The core idea of investing is simple, buy low sell high. Everything is based on one question: “When will markets move?”. The answers you might get can vary drastically. Some will argue that you should learn how to analyze projects fundamentally and others will recommend technical analysis. Few investors and traders ask themselves: "Why do markets move?". In this post, I will demonstrate the importance of understanding "why" instead of "when". You will realize that these questions are two sides of the same coin. If you don't understand one you miss half of the truth. It also might help you make more money! 🤫
Boring Disclaimer 🤭: I am not a financial advisor. This post doesn't contain any financial advice even though it looks like such. I do not warrant any predictions or results presented in this post. Financial markets are chaotic systems. Anyone expecting guarantees shouldn’t follow this blog. ☑️
A Story About Habits
Everyone who tried becoming a better human by changing their habits knows that it's extremely difficult building new and removing old ones 🏃♂️. Amusingly, it is something all humans have in common. We tend to linger with our past routines. Be it a smoker who tries to stop consuming cigarettes or as simple as a lazy person who wants to do more sports. Bad habits stick to us like glue.
Habits are not only specific actions such as flossing. Your whole life is routine. Your media consumption, eating behavior, bedtimes, thought patterns, and everything else is a habit. Sit down in a quiet place and reflect your daily actives. Countless habits will reveal themselves, healthy and destructive ones.
This human trait is key for understanding "Why do markets move?". 🔁
Financial Markets Trapped In Habits
Humans buy and sell an asset. When the demand is high the value of an asset rises and vice versa. Most often they don't exchange their assets based on sober decisions but they follow emotions, such as fear ❄️ and greed 🔥. The price moves in a cyclical pattern that pursues all different types of emotions.
How Textbooks Describe This Phenomenon
The market completes one whole cycle when it ranged from despair to greed. After one cycle the next one begins. This diagram illustrates this concept neatly:
a complete market cycle and its emotions
The goal of every investor is to recognize the current phase and predict the next one. Everybody should want to be the "Smart Money", people who buy an asset and predict future potential when the majority of investors ignore it.
The Four Stages Of A Market Cycle
There is also an alternative method of describing this phenomenon, the Wyckoff market cycle. It has a simple structure: After extended sidewards price movement (accumulation), price marks-up. At a certain price level, investors begin to take profits (distribution), and then the price declines. After an extended value loss, the cycle repeats.
Wyckoff market cycle
Try to buy when you detect an accumulation-phase. Sell your asset when it has entered a distribution phase. 🐦
Real-World Example Bitcoin
Viewing a chart with these models doesn't only work in theory. Historically, it proved itself valuable a vast number of times. Now, I am going to show you how a market cycle applies to bitcoin.
Please note: The real-word doesn't follow the theories one to one. There will always be some variations. However, the fundamental ideas are the same.
Bitcoin's market cycles since 2011
As you can see in the diagram, Bitcoin follows the theory nearly perfectly. There are always the 4 stages and every emotion present. ✔️
What You Should Take With You
Savvy investors recognize this bigger-picture and take advantage of it. They analyze the present emotions and they try to detect the stages of a market cycle. I invite everybody to do the same! Apply the theory to your favorite asset and develop strategies around it. 🤺
If you enjoyed reading and you know somebody who could benefit from this guide, please share it🦜. I would also appreciate following me 🤝. On my blog, I weekly publish simple but effective guides. I have recently written about a profitable strategy which implements the concept of fear and greed effectively ("How To Invest in Bitcoin With Ease, Now!")!