Psychology of a market cycle
Meet the 10 stages of a market cycle
Stage 1: Hope
‘Hope’ is the first sign of recovery after “the serious disbelief” stage (see Stage 10 – last in the cycle). The market is showing positive signals for a new bull run. However, investors are still careful. Small amounts of money are being invested.
Stage 2: Optimism
Optimism defines the second stage where prices are rising as new capital is being invested. This stage is reached when the market has been in a sustained uptrend for many months. The market has a positive outlook, and therefore many investors are comfortable investing money at this stage.
Stage 3: Belief
As time goes by, the optimism turns into belief. This stage of ‘belief’ is defined as one of the first signs of a bull market. Investors seek new opportunities in the market.
Stage 4: Thrill
Searching for alternative investment options can be a good idea if you know what you are doing. People easily get caught up in feeling thrilled as they select random projects because they believe nothing can go wrong. Everything is running up.
It is important to keep track of your excitement level as being overexcited is a clear sign for closing a position.
Stage 5: Euphoria
The end of a huge run-up is defined by euphoria. Human emotions are taking over, nothing can stop us now, it’s all puppies and sunshine. There is only one direction – up. In this phase of the bull-run, the “stupid money” jumps onboard the train, this kind of money is the first to leave. At this stage, expect the press to report about the bull market, and you get the “meet the new young millionaires” articles. At this stage, the smart money is taking profit throughout the parabolic movement.
Stage 6: Complacency
At this stage, the bull-run is stagnating as people’s lofty expectations are not met. The first signs of a reversing market start to pop up. This is a very dangerous stage as people think the complacency stage is just a short break before the bull-run continues. Many investors are ill-prepared for the upcoming market reversal.
Stage 7: Anxiety
Finally, people become aware that this bull-run can’t go on forever. They see the market is reversing, losing value and money. The fear of losing lets traders delay the realisation of a loss, which then turns into much greater losses.
Stage 8: Denial
However, the value of your investments continue to drop, and many investors refuse to sell hoping for an even bigger correction upwards. Investors act defensively as they are convinced they have invested their money wisely. However, generally, almost no coin is able to come out scot-free. When there is rain everyone gets wet.
Stage 9: Panic
The market continues to decline as a bear market has become the new reality. Investors try to save their funds by desperately selling their investments, as they are afraid to lose everything. Often we see a major sell-off happening at the panic stage.
Stage 10: Depression
People lose all hope and their belief in the existing market conditions. The market is at its lowest point in the current cycle (as will be noticed afterward). This is where stabilisation and consolidation start building again. This stage can take a very long time.