Understanding Vicious Stock Cycles
When investing in stocks it is important to monitor the stocks to determine whether it is performing as anticipated. Remember that the stock market is as unpredictable as a storm. Analysing the market is an art, not a science. That is why analysts tell investors, ‘When in doubt, get out.”
It is hard to get out when in a bull market. The bull trap is where a stock lifts, falls back, continue to decline and then hits to new lows. This action, leaves the stock holders with losses.
When the market climbs, investors are encouraged. They watch it drop, expecting it to climb again. In many cases, if the stock dropped, excited investors will buy up. In many cases they are laughing at the losers who sold out before the big boom. This new ‘artificial’ boost drives the prices up a bit, encouraging the investor. This creates a situation where any small profit the aggressive investors hoped to harvest are eaten up in their anticipation of big gains.
These investors usually do not have an ‘exit scheme’. They have no pre determined, written in stone, strategy for when they will sell a stock. They flounder for too long before they realize their mistake. By then, it is too late.
The bear trap is the opposite of the bull trap. The stock breaks down through the support level. It looks like it will never hit bottom. The stock suddenly shoots up. It is almost a miracle that the stock is flying.
Investors who were hoping to profit from by selling short are ‘trapped’ and suffer losses as the stock shoots up.
The bear trap can leads to an upward move. This is an artificial surge fed by the number of buyers competing to buy the ‘hot stock.’ The buyers become aggressive feeding the market, and bringing in the novice ‘get rich quick’ crowd.
They see the surge and are attracted to the quick profits, which deplete the supply. Once the supply runs out, the entire house of cards comes toppling down.
Real investors do not touch the stocks. Everyone wants to sell, but no one wants to buy.
These vicious traps play out painfully for investors on the wrong side of the market. Aggressive traders are pulled in easily. They need to watch for the ‘setups’ selling on the right day makes the difference between large profits or devastating losses.
These traps can change within hour. They are common, which is why many investors are warned to stay away from ‘hot stocks.’ Unfortunately, it is fairly easy for market specialists to manipulate stocks on a short-term basis. The patterns, or false patterns, are easy to pick out if investors listen to the market.
And, the victims of these traps are usually emotional and excitable investors who do not watch for the red flags and do not have a solid exit plan. Experienced stock traders get out as soon as they realize they were caught in a trap. This is the only way to minimise losses.
About the Author
Mark Walters is a third generation investor who guides others to financial independence through the Creating Wealth Club
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