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Fear and Greed cycles. Market psychology. How to properly analyze oversold and overbought markets?

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By Yaroslav Krasko Updated November 21, 2022
BikoTrading Academy

Hello. Most likely, you have often heard about psychology, emotions and their huge impact on our daily lives. It is no secret that during peak emotional periods, be it anger, fear, joy, euphoria, most find it difficult to control themselves, which leads to ill-considered decisions and actions. Let's tell you a secret, it's not just about everyday life, it's also directly related to financial markets. If you want to make money in trading and investing, you should definitely understand this issue. 

Key issues:

  • What are the cycles of fear and greed?

  • How exactly do emotions affect the cryptocurrency market?

  • How to identify the extreme values of fear and greed in the cryptocurrency market?

Cycles of fear and greed, what are they and how do they affect the cryptocurrency market?

The cryptocurrency market is a mechanism that was created by people and consists of a large mass of people. Emotions control people. In the financial markets, it is fear and greed.

psychology in crypto trading

 

In order not to fall into the trap, save your money and get the maximum profit, it is very important to understand what phase the market is in.

The picture below shows an example of the emotional cycle in financial markets. You can see that the markets constantly change from periods of maximum fear to periods of maximum euphoria, and so on. The period of euphoria is the best time to fix your profit, and the period of maximum fear, on the contrary, is a good opportunity to buy. If you are actively trading, it will help you determine the market trend and follow the trend, because the trend is what helps the trader to earn.

cycle of market emotions

Graphically, the cycles will look like this.

smart money in crypto trading

The chart shows that the big players (smart money) come in a period of silence, when the market is gradually growing and does not attract much attention from the masses. Then this smart money, which they used to buy, is sold to small players during the maximum excitement. Then there is a fall, the interest of ordinary traders disappears and everything repeats itself again.

 

 

Let's see how this happens with real examples and real charts.

Case #1

bitcoin cycles crypto

Case #2

crypto cycles

Case #3

why altcoins drop

You can compare and notice how identical these charts and cycles are. Understanding this fact, I give you 99%, you can start earning in the financial markets.

How to identify the extremes of fear and greed in the cryptocurrency market?

Additionally, at the end of this topic, I want to give you a bonus and show you how easy it is to identify market highs and market lows.

A large number of beginners are quite gullible, but in periods of parabolic growth they buy after the release of loud news, hoping to get rich quick. But you have to understand that the cryptocurrency market is quite manipulative and here are examples of what happens to the price after the release of such news.

Example #1 El Salvador buys Bitcoin 

EL Salvador buys bitcoin

Example #2 Tesla accepts Bitcoins

tesla buy crypto

Example #3 Shiba Inu in Time Square

Shiba Inu in Time Square

Similarly, the news works in the opposite direction. When there is a lot of negative news, it is a good signal that it is time to buy and the trend reverses.

bear market

Above, a Bloomberg study shows that periods with maximum mention of the Bear Market in the media have always been a good buying opportunity.