All investors find it hard to resist buying a stock after it has suffered a large fall. Take a quick look at the charts of the big four banks, Telstra and Woolworths.

Given how much they have fallen in the past month, it is tempting to buy these companies at their currently depressed prices.  This is natural, because we ground our concept of “value” according to price.

If a stock falls from $10 to $5, we at some level, still view it as a $10 stock. Thus, the temptation is to buy a stock that has recently fallen, because we believe it should naturally gravitate back to where we perceive its value to be: $10.

Fear of bottom picking

So, what does this have to do with bottom picking? Fear, both your own and the market’s, is closely tied to the way we treat stocks when they fall. The fear of missing out on an ‘easy’ trade might cause you to take a position in a falling stock too early. So, how do you avoid pulling the trigger too early? Look closely at the market’s behaviour: is technical divergence indicating the selling is easing?

Bottom picking is usually an unpleasant habit. But if you can watch the market, and identify when bearishness is in decline, you can be prepared to take a position when the price starts moving in the right direction.

The technical analysis signs of divergence should tell you to get ready, but the price action should tell you when to go. Once again, patience, and control of your emotions, are the keys to successful trading.

Reversal patterns

Reversals are more technical than simply a stock going up after having fallen and so on. First of all let us confirm that there are only two types of price patterns – a continuation pattern and a reversal.

Continuation patterns are temporary corrections or minor pauses in the market before it continues on in the previous direction. Reversals, as the name implies, are a complete about face of the trend that had been in existence.

These are the common traits of all reversals.

>	A trend must have been in existence for a reversal to occur. Seems pretty obvious but unless there is a clear and sustained movement in a share price in one direction, then we are only looking at a price fluctuation – not a reversal.
>	A major trendline is broken prior to a reversal. The act of breaking the trendline doesn’t confirm a reversal; it merely warns us that there may be a reversal ahead. A break of the established trend may simply be a continuation.
>	The longer the trend has been in place and the larger the movement of the share price during the trend, the more significant and larger the reversal. Clearly a trend that has been in place for 6-12 months and has run 20-30% is far more significant than one that has only occurred over a month and moved the stock a few percent. A reversal of the former is far more significant than the latter.
>	At the top of an uptrend the reversal tends to occur more quickly than the reversal at the bottom of a downtrend. Shorting at the top (if your timing is right) realises quicker profits than going long at the bottom because prices at the top tend to be more volatile.

Reversals at the bottom take longer to build and the price movements tend to be smaller. Price movements at the turn of a long-term downtrend will tend to be smaller and gradually build over a longer period as the market gets more convinced of a reversal the volume and price will accelerate.

Volume is an important consideration in determining the power of and stage of the trend. Volume should rise as the trend accelerates and should surge at the completion of the pattern.

In the early stages of a trend the volume is not so important, however, as the momentum builds we need to see the volume rise with it – this shows us that there is true depth in the market, there are more and more buyers on the way up or more sellers as the price drops.

When looking at a potential reversal at the bottom of a trend it is imperative that volume spikes. If the prices begin to rise but there is no discernable change in volume then we’re probably not looking at a reversal.

If you are looking for more information on share market education and how to buy shares click on the corresponding links.

Carl Capolingua
Follow Carl on Twitter @CarlCapolingua
Head of Education
Australian Stock Report

   Written by: Carl Capolingua   Other posts from: Carl Capolingua

Traders must always remember to develop a style that reflects their personality and is individually suited to them.

Most individual trading styles are either a combination of techniques or positional in nature. It’s pretty uncommon though for a trading style to be both.

There are a number of dominant trading styles that occur despite the differences in personality, education, experience and all the various facets that go into the preferred style of a trader. Let’s take a look at the common ones below:

Positional traders

Positional traders take a certain number of positions within a certain price area when the market is looking favourable to their strategy.

These can occur on short term weakness when the long-term trend is a bullish one. A known risk is assumed for a certain profit-taking area, and positions remain in place until profits or losses are taken, or the price action nixes the trading strategy.

Such traders hold their trades from a few weeks to a few months, which is ideal is a trader cannot watch the markets all day, or if the trader wants to avoid entering and exit markets on a frequent basis.

Combinational traders

These traders are known for being less ‘patient’ than positional traders in that they seek immediate results or will exit trades quickly.

These traders usually take on extra orders as the market moves in their favour, thus building up big positions for quick 2 – 6 day price moves. They then take their profits and exit.

Those who favour combinational trading enjoy putting options together into various combinations, resulting in some unique risk/reward profiles.

However, this form of trading may not necessarily be lucrative, as there is no magical combination that allows a trader to consistently produce positive returns.

System traders

These traders follow a trading system discipline whereby a series of analyses are conducted to determine whether to buy or sell based on signals derived from technical or fundamental analysis.

Usually, system traders use technical signals to create a buy or sell decision, when such signals point in a direction that has historically led to a profitable trade.

System traders use either manual or automated systems. The former involves sitting at the computer, searching for signs to buy or sell; the latter revolves around the trader teaching the software what signals to look for and how to interpret them. Automatic systems are good in that it removes the emotional component of trading that can cloud a trader’s judgment.

Method traders

The method trader is different from the system trader in that a method trade can follow a system with no discretion or be traded with discretionary intervention.

A method trade allows a trader the ability to change parameters. The method system also gives full disclosure of all its parameters and the logic behind the trading method.

The method trade isn’t exactly based on rationale, rather it is based on statistics. That is, when a certain pattern or setup occurs, and the trader behaves in a certain manner, the result is statistically in harmony with the probable outcome.

The complete trader

This trader can combine all or parts of the above approaches with an individual, personal style.

But in order to be a complete trader, one must be a master of observation and judgment, and have the ability to take decisive action when it is called for.

Carl Capolingua
Follow Carl on Twitter @CarlCapolingua
Head of Education
Australian Stock Report

If you want to get the latest recommendations and learn more on how to buy shares, access our research and educations files free for 7 days by clicking below.

 

   Written by: Carl Capolingua   Other posts from: Carl Capolingua

Panic buying occurs when investors become blind-sided by a sudden market movement and start buying up shares hastily as price increases.

High volume panic buying occurs because people are following price, not fundamentals. And this is a grave mistake for any trader to make!

What happens

Panic buying can be signaled on a stock chart by a sudden spike in volume. The spike is decided and signifies a very sharp increase in volume.

The spike indicates that high volume buying is driven by panic because of a) the short time frame in which buying occurs and b) the lack of a solid fundamental reason for buying.

This form of buying is driven by the fear of not acquiring securities before price rises even further. The problem with this is when can you tell that the price is going to stall?

And even though a panic buyer may get “in” on a trade before price peaks, who’s to say that the investor will be smart enough to get out of the trade before the inevitable fall comes?

In fact, since the panic buyer has bought without thinking in the first place, it follows that they’ll fail to smartly get out in time, too.

Beware the trend?

We’ve all been subject to panic buying before. The term doesn’t just relate to the stock market, but in all forms of buying. If we see that an asset is gaining value, the natural instinct is to buy along with the trend.

That’s where the trader has to be careful, because we are all taught from day one that, when it comes to the stock market, we should follow the trend.

However, a trend should be established and sound if we are to rely upon it. Panic buying doesn’t really signal a trend – it’s too short-term and irrational in nature to constitute the term.

Even charts pooh-pooh the idea of panic buying as a trend, as such events appear as short (though violent) blips on the chart’s radar, so to speak.

Black Friday

One of the most famous examples of panic buying is that of “Black Friday”, also known as the Fisk-Gould Scandal. Black Friday – 24 September, 1869 – occurred when the market crashed after investors tried to corner the gold market unsuccessfully.

A group headed by James Fisk and Jay Gould capitalised on market rumours at the time that the US government would be putting a lot of money into gold. Fisk and Gould used their social connections to get close to Abel Corbin, a financier who supported the pair’s arguments against the government sale of gold. Through Corbin, the men obtained assurance that the government would tip them off when it was about to sell gold.

So Fisk and Gould began buying up massive amounts of gold, sending the price up. Soon, gold was up by around 30%; and then the government’s gold flooded the market. The premium for gold plummeted literally within minutes, as ruined investors tried to sell their holdings. (And, no, culprits Fisk and Gould weren’t financially ruined by their meddling – just everyone else.)

Don’t panic

We realise that events like Black Friday only happen rarely – this, of course, is an extreme example, and not intended to make you see a conspiracy in every instance of panic buying.

The fact is that panic buying swarms the market from time to time and that will probably never change. It’s not often that market-wide panic buying occurs, but panic buying can certainly occur on damaging enough scales, usually based on unfounded market rumours concerning different companies, stocks, commodities, etc.

Panic is driven by human nature; and as the market is driven by human nature, panic will always be part of the market. However, the smart trader will recognize market panic for what it is, and not indulge his or her own tendency to panic.

Carl Capolingua
Follow Carl on Twitter @CarlCapolingua
Head of Education
Australian Stock Report

If you want to get the latest recommendations and learn more on how to buy shares, access our research and educations files free for 7 days by clicking below.

   Written by: Carl Capolingua   Other posts from: Carl Capolingua

A new and exciting concept for traders and investors.  This VIP Traders Conference will be the third of its kind run by Australian Stock Report.  An even better line up of trading eduction, strategies, activities and personal sessions to advance a traders knowledge and skill will be on show.

Held at the prestigious Hyatt Regency Coolum Resort between October 4th and October 8th, the conference will be conducted over 5 days. All of Australian Stock Report’s senior education team will be involved in presenting at the conference, covering advanced trading concepts with a special focus on building and developing a robust trading plan, trading psychology, and also a number of advanced trading strategies.

For more information click here.

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