1. The FOMO Effect
Fear of missing out (FOMO) is a powerful driver in trading. After a significant dip, any upward movement triggers panic among traders who fear losing the opportunity to capitalize on the “recovery.” Many rush to buy during the surge, only to see prices fall again, resulting in losses.
2. Misreading the Market
A temporary rally can easily be mistaken for a full-blown recovery. After a significant drop, even a modest price increase may appear as a positive trend reversal. Traders who misinterpret this temporary spike end up holding assets that depreciate further.
3. Emotional Trading
Watching your portfolio shrink during a downturn is emotionally taxing. When a green candle appears, it often feels like a beacon of hope. Many traders give in to this emotional impulse, acting without proper analysis—an approach that rarely yields profitable outcomes.
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Sell-Off Surge vs. True Market Recovery
To avoid falling into the “buy the dip” trap, it’s essential to distinguish between a fleeting sell-off surge and a genuine market recovery. Here’s a quick comparison: