Market Appreciation – Mass Psychology to be a Successful Trader: Trading is not only a matter of the decisions you make, it also has to do with the decisions made by other market participants. When you work with financial instruments – be it Forex, contracts for difference, crypto currencies or anything else – you certainly need to know what other investors think. Only because your degree of success depends deeply on the behavior of the market in general.
The performance of any financial asset is affected by the people who use it to trade. Market sentiment is the prevailing attitude of traders. The trend never creates itself, rather it is the product of many trades carried out simultaneously by a large number of traders.
If the number of people who want to buy an asset is greater than the number of those who want to sell it, the sentiment is said to be bullish. If the opposite occurs, the sentiment is considered bearish. During periods of bullish sentiment, the asset price rises. When sentiment is bearish, the asset price falls. What advisors mean when they say «follow the trend» is that you should buy when the market sentiment is bullish and sell when the sentiment becomes bearish.
Periods of bullish and bearish market sentiment can be clearly seen on the BTC chart.
An extensive list of factors can influence market sentiment: important economic and political news, past performance of that asset, future forecasts and statements made by industry gurus. Just a glance at the price chart is sometimes enough to identify the prevailing sentiment. However, it is usually advisable to analyze the whole situation. Indices – such as the Global Dow, the NASDAQ Composite, the S&P 500 – are used to evaluate market sentiment.
Okay, the concept of market sentiment is clear, but why would I want to use it? As already mentioned, financial psychology plays an extremely important role in the way markets operate. Both positive and negative trends are affected by rational factors and emotions alike. But when there is emotion, there is also a probability of error. A mistake that you, as a trader, can take advantage of.
In his book ‘The Intelligent Investor’, Benjamin Graham writes that during recession people tend to overestimate their losses, just as they overestimate potential profit during economic boom times. What is the main reason for this? Excessive emotions.
Therefore, you can use the ‘Fear and Greed’ Index to monitor periods of bullish and bearish market sentiment in the equity market. It is both informative and easy to use. When the index is close to 50, traders are more likely to make sound and rational decisions. Most of the better known companies are quite expensive.
When the index drops below 50, fear begins to spread throughout the market. The chances of some traders selling their assets at a discount increase. It is generally considered a good time to buy. When the index price is well below the 50 limit, the market is probably overheated.
Investors, reckless and greedy, will buy even the most dubious stocks at a premium. Market sentiment, therefore, can be used by a smart investor to buy low assets and sell them high.
After all, behind every market there are ordinary people. People who have emotions, make mistakes and follow the crowd. Considering what they think – as long as you trade with them – seems like a good idea.
However, you must also remember that trading is more than the ability to follow market sentiment. Using market sentiment can be very helpful, but by itself it’s no guarantee of success.