What is market psychology?
Market psychology is the examination of patterns, behaviors, and emotions displayed by traders and market participants when faced with various conditions in the financial markets. This process involves analyzing the behaviors of traders, understanding their behavioral patterns at different times, and the impacts of emotions such as fear, hope, anger, and motivation on their decision-making.
With a deep understanding of market psychology, traders can identify and improve their mistakes, leading to better decision-making for investment and trading. Skills that can be developed through understanding market psychology include risk management, emotional control, and choosing the optimal timing for entering or exiting the market.
Therefore, on the path to success in financial markets, having sufficient knowledge of market psychology and the ability to execute appropriate behavioral patterns is of great importance and can increase the level of success while reducing the risks associated with financial market transactions.
Risk aversion: overcoming the fear of risk in trading
Investment reluctance, overcoming the fear of risk in transactions, is a term in financial psychology that refers to the fear of engaging in a high-risk financial operation. In this situation, individuals refrain from engaging in transactions or investments that have the potential for profit due to fear of loss. This resistance to risk can have various consequences for traders.
Benefits of investment reluctance:
Preventing loss: In some cases, investment reluctance can protect traders from financial losses.
Reducing anxiety: Not engaging in risky transactions can reduce traders' anxiety and stress.
Drawbacks of investment reluctance:
Missing opportunities: Fear of risk can deprive traders of profitable opportunities.
Increasing regret: Not investing in profitable transactions can lead to regret and remorse in the future.
From optimism to excitement: Immersed in the fear of missing out (FOMO)
In financial markets, as prices rise and the economy flourishes, investors' reluctance gradually gives way to optimism. Continuous news of new price records and whispers of huge profits among peers can easily sway emotions and turn the fear of failure into the fear of missing out, (FOMO)
Recognizing FOMO in these conditions is crucial, as this mindset can be the most disastrous factor a investor faces.
FOMO peaks in optimism, excitement, and exhilaration. In this state, the tendency to disregard the fear of loss increases. Losses are perceived not as a threat, but as missed opportunities, and entering the market at this point brings short-term mental relief. Going along with the prevailing trend in these conditions brings a sense of comfort.
However, investors who fall into the trap of FOMO and enter the market during the excitement phase will not taste real profits. This is because, before the cycle completes, they face price declines and only exit the market with negligible profits.However, investors who fall into the trap of FOMO and enter the market during the excitement phase will not taste real profits. This is because, before the cycle completes, they face price declines and only exit the market with negligible profits.
From denial to panic: Psychological cycle at market peaks and collapses
At market peaks, there is an inherent danger: uncertainty. No one knows whether we are facing a real ceiling or just a temporary dip followed by renewed growth. Positive emotions in these conditions tend to persist long after the market has reached its peak.
In the midst of this, investors instinctively brace themselves against negative news or price declines and enter a state of denial. In this phase, there is no inclination to sell, which artificially keeps markets at high levels for a while.
However, at the same time, conditions are worsening. Professional investors familiar with market psychology can control their emotions and objectively assess market conditions to sell their assets. But for most investors, the sense of denial is much stronger and prevents them from selling assets. They cannot believe that the upward trend has ended and, with the continuation of the downward trend, experience fear, despair, and ultimately panic.
As asset prices decline, the fear of loss once again dominates decision-making. Traders, in an effort to avoid the emotional pain of loss, hold onto their losing assets instead of reducing their investments.
From resignation to reluctance: Abandoning capital and drowning in regret
As the market continues its downward trend and losses increase, many investors ultimately reach a point of resignation and exit the market. Fear, stress, and the need for liquidity are the primary factors driving individuals to sell assets and leave the market at this stage. These individuals also deplete their emotional resilience at this stage. Many who surrender near the bottom of prices do not return to investing in this market. They lose faith in investing and resort to the safety of cash.
Exiting the market due to ignoring market psychology and making emotional decisions makes it very difficult to return. As seen in the cycle of market emotions, an investor must go through stages of despair, depression, apathy, and reluctance to return to the stage of reluctance. This cycle can take years, and during this process, many investors miss out on excellent opportunities for profit with the revival of the market.
Indicators of sentiment analysis in the cryptocurrency market:
While there is no absolute way to accurately measure market sentiment and other traders' emotions, various indicators and metrics have been designed to assist you in understanding the overall perspective of traders regarding the cryptocurrency market.
The VIX index measures fear and market volatility:
The VIX index, or the CBOE Volatility Index, is one of the most well-known market sentiment indicators widely used by traders in cryptocurrency, stock, and forex markets.
Unlike most indicators that follow price movements, the VIX is a unique tool for technical analysis that helps you understand market sentiment and the level of fear or confidence among traders in real time.
This indicator calculates expected fluctuations for a 30-day period in the future using options contracts on the S&P 500 index. Therefore, it is also called the "Fear Index."
The value of the VIX is inversely related to market sentiment. An increase in the VIX indicates an increase in fear and volatility in the market, while a decrease in the VIX indicates an increase in confidence and stability.
Bull market and bear market index:
Bull & Bear Index, created by Augmentin, is another sentiment analysis tool in the digital currency space that helps understand prevailing sentiments about Bitcoin. This index uniquely focuses on sentiments on social media platforms, especially Bitcointalk.org, Reddit, and Twitter.
Index Operation:
Artificial Intelligence (AI): AI software is used to analyze conversations on social networks and identify sentiments and topics of discussion.
Scale: The index fluctuates between 0 and 1. A value of 0 indicates very negative sentiments (bearish market), and a value of 1 indicates very positive sentiments (bullish market).
Updates: The index is updated hourly and is suitable for active daily trading.
Interpreting the Index:
0: Very Bearish: The market is at its price bottom, and a correction is likely.
0.25: Bearish: The market is undergoing correction, and caution in trading is advised.
0.5: Neutral: The market is stable, and there is a possibility of movement in both directions.
0.75: Bullish: The market is growing, and there is a possibility of price increase.
1: Very Bullish: The market is at its price peak, and there is a risk of correction.
Fear & Greed Index:
The Fear & Greed Index is one of the most popular sentiment analysis indicators in the digital currency space, freely available to the public. Inspired by a similar index in the stock market, it was created by the financial section of CNN Money.
The Fear & Greed Index provides an overall level of fear or greed in the digital currency market by examining and analyzing various components. The components analyzed in this index include:
Interpretation of the index:
Bison's Cryptoradar: Monitoring Sentiments in the World of Altcoins.
Crypto Radar, an efficient tool for analyzing market sentiments in the world of digital currencies, especially major altcoins, is offered in both website and mobile app versions, enabling users to monitor sentiments on social networks for Bitcoin, Ethereum, Bitcoin Cash, and Litecoin in real-time.
How Crypto Radar Works:
Advantages of Crypto Radar:
Conclusion:
In the journey towards becoming a successful and professional trader, the market teaches us behaviors that, with an understanding of the psychology behind them, allow us to navigate this path more swiftly and calmly. By understanding key points in the psychology of traders' behavior during trading and applying them in transactions, you will gain an edge over other competitors and traders, predicting and understanding market movements and behaviors more effectively, thus making better decisions in your trades. Learning the psychology of trading markets is essential for all traders, from beginners to professionals, regardless of trading strategies or types of markets they engage in.
The most important point here is that market psychology helps us to utilize all informational and behavioral inputs present in the market and, through proper analysis and evaluation, make trading decisions with greater confidence. This ability allows us to adopt the best trading strategies and approaches and ultimately achieve greater success in financial markets.
