The Role of Market Cycle Psychology in Trading
When the first few cases of local community transmission of COVID-19 compelled the Philippine government to impose an enhanced community quarantine nationwide, one of the things that transpired at the onset of the lockdowns was the vast stockpiling of food and grocery items. In most cases, the demand exceeded the supply, because the demand was greatly exacerbated by the unprecedented urgency of the situation.
This is just one example of how our response to our perception of a situation can, in fact, tip the scales of a market. The decisions we make when it comes to buying and selling are, at their core, the result of our personal choices. As a bigger community, factors like culture and prevalent economic status influence these personal choices which, in turn, influence our attitude and behavior when it comes to the goods and services we purchase. This extends to our investment choices and the way we handle those investments.
The Psychology of Filipino Buyers
All buyers’ decisions revolve around beliefs, feelings, and behavioral intentions, and these aspects of decision making for the Filipino buyer are further influenced by our culture, heritage, and community, as a studynotes.
Two things that we value the most in buying or selling would be the affirmation and promotion of goods and services by the people around us, like friends and family, as well as the convenience of having all these products presented in one place, like a one-stop-shop. Hence the presence of large shopping malls in most urban centers around the country. Looking around in shopping malls also highlights the value of items on sale, which we often prefer to purchase as much as Western brands.
These may be the reasons why investments may have yet to become more mainstream in our society and also why there is a lot of promise and capacity for a unique Filipino culture of trading beyond traditional goods and services. Most would wait until it has become more socially acceptable to set aside portions of monthly income for investment, but the variety of platforms and options presently gives prospective stakeholders from all walks of life the ability to invest according to their buying power.
Filipino Psychology and Market Cycles
Experts and analysts have long proposed that the cycles of growth and decline in markets are directly related to the emotions and thought processes of their stakeholders, collectively named the market sentiment. While subjective, such sentiment—composed of individuals and the overall group—can be positive and negative and thus affect the trends of the market, whether bullish or bearish. A bullish trend or a bull market is defined by strong activity and the rise of the prices of assets, whereas a bear market refers to the opposite, a downtrend.
Market cycle psychology comes into play when investors act on positive and negative sentiment, which further drives both growth and decline.
The cycle could be read in four stages.
This is the period of expansion where initial investors and early excitement of new products drive the market up.
When traders jump on the bandwagon and begin to buy in large amounts believing that the market will continue to rise, this begins to form a financial bubble that could go on for an extended period of time. As such the belief and “hype” drives this growth almost regardless of the actual value of the products and assets.
Signs of Decline
During the downtrend, because investors would refuse to sell thinking that the decline is only temporary, their losing positions are also held for some period of time until the trend is recognizable enough to indicate the decline of the value of their assets.
As the downtrend becomes more evident, traders then sell their assets at a loss as the prices drop. However, such widespread sale becomes an indication to other investors that the market will soon stabilize after the period of volatility and excitement for the next uptrend picks up again.
Therefore, it is of utmost importance that prospective investors should always study the market, its trends, the products, and historical data to optimize the money that they are allocating towards desired growth. While we cannot discount the buying and selling choices of our communities as well as our own ability and resources, we can be strategic with our individual movements and exercise proper risk management.
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