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How collective psychology affects the markets

In the previous post, we saw the impact of individual psychology to an individual’s portfolio. Now, we will see the impact of mass psychology on the market.

Introduction

Mass psychology is as important as it sounds. It is what moves the market. The efficient market hypothesis is an example which shows the markets reflect the truth at any given point of time. However, the truth that they reflect are essentially the collective decision of every single trader & investor in the markets. If the majority of players in the market are bearish, the price will go down. Likewise, when the majority of players in the market are bullish, the price will go up.

Evaluating the psychology of crowds is key because that lets us determine the general direction of the markets. There are several emotions that are present in the market and your job as a trader is to gauge where these emotions are leaning. You can then take a position in the markets that could make you a profit.

Rise and Fall

A prominent example is the Tulip mania in the 17th century that saw extraordinarily overpriced tulips. The general sentiment was the prices would never fall and people kept on buying tulips at an ever growing premium. The prices eventually fell when the bubble burst. Too bad, you could not short future contracts of Tulips back then.

However, the current markets do help you in this matter. In the 2017-2018 Cyptocurrency bull run, a minority of the market were aware that the absurd price increase in Crypto was due to the psychology of the collective that believed the price of Bitcoin would never fall. However, the smart investors and traders were aware that a bull run is always followed by a bearish phase. This is true for all markets globally. 

It is impossible to catch the top, the markets are subjective and the smart investors wait for the right time. This is what you must do in such scenarios. Wait on the sidelines and take your positions with a defined risk – reward ratio.

Wisdom of the Crowds & Whales

A prominent driver in the psychology of the masses is being left out, or in crypto terms – FOMO. Fear of Missing out. The FOMO of the crowds sometimes outweigh the risks associated with such investments and trades.

In such scenarios, key opinion leaders globally also tend to drive the overall sentiment of the market. A scenario of this would be the controversial tweet by Elon Musk caused quite the problem. The SEC eventually fined him. You can find a lot of people on Crypto Twitter like John McAfee, Pomp to name a few that have strong views about the general direction of the market. The main price fluctuations in the crypto markets are mostly caused by whales & anonymous institutions that decide to buy/sell in huge quantities causing the market to trend in a direction for a specific timeframe.

How to win over the markets

The best way to determine mass psychology of the markets is to always trade with the trend. Trading against the trend is what institutional markets and whales can afford to do. 

Your analysis can depend on the countless technical analysis strategies that work while trading. A couple profitable strategies like trading with volume and Elliot Waves might help you have an edge over the market. 

Sign up now at https://bbod.io to access plethora of altcoin perpetual futures contracts. Trade with up 50x leverage to maximise your profits. But also take into account the Mass psychology of the markets before taking a trade!

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