August 13, 2020

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Market Volatility Can Affect Market Cycle And Psychology

When volatility increases, the price range will widen, the volume is high, and more trading in one direction. For example, few buy orders when the market is down, few sell orders when the market is strong. At the same time, traders may be reluctant to hold positions because they know the market can change very drastically – turning profit into profit. A deeper analysis of market volatility implies that the probability of a market to decline will be higher when volatility is high, and low volatility is more common in a rising market. You may want to visit if you are interested in Volatility 75 Index.

There are many factors that cause market volatility, such as unexpected announcements from the central bank, company news, and unexpected company earnings reports. Even so, one thing that connects everything is the reaction caused by psychological factors experienced by every trader throughout the trading day.

When the market peaks, traders are satisfied with the trading results and feel that a favorable market environment will continue. Trading feels like the most fun job in the world, managing risk feels so easy, and choosing even profitable instruments is as trivial. In other words, traders begin to be complacent and ignore the danger signals.

The reverse side is the emotional stage when the market experiences a downtrend. Initially, there may be a feeling of denial, which then turns quickly into anxiety. Traders lose faith, thus changing or even ignoring plans and strategies because fear is so great, then despair and surrender.

The last period is when the trader reaches nadir. His suffering can only be ended by pressing the sell button, and sometimes the trader cannot think rationally. This stage is a classic example of ‘fear when others are greedy, and greedy when others are afraid’, the famous term from legendary investor Warren Buffet. At that time, the strong will accumulate, while the weak remain in liquidation mode.

Fear and worry are the two main fuels of volatility. Both are the real foundation of price action when volatility increases and can occur at any time span. Scalpers, day traders, swing traders, all experience it.