The Psychology of Market Cycles: How Emotions Control Market Movements?
Financial markets go through recurring cycles of rise and fall, known as market cycles. These cycles are not driven by numbers and indicators alone; collective psychology plays a fundamental role in shaping their characteristics. Emotions such as greed, fear, regret, and hope directly influence investors' decisions and reflect on the behavior of the market as a whole.
1. The Optimism and Greed Phase - Rising Peaks
The cycle usually begins with gradual optimism, which turns into excessive confidence, and then into rampant greed as prices rise. During this phase, investors feel that 'the market cannot crash,' and new money often enters late, near the peak.
2. The Denial and Fear Phase - The Beginning of Correction
When prices start to decline, many investors deny reality, considering the downturn temporary. However, as the decline continues, fear and panic begin to take over, leading to a collective sell-off that may deepen losses.
3. The Bottom Phase - Pain and Boredom
In this phase, feelings of regret and hopelessness prevail, and many come to the conclusion that the market will not recover. However, this phase is usually an indicator of exceptional buying opportunities for investors who understand market psychology.
4. The Recovery Phase - Hope and Gradual Return
The market begins to recover slowly, accompanied by a gradual return of confidence. The most aware investors are the first to enter this phase, while the rest of the market lags until the upward trend becomes clear.
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Summary:
Understanding market psychology is as important as technical or fundamental analysis. A successful investor is one who transcends the influence of emotion and acts rationally when fear takes control.
The greed of the majority.
