24th March 2021 marks the anniversary for Nifty @ 7500. In honour of the historical day, we write today on market psychology for the week.
The equity market cycle is driven by greed and fear. The market cycle has peaks and troughs just like a sinusoidal wave has.
The same time last year was a peak – one of extreme fear. Greed and fear in the markets can be classified into the following four types
- Fear of losing capital
- Fear of missing out
- Greed for making more profits
- Greed for protecting profits
A longer-term investor is agnostic to all the four phases mentioned above. For a more opportunistic person viz trader, having an understanding of these phases is important. There are two schools of thought here:
One, which says to act contrary to the sentiment. This basically means ‘buy into the fear and sell into the greed’.
Two, which says ‘trend is your friend’. This basically means never oppose momentum and go with the flow.
An average trader finds it difficult to decode the current phase of the market or decide whether to go with the flow or be a contrarian. The whole concept of technical analysis makes this cycle even more interesting.
The core principles of technical analysis say that one should have a defined entry, exit and stop loss to every trade.
The assumption in technical analysis is that the market will keep repeating the patterns it has gone through in the past. If you take a minute to think about it, the assumption is a fair one.
The forces of greed and fear are just like the north and south pole of a magnet. When the behaviour of magnetic forces remains predictable over time, so should the behaviour of market forces be.
In the end, human emotions of greed and fear are eternal. If you can identify the phase through which the market is passing, making profits becomes easier.
Combining technical analysis with a fair understanding of greed and fear can do wonders to your trading P&L. The ‘fear of missing out is the strongest force among the 4 phases mentioned above.
This fear gives wonderful trading opportunities on the pullback. Eventually every ‘fear of missing out’ gets transformed into the ‘greed for making more’.
Nifty 50 crossed the 50-day moving average successfully in May 2020 @ 9200. If one had spotted this as a breakout opportunity, there was a handsomely profitable trade opportunity.
The point we are trying to make is that if technical analysis is interpreted in combination with market emotions, results are likely to be better than interpreting technical analysis in isolation.
Coming to the current phase of the market, ‘fear’ is definitely low today. What we are left out with is ‘greed’. If we must predict the phase of greed that we are going through, I would like to think that we are in the ‘greed for protecting profits’ phase.
This phase is an interesting one and likely to give opportunities to sell higher and buy lower based on technical analysis. The Nifty 50 is at 14500 and we are still almost 90% above the panic low made in March 2020.
If your technical analysis system allows you to map this greed on your charts, you are likely to do well in the coming weeks as a trader.
As I have said earlier, a longer-term investor is above the ‘fear and greed cycle’. S/he knows that these are passing phases of every market and giving too much attention to these phases is not her/ his interest area.
Did you finish reading this article and still trying to figure out who you are: investor vs. trader?
I rest my case by saying: It is good to be a saint and stay above the emotions of greed and fear. However, there are cons to be a saint in a world full of opportunists.