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Financial Markets Fear
One is afraid when there is an uncertainty, doubt, confusion and risk. The fear in fact is the opposite of faith. One can also say that a person that is afraid is irrational to a certain degree because he or she is likely to make a wrong decision or get carried away with emotion.
The two most dangerous emotions in the financial markets are fear and greed. Nevertheless, the financial markets fear is the most impulsive of both.
This article will highlight examples of financial markets fear.
Before we start, I would like to touch upon why one ought to understand the financial markets fear.
One can profit in the financial markets by using fear as a market indicator.
Generally, the financial markets become bearish when the fear of losing is increasing. However, when the key factors that are causing the fear begin to evaporate, the market sentiment begins to turn bullish.
So, one that reads and interprets the financial markets fear can forecast the reaction of other market players. Those are the reasons why one ought to understand the financial markets fear. Obviously, I will be talking about the VIX indicator commonly known as the financial markets fear indicator.
First Example Of Financial Markets Fear
The first example of the financial market fear is the fear that is caused by external factors that are not directly connected to the financial markets. Men have always been more afraid about strange things. Things that are not familiar to them or part of their environment. It is also true that misunderstanding also causes fear.
The most recent example in 2020 is the coronavirus. That was an external factor that market participants do not understand. Consequently, all barometers of the financial markets fear have turned red.
Major stock indexes declined at a faster rate. No one could escape the wild wild volatility that ensued.
External factors such as earth quake, tsunami, volcano, hurricanes, pandemics and any natural catastrophe of a higher grade will cause financial markets fear if they are likely to cause billions of dollars damages or impact the financial market sectors.
Therefore, it is important that active market players stay tuned to the best news feeds or sources in view to get real time news.
One can just download the Smart News App onto one's smartphone. This is not about using those news as a panic button, but instead to gauge the intensity of the fear they may cause.
Second Example Of Financial Markets Fear
The second example is the fear of being forced out of positions. Large investment firms often take defensive measures to protect their positions because they do not want to be forced out of their positions.
Usually, those are medium to long term investors who do not want to be shaken off by anyone. Behind the scene, the fear of being forced out of positions can cause them to sell or buy precipitately. It does not matter what causes the fear, the result is always the same in this case. And it is the high volatility.
When an influential market player has been wrongly betting on a financial asset for a long time, it is likely to be forced out positions. Often that causes volatility in a financial asset or markets trading.
That fear starts to grow as soon as an influential market player is put under pressure to close those positions. To avoid that other markets players put them under pressure investment banks and hedge funds do everything to hide their trading activities. They also put defensive measures in place to protect them.
If after all, those precautions did not help to stop the pressure, there will be a surge in the fear of being forced to close positions too early.
Similarly to the investment banks; individual traders and professionals can also be forced to close their positions.
Whether, one is day trading, swing trading, position trading or investing, one can be forced to close positions. There is always that fear of being forced to close positions. Apart from the first fear that comes from external factors, the fear of being forced out of positions is the second high impact source of volatility (fear) in the financial markets.
Third Example Of Financial Markets Fear
The third example is the fear of losing the initial investment fund. Professional traders and investors understand that losing is part the game of the financial markets investment.
However, no one wants to lose everything or the initial investment capital. Nevertheless, the grip of the fear of losing the initial capital is real especially among retail and individual financial markets players.
Sometimes, that fear can also get hold of a professional and turn him or her red to the point that he or she may need counselings.
Many beginners often think that it is impossible to lose the initial investment capital. Obviously, they are far from the truth because one can lose 100% of a trading or investment capital. It does not matter how big it is.
Usually when that fear kicks in, the volatility can reach an unprecedented level.
The Fourth Example Of Financial Markets Fear
The fourth example is the fear of taking a position. Believe it or not, that fear is devilish indeed. I would say that it is not an exaggeration to request an exorcist to remove that demon.
Many professional traders will quickly understand why I said that because it is one of those fears that literally stops one from doing anything ( take positions) as a market participant.
Though, one has the knowledge, skills, abilities, experience and above all more than enough investment or trading fund, one is really afraid to open a position.
Have you ever been in that situation before?
Usually, past trading misfortunes are the number one factors of that fear. Sometimes, it can take up to a year for a trader or investor to shake off that fear. In my view professional counselings are needed to alleviate that fear of opining a trading or investment position.
The Fifth Example Of Financial Markets Fear
The fifth example is the fear of the financial markets manipulations. The financial markets have always been manipulated one way or the other, but also directly or indirectly.
However, only few market manipulators can escape the radars of the watchful eyes of the SEC ( Securities and Exchange Commission).
The topic of the financial markets manipulations is highly divisive because what one names market manipulation may not always be recognised by others as so. In my opinion, more than fifty percent of the financial markets traders and investors believe that a market manipulation is always in play.
Though the fear of the financial markets manipulation does not take hold of many on regular basis, its effects can be amplified if it takes hold of a major investment bank or investor.
Other Financial Markets Fear
Apart from those five financial markets fear that I have already mentioned, there are also: 1/ Fear of the financial asset's price distortion. I will be writing about that topic another time. That fear is genuine and justified because it is the number one enemy of all investors.
2/ Fear of missing out. Those are late comers that unknowingly create the pump and dump effect in the financial markets especially during the fifth Elliott wave.
5/ Fear of giving away profits that are not yet banked. That fear can lead a market mover to sell a big chunk of its most profitable holdings. It is like " I am not having that anymore". "Sell, sell and sell and bank all profit". " I am out." It
You get the idea?
All in all, those are the common fears that both traders and investors face in the financial markets.
VIX Indicator Or Volatility Index
The number one technical indicator for measuring the financial markets fear is the volatility index known as VIX. Most traders and investors rely on the VIX to determine the level of fear and hope in the financial markets.
In theory, the higher the VIX, the more bearish the market is likely to be. On the contrary, the lowest level the VIX records, the higher will be the bullish market sentiment. Note that is the theory because of other factors that also influence an investor in the financial markets.
Fear is needed in trading and investing to make the game of the financial markets more interesting. When one discovers who is genuinely afraid and understands that fear, one can take advantage of that juicy investment opportunity.
When there is fear in the financial markets, there are always sectors that turn bullish while others are under pressure. It is not only greed that is good (motivator), but fear too, because it creates opportunities in the financial markets.
The key is to know and understand common financial markets fears, and spot them as they engulf the market in view to make an intelligent investor's or trader's decision.
Finally, remember that technical and fundamental traders rely on the VIX indicator to quickly gauge the current level of fear in the financial markets.
That is it. I hope this has been a valuable educational material for you. If that is real, please share and bookmark it today. Also, remember to say few good words about us in various trading forums.
Stay tuned because soon I will be posting another investing article.
I wish you the very best in your investor life.
This article is written by G Beaulieu Founder of Stochastic-macd.com