If you've ever asked, “Why is the market going up on bad news?” or “Why did it dump after great earnings?”, you're not alone.
Markets may seem logical—economic data in, price action out—but in reality, they’re driven by human emotion, crowd psychology, and reflexive feedback loops. The charts don’t lie, but the reasons behind the moves? Often irrational.
Let’s break down why markets are emotional—and how traders can use that to their advantage.
🧠 1. Markets Are Made of People (and People Aren’t Rational)
Even in the age of algorithms, human behaviour sets the tone. Fear, greed, FOMO, panic—all of it shows up on charts.
Fear leads to irrational selling
Greed fuels bubbles and euphoria
Uncertainty causes volatility spikes—even with no new information
📉 Example: The 2020 COVID crash saw massive capitulation. Then came one of the fastest bull markets ever—driven by stimulus and FOMO.
another example
📊 S&P 500 in 2020 with VIX, the S&P 500 crashed and the VIX went up, When the VIX (CBOE Volatility Index) goes up, it means that traders/investors expect a greater likelihood of price fluctuations in the S&P 500 over the next 30 days. This generally indicates increased fear as shown on the chart below
📈 2. Price Doesn’t Reflect Facts—It Reflects Belief
The market is not a thermometer. It’s a barometer of expectations.
When traders believe something will happen—whether true or not—price adjusts. If the Fed is expected to cut rates, assets may rally before it actually happens.
💡 Nerd Tip: Reality matters less than consensus expectations.
Chart Idea to visit:
💬 USD Index vs. Fed rate expectations (2Y yield or futures pricing)
🪞 3. Reflexivity: Belief Becomes Reality
Coined by George Soros, reflexivity explains how beliefs can influence the system itself.
Traders bid up assets, creating bullish momentum
That momentum attracts more buyers, reinforcing the trend
Eventually, fundamentals “catch up” (or the bubble bursts)
📌 Insight: The market creates its own logic—until it doesn’t.
😬 4. Emotional Extremes Create Opportunity
When markets overreact, they offer setups for rational traders.
Capitulation = Bottom Fishing
Euphoria = Caution
Disbelief = Strongest rallies
🧠 Pro Tip: Watch sentiment indicators, not just price. Fear & Greed Index, put/call ratios, or COT data reveal what the crowd is feeling.
Chart Example:
📊 Bitcoin 2022 bottom vs. Fear & Greed Index.. on the chart above the index score close to zero (RED) indicating extreme fear this was because in november 2022 crypto cybercrimes grew new level and investors lost confidence, these cyber crimes included the bankruptcy of FTX as the owners were allegedly misusing customer funds.
💡 5. How to Trade Rationally in an Irrational Market
a. Have a plan. Pre-define entries, exits, and invalidation levels.
b. Expect overreaction. Markets often go further than they “should.”
c. Use sentiment tools. Divergences between price and emotion are gold.
d. Don’t fight the crowd—until it peaks. Fade extremes, not momentum.
e. Zoom out. 5-minute panic means nothing on a weekly trendline.
🎯Nerd Takeaway:
Markets aren’t efficient—they’re emotional.
But that emotion creates mispricing, and mispricing = opportunity.
You don’t need to predict emotion—you just need to recognize it, and trade on the reversion to reason.
💬 Have you ever traded against the crowd and nailed it? Or got caught up in the hype? Drop your chart and your story—let’s learn from each other.
put together by : currencynerd as Pako Phutietsile
Markets may seem logical—economic data in, price action out—but in reality, they’re driven by human emotion, crowd psychology, and reflexive feedback loops. The charts don’t lie, but the reasons behind the moves? Often irrational.
Let’s break down why markets are emotional—and how traders can use that to their advantage.
🧠 1. Markets Are Made of People (and People Aren’t Rational)
Even in the age of algorithms, human behaviour sets the tone. Fear, greed, FOMO, panic—all of it shows up on charts.
Fear leads to irrational selling
Greed fuels bubbles and euphoria
Uncertainty causes volatility spikes—even with no new information
📉 Example: The 2020 COVID crash saw massive capitulation. Then came one of the fastest bull markets ever—driven by stimulus and FOMO.
another example
📊 S&P 500 in 2020 with VIX, the S&P 500 crashed and the VIX went up, When the VIX (CBOE Volatility Index) goes up, it means that traders/investors expect a greater likelihood of price fluctuations in the S&P 500 over the next 30 days. This generally indicates increased fear as shown on the chart below
📈 2. Price Doesn’t Reflect Facts—It Reflects Belief
The market is not a thermometer. It’s a barometer of expectations.
When traders believe something will happen—whether true or not—price adjusts. If the Fed is expected to cut rates, assets may rally before it actually happens.
💡 Nerd Tip: Reality matters less than consensus expectations.
Chart Idea to visit:
💬 USD Index vs. Fed rate expectations (2Y yield or futures pricing)
🪞 3. Reflexivity: Belief Becomes Reality
Coined by George Soros, reflexivity explains how beliefs can influence the system itself.
Traders bid up assets, creating bullish momentum
That momentum attracts more buyers, reinforcing the trend
Eventually, fundamentals “catch up” (or the bubble bursts)
📌 Insight: The market creates its own logic—until it doesn’t.
😬 4. Emotional Extremes Create Opportunity
When markets overreact, they offer setups for rational traders.
Capitulation = Bottom Fishing
Euphoria = Caution
Disbelief = Strongest rallies
🧠 Pro Tip: Watch sentiment indicators, not just price. Fear & Greed Index, put/call ratios, or COT data reveal what the crowd is feeling.
Chart Example:
📊 Bitcoin 2022 bottom vs. Fear & Greed Index.. on the chart above the index score close to zero (RED) indicating extreme fear this was because in november 2022 crypto cybercrimes grew new level and investors lost confidence, these cyber crimes included the bankruptcy of FTX as the owners were allegedly misusing customer funds.
💡 5. How to Trade Rationally in an Irrational Market
a. Have a plan. Pre-define entries, exits, and invalidation levels.
b. Expect overreaction. Markets often go further than they “should.”
c. Use sentiment tools. Divergences between price and emotion are gold.
d. Don’t fight the crowd—until it peaks. Fade extremes, not momentum.
e. Zoom out. 5-minute panic means nothing on a weekly trendline.
🎯Nerd Takeaway:
Markets aren’t efficient—they’re emotional.
But that emotion creates mispricing, and mispricing = opportunity.
You don’t need to predict emotion—you just need to recognize it, and trade on the reversion to reason.
💬 Have you ever traded against the crowd and nailed it? Or got caught up in the hype? Drop your chart and your story—let’s learn from each other.
put together by : currencynerd as Pako Phutietsile
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Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.