Beginners need to be extremely careful of how they filter news. On any day, if you listen to CNBC, you will hear people with strong beliefs that the market is about to go in a certain direction. They might be right, but if the majority of commentators are saying that things are about to fall apart, it could mean that things are ready to turn up.
In The Stock Market, What Is Obvious Is Often Wrong - By Jeanette Szwec
If you are considering trading stocks to make extra money, there are certain things you need to understand about market dynamics and market sentiment. Everything logical and sensible is often wrong. As a former professional stock trader, I learned a lot of "tips" that aren't shared with the general population. Here are a few tips that the professionals know.
If you are just getting started with the stock market, you need to be very cautious about things that seem logical, but aren’t true. As an example, you may hear about a company that is about to introduce some really exciting product - could be a new MP3 player or a drug - just any product that is really being hyped in a publicity campaign. The "logical" thought is to buy the stock just as it is being introduced. But that "logical" choice could be a very bad one.
The market often responds by “buying on anticipation of news, but selling on the actual news.” There is even a common phrase of “buy the rumor, sell the news.” The beginner who expects the news to bring good results will be punished severely. The market has its own rules of behavior, and they often don’t follow our logical beliefs.
Most likely, the stock of the company that is introducing the new, exciting product has already risen in value. The hype pushed the price up "in anticipation" of the product introduction. As soon as the product is actually introduced, the people who bought early are likely to cash out, letting the stock price drop as soon as the product is actually introduced.
Another example of this is “trader’s sentiment.” This is just a fancy term for “what do people think is going to happen to the market in the future?” When the sentiment gets very bullish, there is a great likelihood that the market will start tumbling. When the sentiment gets very bearish, there is a great likelihood that the market is ready to turn back up. Although this seems illogical, there is some underlying logic to it. When most people are very bullish, there is a good chance that they already bought stock. As more and more people are bullish, there is a good chance that these “bulls” have become fully invested and there are fewer people out there with cash in their pockets, ready to invest. Consequently, there are fewer buyers on the sidelines, and this can lead to the market turning down.
This means that beginners need to be extremely careful of how they filter news. One any day, if you listen to CNBC, you will hear people with strong beliefs that the market is about to go in a certain direction. They might be right, but if the majority of commentators are saying that things are about to fall apart, it could mean that things are ready to turn up. The best indicator of market direction is this: if most professional stock commentators are saying the market is going up, that is the best indicator that the market is ready to go down! So listen to analysts' predictions but consider that the opposite is more likely to occur.
Is this confusing? You bet it is! That is why a beginner needs to spend a lot of time observing, learning to detect these patterns, understanding sentiment analysis, and developing a list of indicators they can use to determine whether the market is more likely to move up or down. With the market, news is often expected and the effect of the news is already factored into the market pricing, so when the news is finalized, prices start to drop since there is no more anticipation of good news. The anticipation causes the price to rise. The actual news brings the end to anticipation.
Watch. Observe patterns. Never assume that things that seem logical will be true. Be an observer, not a believer. Have very few beliefs of what you think will happen. Spend more time observing what is actually happening.
Source: sap-basis-abap.com
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