零点课堂 | The Psychology of Market Cycles（2）

How do emotions change during market cycles?

Uptrend

All markets go through cycles of expansion and contraction. When a market is in an expansion phase (a bull market), there is a climate of optimism, belief, and greed. Typically, these are the main emotions that lead to a strong buying activity.

It's quite common to see a sort of cyclical or retroactive effect during market cycles. For example, the sentiment gets more positive as the prices go up, which then causes the sentiment to get even more positive, driving the market even higher.

Sometimes, a strong sense of greed and belief overtakes the market in such a way that a financial bubble can form. In such a scenario, many investors become irrational, losing sight of the actual value and buying an asset only because they believe the market will continue to rise.

They get greedy and overhyped by the market momentum, hoping to make profits. As the price gets overextended to the upside, the local top is created. In general, this is deemed as the point of maximum financial risk.

In some cases, the market will experience a sideways movement for a while as the assets are gradually sold. This is also known as the distribution stage. However, some cycles don't present a clear distribution stage, and the downtrend starts soon after the top is reached.

Downtrend

When the market starts to turn the other way, the euphoric mood can quickly turn into complacency, as many traders refuse to believe that the uptrend is over. As prices continue to decline, the market sentiment quickly moves to the negative side. It often includes feelings of anxiety, denial, and panic.

In this context, we may describe anxiety as the moment when investors start to question why the price is dropping, which soon leads to the denial stage. The denial period is marked by a sense of unacceptance. Many investors insist on holding their losing positions, either because "it's too late to sell" or because they want to believe "the market will come back soon."

But as the prices drop even further, the wave of selling gets stronger. At this point, fear and panic often lead to what is called a market capitulation (when holders give up and sell their assets close to the local bottom).

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