What most people forget when starting to look at investing is how much the emotions of fear and greed will play an important role in the behavior of stock / crypto prices , economic statistics, valuations, earnings, and . Short term these two emotions are just as important as any other factors or even more so .

This post will go through the role fear and greed play in the psychology of the market, and how investors can use it to their advantage . One of the greatest investors in the world uses this psychological techniques :

What is fear and greed?

For as long as investing has existed, it has been clear that price movements are not always rational, they are more emotion playing a key role in the decision making of investors. Of all the emotions that can affect the prices and other assets, fear and greed are the most unique .

Wen greed dominates, investors are concerned with more returns . Confidence is high, and headlines good news. This is also when the prices of riskier assets outperform conservative assets.

When fear dominates, investors are concerned with preserving capital. Investor confidence is low, and headlines of news are bad . This is when safe haven assets like US treasuries,gold , Bitcoin often outperform other asset classes.

How do emotions affect the stock market?

If you look at the price chart of any crypto / stock market index, you are likely to notice that volatility is greatest at major highs and lows. Very often these highs and lows don’t correspond with major changes in the economy or corporate profits either. Increasing volatility is a sure sign that emotion, particularly fear, is playing a part in the decision-making process of traders. Fear is not only associated with downside – the fear of missing out(FOMO) can drive prices to irrationally high levels.

I’ll write part two tomorrow on how to utilise this and