The chief value of money lies in the fact that one lives in a world in which it is overestimated.
– H. L. Mencken
Buy low, sell high. How hard can that be? Well when there is a wave of positive speculation going on, the crowd of amateurs have entered into the game and the media is reporting the results of the strong market interest going. Going with the wave of the enthusiastic buyers becomes an opportunity too good to miss.
However, we as the trader that just presumes to go with the waves will crash and even drown if not careful. The media interest and positive generation of market activity does not reflect how it is all the time. It is essential to be ready for those moments when the markets are operating differently which means making some fundamental elements part of our planning and preparation process.
We have to be able to see what ‘low’ is versus ‘high’ to profit take and in some markets there isn’t a lineal effect. So then we have to be able to spot what phase a stock is in and where the level of resistance is, so that we can exit prior to it topping out. We need to know for each trade we execute what the ideal entry and exit points are, and map that in to what the markets currently appear to be doing.
One of the fundamental errors that we can make is to presume to be able to spot the current trend of the market and set up trades accordingly. The arrogant presumption is we instinctively know enough to not need to investigate the stock or the surrounding market environment. However the successful trader is the one who takes the time to thoroughly investigate the company and the sector conditions and studies the past fluctuations of the stock. We aim to be this trader.
In this way we can then identify the levels of resistance and plan a far stronger strategy for profit taking as they’ll have entry and exit points based on sound knowledge. We will know if there are any significant announcements in the near future or if it a stock that is likely to become ‘trendy’ thanks to the media. All this knowledge reduces the risk of each trade and also the potential for profit even in adverse market conditions.
The psychology of the crowds means that the enthusiastic amateurs are likely to leap into the market during media hype but equally likely to sell out the instant there appears to some negative news or they see others selling out. Recognising this and knowing the resistance level that is likely to create this reaction is where the sound and prepared trader enters as they can buy in at the start, sell out before resistance level and then buy back when the price drops again.
What makes this possible is the knowledge that we as the prepared trader have gained enough knowledge confidence about the company, so we can more instantly spot the opportunities as they present.
The stock market really isn’t so different to any other market. Get the stock as low as possible and sell it high but with an honest and realistic perspective as to what the market can absorb as the high.
Aim to know about our stock and our market as well as possible, and to be in a position to execute trades with as little risk as possible and for maximum gain.
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