Masses drive the market: the psychology of bull and bear

It is the constant intraday stock market tug-of-war between bulls and bears which drives the market. Whether the market would rally or decline depends on how the bulls and bears behave. Irrespective of what your style of trading is, as a trader, your goal should be to realize how much power bulls and bears hold in the market. You also need to be able to predict which one of the two would take the lead in the future so you can plan your trades accordingly. Visit mex.ae

In this piece, we’re going to see how market psychology and behavioral finance steer bull and bear markets.

The balance of power

You can have different perspectives about the market. One is to see it as an unmanaged crowd that aims to determine the economy’s mood. Another point of view is to look at it as a space where optimists (bulls) and pessimists (bears) are establishing the market’s sentiment which in turn generates returns from a good trading decision that could yield long-term results. 

But one should understand that the market crowd includes different kinds of people. Every individual in the system is susceptible to conflicting emotions. Be it optimism or pessimism, hope or fear, an investor could be going through these emotions at any point in time. When you make a trading decision, your aim should be to overcome these emotions and analyze the crowd's sentiment. 

A long-lasting bull market in a financial instrument such as a commodity, currency, or equity might make people feel that a trend is unstoppable. This degree of optimism makes people go over and above to acquire the object at the center of attention while lenders compete to keep this going. 

Gradually, fear grips the investors who realize that the market may not be as good as they believed it was. Unsurprisingly, the market nosedives, and people begin to panic sell. This makes the market fall further to a level from which the market recovers in years! 

Herd behavior

The secret to a widespread phenomenon of such a level is in the crowd’s herd mentality. It affects rational and composed traders when they see all of their peers reacting in a certain common way to the market. The ones who have observed human behavior over the course of time have realized that missing out on an opportunity affects people more than losing their own money. At the core, the FOMO builds up when everyone around you, be it your friends, relatives, and neighbors appear to be making the riches, while you’re not pocketing as much. It’s human nature to want to belong to a community where people have a shared culture and socioeconomic rules and customs. That said, people continue to value their individuality and are responsible for their own well-being. Investors could sometimes be tempted to give into the herd mentality while purchasing at the top of a market rally or exiting the market in a sell-off. Behavioral finance associates this behaviour with the natural human tendency to be affected by societal influences which leads to the fear of being alone or left out. 

A strong leader amongst the crowd

Another factor that motivates the crowd is our inclination to look for leadership in where the majority lies or perhaps in certain important individuals who are the ones swaying the public opinion. These are the investors who have garnered a reputation for their ability to predict the market’s future precisely. When the times are not certain, which could be anytime since the market is full of choices–strong market leaders are the ones who have the ability to give the market some direction with their expertise and experience. This overpowering persona of the market guru is an instance of a person most people consider the know-it-all kind of a figure. But when the market changes its course, folks like these are among the first ones to fall from glory.

Choices

Given how powerful the crowd is and the way trends have this tendency to carry on for long periods because the crowd thinks the trend is strong–it can often leave people in a dilemma. The pressing matter then is–whether to go where the crowd takes you or listen to your own analysis and rationale to stick to your own predictions. You can in fact solve this problem easily: you go with the crowd when their move aligns with your analysis and bring down your losses by exiting the market when the crowd’s going against your deductions. Remember that going with the crowd and moving against them has its own set of challenges.

Risk of following the herd

In order to be successful in the long run in the world of trading, one should have a solid, unique trading system that’s made up of rational analysis and is implemented sincerely. It is up to the individual trader's preference when it comes to chart and technical analysis. If market reality is in sync with the elements of a trader's system, you can have a great, profitable career in trading. 

Hence, the perfect situation for a trader is when their own calculation and analysis is in harmony with the public sentiment to ensure profitability. This is the point when traders at large validate your analysis which makes room for you to earn a lot of profit in the short term. Know more multibank group

Of course, there would be certain situations when the crowd's behavior would vary from what your system suggests. That would be your cue to take the hint and leave the market. It might seem hard to leave a winning position since it can be easy to doubt your decision when you’re earning, even if your own analysis tells you to exit. The temptation to stay for a little more profit can be immense. As we always mention, it is not a good idea to move away from one's own system for short-term profits. Keep the larger picture in mind and stick to your strategy with proper discipline.