So it is understandable that people are searching for alternatives to the traditional “rat-race” system that makes them unhappy. Regardless of the reason for their investment, the investor’s risk profile, or the open interest, the mases’ psychology can directly impact financial markets and their price fluctuations, even if it’s a Bull or Bear Market.
What is the market’s psychology referring to?
The term is often used in the news or by analysts to explain some market movements that retail investors directly influence. Depending on the market sentiment, retail investors can behave based entirely on emotions and feelings like fear, greed, fury, or unrealistic expectations. People want to invest their hard-earned money in assets that will multiply their investment in the longer term. No one enters a market with the intent of losing money. Even if bad trades are unavoidable when we’re actively trading, staying solvent and profitable at the end of the month is essential.
Too much optimism can determine retail investors to purchase assets at any price, thinking that if the price has continuously grown for six months, it will continue growing – while pessimism and the fear of a Bear Market drawdown will make retail investors sell for a loss. It may seem unimportant if we sell, let’s say, one Ethereum on the market – but if a lot of retail investors think the same, the price of ETH will be influenced by sellers.
How can investors’ psychology affect the market?
When people let themselves be taken away by their emotions, they may take irrational and dangerous actions, especially regarding money. Affecting the market is the main reason for the Fear & Greed Index to exist – the indicator that can say a little about market melt-up and drawdowns and how rational these are. Of course, such an indicator and reading the markets’ psychology are actions that must be carefully done along with other indicators or analysis types. But on a general note, if the reading is done right, we can guess if certain assets represent an opportunity (or not) – and if their price is above or under their expected value.
What are the most dangerous biases that we need to be aware of?
A bias is an inclination or tendency based on an unmotivated vision and prejudice. Our brain works simply and logically, but sometimes it sends us wrong signals based on our emotions and feelings. So it’s crucial to become conscious of the things that form the base of our thinking. In investors’ psychology, there are some well-known biases. Many prejudices sprout in our minds when it comes to investment and money, but some of the most important ones are:
- Following the herd and its tendency: The group and the group’s acceptance are among the most critical factors for humans because we’re social beings. This bias is very dangerous because it can be used as a strategy against retail investors. Following the trend, the herd, and its sentiment are essential because we can realize certain things. Do not blindly follow the masses because most retail investors lose money in the trading business.
- The Confirmation Bias: The bias discussed above might be tied to the confirmation bias – that appears when we’re searching for things that only give the answer we’re searching for, without considering that it might not be accurate. When we’re right, dopamine kicks in, and we feel good about it. It’s simply how we work as mammals. This is a highly nocive bias when market signals are not accurate, but we still prefer to follow what fits our beliefs.
- The Risk Aversion: In simple terms, people do not want to lose money, which may quickly lead to selling assets at a loss. Maybe we’re all familiar with this thought: “I’d better sell my ETH at $1,000, even if I bought at $2,000. It’s heading lower, and I’m scared“. We must stay rational if we do not want to lose money. Remember that risk aversion could also be played in both directions: “I’d better sell now, at $2,000 per ETH, while I’m still in profit with the ETH I bought for $1,500“. For any investment or trading, we need well-developed plans and tactics to avoid such mistakes.
A strong mentality and discipline is required for traders that want to take their experience to the next level. Traders are able to use proper risk management on IXFI’s platform – one of the most important aspects everyone should be aware of.
Disclaimer: The content of this article is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not take into account your individual needs, investment objectives and specific financial and fiscal circumstances.
Although the material contained in this article was prepared based on information from public and private sources that IXFI believes to be reliable, no representation, warranty
