1. Market Top - After a furious rally to the top of a channel, the house account usually runs out of money. And, almost always, the market either retraces in the afternoon, losing all morning gains, or it crashes within the next few days. It's also the time when everyone is so bullish and complacent.
2. Market Bottom - When everyone is so bearish, then it's a sign that the market is about to turn to the upside. I usually ask my colleagues whether they're buying to the close or not. When no one is brave enough to buy, it's usually a good time to probe the leaders.
3. The Happy Meter - Whenever more than a handful are rejoicing and making unrealized profits in a single stock, it may be a good time to sell. Looking at it from a larger perspective, it may mean that there are no more buyers to push up the stock - which means that the upside has already been capped.
Just today, I experienced the happy meter. Everyone who had shipping stocks today was ecstatic in the afternoon due to the sudden acceleration of buying. One was already thinking of going to a club and celebrating, others were already computing profit targets, etc. At the back of my head, I was already wary of a sudden reversal and, thus, I planned a tight mental stop. Lo and behold, about 20 minutes into the close, the shipping stocks did reverse. But of course, I didn't sell right away. I froze for about 5 minutes and hoped that my stock would still go up, and I paid a few dear fluctuations for it. (ALWAYS FOLLOW YOUR PLAN!)
Here's a snap shot of the intraday chart of the stock almost everyone had today (click to enlarge):
In conclusion, one should always be wary of how his/her fellow traders (as a group) are acting. A trading firm is a good microcosm of all the market participants in the world. However, one should also put into mind that, though very important, crowd psychology is only supplementary to proper technical and fundamental analysis, and must not be used alone.
No comments:
Post a Comment