Buy on Greed, Sell on Fear

Buy on Greed, Sell on Fear

There are only two forces behind the supply and demand forces that drive a stock's price higher or lower.

Those forces are the emotional forces of fear and greed.



Suppose
you are a trader observing the bullish rally of Stock XYZ at the
beginning of the 3rd bullish green candlestick, and considering an
entry.

You have witnessed the stock rally huge for two days and
know that each trader who entered on the first two days is now a big
winner.

Based on the emotion of greed you decide to enter at
that beginning of the 3 day, and mentally count your profits as the
price rallies to a new high.

After the stock closes, you brag to your friends at the golf course regarding the great trade that you made that day.

You
go home from the golf course and celebrate the victory with your spouse
and maybe even discuss how you will use the extra money that you have
earned through the trade.

Now keep in mind that the profit is only on paper and not one penny has been earned yet.

The
next morning you check the price of your position, with expectations
that your bullish stock will rocket to the moon! Now imagine the
emotion that goes through your mind when your position not only fails
to go higher, but also opens below your entry price.

What is the
emotion that flows through your body as you not only see your profits
erode before your eyes, but now rob your account of precious capital?

The
emotion that you will experience is undoubtedly fear and will prompt
you to scramble to liquidate your position as soon as possible to
minimize your losses.

Now consider that there were also 2 or 3
thousand additional traders who entered the same stock at around the
same price with the hopes of the gaining the same profit.

All of these traders will be tripping over themselves trying to get out of the stock.

As
was illustrated in the previous section, this increase in fear results
in an increase in supply of the stock relative to the increase in
demand, and triggers the sharp decline in the price.

The deeper
the red candlestick cuts into the bullish green candlesticks, the more
traders are thrown into loosing positions, and thus the further the
price decline.

Perhaps you are beginning to realize the power of emotions in price movements of a stock.

The
technical analyst through candlestick reading is trained to read this
greed and fear emotions in the market and capitalize on them.


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all this post by caffein_blue
owner of www.belajarmarketiva.com