Hyman P. Minsky, American economists researched about the development of financial instability. Later, he created the characteristics of financial crises. Minsky also identified five stages in the credit cycle. His thought contributes the patterns of a bubble. This article elaborates the patterns and stages of a bubble so traders could build awareness on price swings.
The first one is displacement. It is a stage where investors begin to notice a new paradigm occurring in new products or technology. Displacement also depicts a consciousness where investors start to recognize that the interest rates are historically low. In a nutshell, it is actually everything that gets investors’ attention.
The second stage after displacement is boom. It occurs when prices start to rise leading to a moment when investors chase the market. The name for this situation is boom. The cause could bring more people to buy more assets. After boom, the third is euphoria. Euphoria here means that when a bulk of people start buying assets, the prices of assets increase wildly.
The fourth stage is profit-taking. Basically, identifying that the bubble would burst or price rise is hard. This is because when the bubble bursts, it is nearly hard to inflate again. The key solution to this is, investors should be able to know the early warning sign. This way they could still make money by taking sell off positions.
The final stage is panic. Panic happens when the price swings drop and increase too rapidly. When the prices rise, the price could also drop severely. At this moment, investors expect to liquidate them at any price. This is because asset prices decline as supply outshines demand, said Investopedia.
