Market Psychology and Market Tops

2020年12月7日

Successful traders are cognizant of the three phases of a market cycle, namely accumulation, public participation, and distribution.
The first stage of a bull run is the accumulation phase – this is where the smart money is buying. After a large, long-term sell off, the market bottoms out and it starts moving sideways. This is when the successful investors buy. They recognize that the stocks or cryptos are on sale and it is time to buy. Successful traders are patient and don´t mind sitting on the sideline waiting for the right opportunity. They know it is impossible and dangerous to “chase the market.” They buy when the risk is low and the chance of future advance is very high. Baron Rothchild once said, “The time to buy is when there´s blood in the streets.”
Unsuccessful traders get in when the market already has been advancing and the risk/reward ratio is not in their favor. They are greedy, ignorant, and most importantly: easily influenced by what they read and see in the media and on youtube. Rather than doing what is hard and necessary for long-term success, they are attracted to “get rich quick schemes” and alleged trading gurus. A quick check on YouTube reveals the following headlines:

“EXTREME BITCOIN BREAKOUT IN LESS THAN 24 HOURS!!!!!!!!”

“WHY Bitcoin Will Succeed And Make You Rich”

“BITCOIN GOING TO $100,000 IN 2021, BUY NOW BEFORE IT'S TOO LATE!”

“LAST CHANCE TO BUY BITCOIN UNDER $20,000! “

“NEW BITCOIN DATA: Bitcoin Following A Path To $100,000 [Watch Before 2021...]”

“99.9% CHANCE BITCOIN GOES TO $1,000,000!!”

“350k BITCOIN IN 2021? ALTCOINS LIKE CARDANO & LITECOIN ON THEIR WAY TO $1 TRILLION MARKET CAP?”

Smart money isn´t influenced by such hype, hysteria, and improbable predictions. It is also significant that the producers of these videos more often than not are trying to sell various products to the watchers and use obvious click-bate and deceptive titles to attract viewers, indicating that trading does not generate enough revenue for them.

The next phase is the public participation phase. When it starts you want to be in the market. This is when the market advances. At this time, optimism begins to grow. Pessimism is at its lowest at around the accumulation phase.

The last phase is the distribution phase. This is when smart money starts selling while the greedy, uninformed novices hold or buy and believe the stock or crypto will go to “the moon.” Optimism is at its highest at this point. A market top can roughly be predicted by gauging the hysteria vs. pessimism of a particular market. In regard to bitcoin, we see obvious signs of extreme optimism. This is a strong indication that the market has reached its apex or at least is very close to it. A market top is furthermore characterized by a decline in volume, a lack of momentum to push prices higher, sideways action, and higher selling than buying volume; the stock or crypto starts moving sideways and eventually “roll over.”

My conclusion is simple: It is extremely unlikely that smart money is buying now – they are prepared to sell or is already selling. Buying now is extremely risky - bitcoin has increased from about $3800 to $20,000 in a short period of time, hysteria is evident, and the market has started to move sideways.

Most likely, we are watching a market top and a sharp decline will soon happen.