SEC S18-W3 || Psychology and Market Cycle.

When we discussed about stock market, we mainly talk on trading charts and indicators, Stock market movement, company performance and growth, company profits/losses, fundamental, etc. Here, one of most serious and important factors gets ignored that is psychology in Market Cycle.

Investors emotions can misguide them while taking decision in investing and market psychology helps to identify the movements that happened in the stock market. Awareness of psychology circumstance that can affect to the stock market and trading techniques can be beneficial for you to become confident investor.

In this blog we will discuss in details about stock market psychology and investors behaviors and common investors mindset that can affect while making decision in investing.

Table of Contents.

1. Psychological Progression Of Investors Stages And How They Influence Investor Behavior?
2. Identify what emotional stage of the market cycle the chart likely represents based on technical chart showing a recent movement in the price of a cryptocurrency (no date/time).
3. How an incorrect mindset, such as the belief that "this time is different," can affect an investor's decisions and potential returns. How does this mindset typically affect a person's performance in the market during volatile phases?
4. Incident where significant FOMO (fear of missing out) or FUD (fear, uncertainty, and doubt) impacted the price of the STEEM token. Discuss how this sentiment influenced trading behaviors and the price of the STEEM token. Also suggest strategies that STEEM investors could use to avoid making decisions driven by these emotions.
   1. Strategies that STEEM investors could use to avoid making decisions driven by these emotions.
5. What Is “Buy Red and Sell Green” Strategy? A Strategy that could be applied effectively and psychological challenges which investor might face while applying this strategy current market Downtrend and Recovery.

Psychological Progression Of Investors Stages And How They Influence Investor Behavior?

Psychological progression of investors stages means the levels of emotions that investors commonly experience during the different periods of stock market cycle. These levels of emotions can seriously divert investors concentration, behavior and decision-making activity in stock market.

1 - Optimism

• Progression Stage: Investors have faith, confidence and trust in overall crypto market conditions. They start thinking that there is a possibility of growth in the crypto market or in a particular crypto coin.

• Behavior: IInvestors start investing money and buy stock, crypto coin by referring positive news, financial indicators that give buy signals, recent pump in the market. Investors normally conduct research, depends on analyst’s suggestions and create strong base for their judgments.

2 - Excitement

• Progression Stage: This is the stage when an investor's initial investment starts paying off / makes profits which lead investors more excitement.

• Behavior: The investor starts investing more energetically, assuming that the market trend will continue and profit made on the initial investment will continue to rise. Investors start adding more money in the market means ready to take more risk than needed.

3 - Euphoria

• Progression Stage: The market performing outstandingly well. The initial investment reaches high returns and exceed expectations. Investor feel safe and more confident.

• Behavior: The investor can be overconfident assuming they are safe, they ignore risk factor and signals of overvaluation in assets. The investor heavily make investment by assuming the assts price continue rise and will not lose anything.

4 - Anxiety

• Progression Stage: The market prices start fluctuate ups and downs which create fear. Profits start fluctuate and investor starts worrying about the prices will not hold their high levels

• Behavior: Investor start thinking about to take decision but not ready to accept that the market may turn back. Investor hold investment more assuming that there will be recovery and market price will bounce back, and start moving up again.

5 - Denial

• Progression Stage: Market falling. Investor does not accept that the market is currently in trouble and suffering. Investor think that the current fall in price is temporary and it will bounce back soon.

• Behavior: Investor may start averaging by investing more money on dips and hold tightly. Investor start looking for the information on market situation but ignored that news. Investor thinks all negative information's, news and temporary and market will bounce back.

6 - Fear

• Progression Stage: Market continue in downtrend that creates panic situation in overall market. Investor start feeling that their investment is at risk and thinking about losses.

• Behavior: The panic situation force investor and sell their assists in the running market. Investor abort their long-term plan, strategies and sell their assts to avoid further losses, mostly sell at the lower price than the buying price and accept some losses to avoid further losses in downtrend market.

7 - Despair

• Progression Stage: Market remain continue in the downtrend. Investor start feeling disappointment due to negative portfolio. Assuming market is crashed.

• Behavior: Investor sell remaining assts in their portfolio to control total investing capital, they assume the loses will never recover. This phase commonly sees at the bottom of the market even though it is not defined what can be the lowest level.

8 - Hope

• Progression Stage: When market sustain at some downtrend level, the hope starts gains. Investor believe that the market crash is seems to be end and hoping up side rally.

• Behavior: Some investor continue re-enter into the market to recover the losses, some investor make investment by looking precaution. Investor start building their portfolio again, start focusing on promising and stable assets. At this time some investor learn from the past mistakes and implement some rules, discipline in their investment.

Identify what emotional stage of the market cycle the chart likely represents based on technical chart showing a recent movement in the price of a cryptocurrency (no date/time).

We will see the technical chart and the price movement of one of the crypto coins, based on it we can try to look for what emotion’s stages can investor go through with changing in the price movement. Please see the below technical chart.

_{Technical Chart With Emotions Stages - 1.}

Start with Optimism where investor started thinking to invest in the assets as he believes potential growth in the asset. Investor make investment in the asset.

Further, as we see the price of the asset start moving upside wherein the investor start seeing profits from the initial investment that he put into the asset. The investor see that the profit is growing, here investor start feeling Excitement. At one point the investor also start thinking like if he made more investment, he could see good returns. Investor start adding more money and buy additional quantity of the asset.

Continuation in the current market, the asset price keeps moving upside we also called as Bull Run. The emotional phase Euphoria can occurred at this duration. The investor sees more profits than expected from the investment he made, he started feeling more confidence and assuming he is safe and cannot lose. The investor believe that the asset price will continue move upside so he heavily add more capital and buy additional quantity of the asset. The investor does not consider the risk factor, also do not look overvaluation in the asset.

When asset reaches to its pick point it start fluctuate with some ups and downs. Accordingly, the investor also find fluctuation in his profit that he achieved till now. The emotional phase Anxiety start here wherein the investor start thinking that market price is seems not sustained. The investor start thinking to take a decision but still somehow, he is not accepting market condition, he think market will recover and start moving up again so he can decide to hold more.

_{Technical Chart With Emotions Stages - 2.}

Continuation technical chart. As we can see in the above chart, the market keeps falling but here investor does not ready to understand that the market is not sustaining and currently it is trouble. This is Denial emotional phase for the investor as he may come to know certain information about market condition but he take lightly and ignore to that news. The investor assume that this is just a temporary fall and market will recover soon.

However, the market continues in the downtrend. Here the investor went to the Fear emotional phase. The investor see that their profits are now decreases. The investor started thinking about losses and consider that their capital is at risk. To avoid further losses the investor starts to sell their asset.

Despair emotional phase. As we can see in the above chart, the market continues in its downtrend which now creates panic in the investor. This situation force investors to sell remaining all the assets available in their portfolio to cover capital. Mostly the investor sells in panic selling and sell at lower point than the buying point. Investor think that this is market crash and will not recover.

At the downtrend when market sustain and start fluctuate again, further it starts moving up slowly. The investor emotional phase Hope gets activated, wherein they start hoping growth in the market. Some investors keep re-investing to get some relief from the losses, some investor avoid previous mistakes and implement some rules and start investing.

How an incorrect mindset, such as the belief that "this time is different," can affect an investor's decisions and potential returns. How does this mindset typically affect a person's performance in the market during volatile phases?

Before make investment in the market, the proper mindset and vision has to clear. The investor has to be aware certain factor in the market like few technical and fundamental studies. The investor has to understand the market mood and accordingly make an investment plan instead believing that "this time is different".

The incorrect mindset can lead serious effect to the total capital and the end can be lost it. To understand better how incorrect mindset can affect to the return and investor performance in the market during volatile phases, we will see below chart as an example.

_{Technical Chart Example.}

In the above chart we can see the price of the asset is going up and down frequently, if we look technically then we can also see that at some point the price of asset is crossing supports and resistance indicating that price will continue go and down.

First investor buy asset assuming that it has crosses previous high so believing "this time is different" and price will continue go up, so he does investment. Later he notices the price start falling, in the fear situation and seeing that the initial capital is going minus he sells the assets to avoid further losses.

After some duration, the investor find again that asset price is moving up again so he again buy it from the remaining capital assuming that he will cover previous loss and gain some profit. Unfortunately, the asset price again started moving down, the investor see again that the actual capital is decreasing, so sell again assuming that the price will continue fall.

Similarly, whenever, the price start moving up the investor make investment but he does estimate like how much price can go up from the current price level and on the other hand how much it can go down so this can give clear vision to the investor. The investor assume that this time is different and believe that market movement will be in his favor.

Keep buying and selling create huge fear in the investor and he does not sustain in the volatile market which affect to its return and the investor performance, he ended believing that he took wrong decision. The initial capital keep decrease due to sell asset in loss and booking small losses, at the end he left few capitals than what initially investing. The investors starts losing hope from the market.

This is where investor look his overall performance and start thinking like if he could hold instead book small loss or buy at specific point then he would have good return or at least able to sustain in the volatile market. Such things investor should consider before investment.

Incident where significant FOMO (fear of missing out) or FUD (fear, uncertainty, and doubt) impacted the price of the STEEM token. Discuss how this sentiment influenced trading behaviors and the price of the STEEM token. Also suggest strategies that STEEM investors could use to avoid making decisions driven by these emotions.

The bad news gets spread faster than the good news. Questions and complaints on social network that lead to spread rumors quick which cause others to move to the incorrect direction.

During the hard/soft fork of Steem there were numerous news were published on/against Steemit, Steem witnesses, Tron founder Justin Sun, also the Binance CEO Changpeng Zhao (CZ) was involved in many comments during the hard/soft fork of Steem.

One of the incidents early 2020 was the Hive user send Threats to the Steem Witness stating threatening which later become dangerous and gets out of control due to which the Steem witness step down. It was also mentioned that some other witness received similar threats due to which many other Steem witness were also decided to step down.

The opposition group were claiming different. However, there was no official statement or comment released. The Binance CEO Changpeng Zhao (CZ) was in support in fork. The news was starting spread which affect to the Steem price, we can see below.

_{STEEM/USD Technical Chart Example.}

During the discussion of the steem fork, we can see in the above chart that how the steem price was dump and pump due to effect of the various ongoing news/tweets. Such ups and downs in the price movement can make fear, panic or greed emotions.

Strategies that STEEM investors could use to avoid making decisions driven by these emotions.

• Steem investor should avoid making decision based on tweeter, Reddit comments as such discussions can creates panic situations and may influence you to sell at early stage or buy on delayed.

• During volatility caused by comments, news, the STEEM investor should always look for official statement or the tweet, Reddit before making decisions.

• STEEM investors having basic understanding of technical chart can refer the technical charts that explain well when you should in or out based on Support and Resistance.

• STEEM investors who’s having Steem Power on Steemit should avoid power down during the panic situation caused by such FUD.

What Is “Buy Red and Sell Green” Strategy? A Strategy that could be applied effectively and psychological challenges which investor might face while applying this strategy current market Downtrend and Recovery.

In Stock/Crypto Market mostly the technical charts use green and red candle wherein the green candle indicates good price (price moving uptrend) and red candle indicate bad price (price moving downtrend).

Normally investor look for uptrend to take an entry (buy) and then take exit (sell) in the downtrend. When using this concept most of us may have experience that after we take entry with few positive points the asset start moving down, it never come up again or take very longer time in which holding period unnecessary get increased. Similarly, when we exit at the downtrend market, then with few negative points the asset start moving up where we regret due to early selling decision and unnecessary book loss of few capitals when exit, such psychological challenges investor always faced. Never try to chase price in the market.

When market started moving down side there could be a various reason like financial, bank corrupts, business impact, government decisions, changes in taxes, with such reason the market gets impacted and it start moving down. When a particular asset or due to a specific asset a particular sector gets impacted the other assets with the same sector or category also start moving down even there is no issue with their business or they are not that much badly affected with the changes like mentioned above.

During downtrend volatility market a psychological challenge is the investor start selling their assets even they sell that asset which is not really impacted.

In the stock/crypto market with reputed assets, I like to say that The Things That Go Up Will Down and Things that Go Down Will Up, this is where “Buy Red and Sell Green” strategy can work. Buy assets when market is down and Sell assets when market Up. During the downtrend instead of fear we need to understand that we get assets at some discount price, so having quite good technical knowledge can get good opportunity to invest/buy during the downtrend market.

Similarly, when you have assets in holdings and market is moving up, understand that not every company is doing extraordinary. The reason mentioned above, the couple of them can be a reason for entire market moving upside. Not every asset will become a Bitcoin or Ethereum, talking about Indian Stock Market so not every stock can become MRF (currently most expensive stock in Indian stock market trading at Rs. 1,26,300.00/$ 1512.65). When market is uptrend, this is the opportunity when your invested capital giving you 100% or 1000% returns, instead holding more and losing some % if market take reverse, good to sell and wait for the downtrend. This is applicable when entire market is up/down or a specific reputed stock/crypto is up/down.

We will see in some below chart examples how “Buy Red and Sell Green” strategy can be look like and how can we implement it.

_{Technical Chart Example, Buy Red and Sell Green strategy - 1.}

The pointers levels with tag buy/sell are just an example. The technical chart above is for Binance Coin (BNB) from 2021 to 2024. We can see instead of investing in uptrend when asst price is already high, it is good to wait for downside and then do an investment/buy. Also, we can see at the point of up and down the price levels are not the same, here we need to understand assts price is not be the same always, so instead of chasing price you should always look for the % that you are getting in returns or set expectation that how much do you want and once that is achieved you should sell instead of greediness that it may go more up and more return can get.

If we see a same technical chart above with Buy and Sell as per the normal psychology that investor commonly have, then we can see a picture like below.

_{Technical Chart Example, Buy Red and Sell Green strategy - 2.}

The pointers levels with tag buy/sell are just an example. Normal investor psychology, we take an entry in the uptrend, later we can see how price is moved to the downside which create lot of fear and panic situation, Here, the invested capital start decreasing just later after you take an entry, emotions during this time does not give you more time for the second thoughts. After entry, commonly you believe market but does not look the history and current valuation of asset (overvaluation/undervaluation).

For “Buy Red and Sell Green” strategy, I would like to show the most recent example below from the Indian Stock Market, Nifty 50 Index.

_{Nifty 50 Index Technical Chart Example, Buy Red and Sell Green strategy - 3.}

Currently, it’s a big election phase in Indian (Prime Minister). As mentioned above the reason that could affect market, election is also one of them. In the above chart, we can see how market was drastically falling around 3000 points in just one day and very next day recovery happened around 1500 points. Many investors may have trap in this phase, the investor who took entry in between uptrend has lose assuming market remain up. On the other hand, who sell at around low level are now regret for taking early decision or unnecessary booked lose due to fear of further losses.

In the conclusion, it is very hard but important is to control psychology, emotions while investing in the stock market. Do proper research before investing hard earned money. Referring forums, dissection’s, tweets, news, expert reviews are good to understand overall market sentiment, emotions but you should not take investment decision based on such source’s recommendation. Learn some technical strategies and their success rate that can help you to understand movement and valuation of market, asset and also help you to control on emotions. Basic understanding about market can also help you to make investments and book return at right time.

_Disclaimer: _{The information provided in this blog is for educational and informational purposes only. It should not be construed as investment advice or a recommendation to buy or sell any securities mentioned. Investing in the stock and crypto market involves risks, including the potential loss of principal. Readers are encouraged to conduct their own research and consult with a qualified financial advisor before making any investment decisions. The author of this blog is not liable for any losses or damages arising from the use of the information provided herein.}

Author,
@steam4u
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