top, or all bearish at the bottom, it’s probably too late.
Ironically, the best opportunities often lie in going against the trend.
Buy when others are overwhelmed by fear, sell when greed and euphoria are overwhelming. Yes, I know, it is easier said than done, and it takes a lot of mental strength to go against the trend.
But as one of the greatest investors ever said, be fearful when others are greedy and be greedy when others are fearful.
So if predicting tops and bottoms based on sentiment is generally a losing strategy, what’s a better approach?
One way is to focus on your own analysis and develop a plan.
Rather than trying to find the perfect entry and exit points, consider gradually accumulating on the decline and taking profits on the rise.
Have a strategy and stick with it no matter what the herd is doing. Develop a theory based on fundamentals, technicals, or your assessment of the market cycle and let it guide your decisions.
You don’t know what other people’s “predictions” are based on. Maybe that bull on X yelling about $100,000 in a week is a 16 year old who doesn’t even know the funding rate?
FOMO is a powerful force, and the temptation to abandon your plans to chase gains can be strong. That’s why discipline is so important.
A big mistake I make over and over again is how to justify losing coins in my portfolio.
Even though I knew the smartest thing to do was to cut my losses and invest in something else, I still held on to them hoping to get my money back.
This is human psychology at its best.
No one can seize every opportunity.
I'll say it again: No one can seize every opportunity.
There will always be coins that you didn’t buy that go up 100x, or coins that you sold too early.
This is the nature of the market. The key is to not let FOMO dictate your actions, to be disciplined, stick to your strategy, and believe that there will always be new opportunities.
By creating a plan, staying disciplined, focusing on your own analysis rather than the herd’s opinion, and maintaining a long-term perspective, you can work towards buying low and selling high, rather than the other way around.
It’s not easy, but this mentality separates the few who succeed from the many who fail.
Ultimately, the goal is to take emotion out of the equation as much as possible. Fear and greed may be inevitable human reactions, but we don't have to let them control our every move in the markets.
Let’s break it down:
Professionalism means having a plan and sticking to it, even when emotions run high.
Consistency is about applying your strategy every day, not just when it’s easy.
Discipline is about resisting the urge to deviate from your plan when FOMO strikes or fear grips the market.
Repetition is about putting in the screen time and doing the homework, even if it feels tedious.
Perhaps most importantly, the ability to overcome repeated failure and disappointment is essential, as no strategy is perfect and losses are part of the game.
So why do most traders struggle with this? Why are they bearish at bottoms and bullish at tops even when they know better?
A big part of the reason is that it’s difficult to truly internalize these basic but important principles. It’s one thing to understand the concepts, but it’s another to consistently apply them when it counts.
That famous quote from Warren Buffett about being greedy when others are fearful rings true again.
But in practice, it is very difficult to buy when there is blood in the streets and your portfolio is down 50%. Similarly, when euphoria reigns, we know to be cautious, but when everyone around us seems to be getting rich easily, the temptation to make a quick profit is powerful.
How can you sit still when you see headlines like “High School Student Makes $1,000,000 Overnight”?
That's why it's so important to have a plan and stick to it. If your plan is to accumulate on the dip, then you buy when prices fall and sentiment is bearish, no matter how you feel.
If your plan is to take profits when you reach your target, you will want to sell some of your money on the way up, even if it feels like the rally could go on forever.
It may be ego-satisfying to accurately catch bottoms and tops, but it's not a reliable way to build long-term wealth. A better approach is to focus on executing your plan over and over again, even if it means missing some of your best days.
A slow and steady approach often wins out in investing.
But even the best laid plans cannot completely eliminate the influence of psychology on our trading. We are emotional creatures and we make mistakes.
The key is to learn from those mistakes, regroup, and move on.
Every trader has bad days, bad weeks, and even bad months. Those who succeed over the long term are those who are able to bounce back from the inevitable setbacks and disappointments. They are the ones who continue to execute their strategies even when things get tough, who are able to resist the temptation of FOMO and the grip of fear that is stronger than a professional wrestler.
So, the next time you find yourself overly bearish or irrationally extremely optimistic, calm down.
Remember, in extreme cases, the public is usually wrong.
Remember your plan and the effort you put into making it.
Discipline is the key to long-term success, and every setback is an opportunity to learn and improve.
Stay rational, and may you be richly rewarded!
Be fearful when others are greedy, and be greedy when others are fearful!
Take care of yourself.
