Recognize the Optimum Points to Enter and Exit a Trade
Of course, you want to buy low and sell high, but this is easier said than done. Not only are your actions influenced by the activity of a particular stock price, but also by the investor sentiment of others in the market.
Overcoming fear in a downward spiraling market.
We can’t underestimate the significant influence of investor attitude on the overall market. With that said, let’s start the discussion by exploring the case of a downward turning market, in other words a bear market. When stock prices begin to plummet, this causes extreme uncertainty and panic among investors. Often, as people begin to worry about uncertainty of future markets they begin to rapidly sell off assets. Especially during these times, bringing yourself to invest in the wake of panic can be extremely difficult. However, these are some of the most important times to invest since stock prices are severely discounted. This is just the psychological aspect of the trade. You must also consider the technical aspect and picking the right stocks that are likely to rebound from these deflated price levels.
Don’t be persuaded by the sheer optimism of those around you.
The next case is that of a rising market, which is also referred to as a bull market. This is the complete opposite of what we just discussed in which investors experience a rise of investor sentiment. This is similar to what we’ve seen over recent years in the U.S. stock markets, which can often cause a sense of over optimism. It’s during these times that it can be especially easy to fall into the trap of listening to a friend about how much money they have been making on a particular stock. Unfortunately, at this point the stock price has already risen above what your friend might have paid and has a better chance of being further overvalued at this point. Despite all of the psychological factors pointing to the “buy” decision, you need to hold off. Now, part of the price increase is due to the rush in demand, rather than strictly on an improved financial outlook of the company. Essentially, the fact that everyone wants to get in on the action combined with the optimistic atmosphere calls for rising stock prices––this is not what it means to buy low.
Half of it is a mind game.
At times it will be very tough to do what needs to be done and execute on a trade position. This is especially true when considering the reasons mentioned above. All of these relate to an idea known as herd mentality. Basically, this means falling into the same train of thought as those around you––otherwise referred to as the herd. It takes serious mental stamina and faith in yourself to continue holding a stock, let alone buying even more as its price declines and the market is flooded with supply.
The opposite is also true when you decide to sell high despite the price continuing to rise––all while everyone else continues to buy more and more of it. Wouldn’t you rather sacrifice a little off the top of your profits than lose your initial investment altogether?
One of the best indicators is to look at its previously stable levels or even the industry in general. If you refer to the industry, then you should also consider how the stock previously reacted in regards to the activity of the entire industry.
Our Rich Dad Education instructors will teach you everything you need to know about the actual execution of entering and exiting a trade, as well as practical techniques you can use to best determine when you should be doing each. Be sure to learn about all the ways Rich Dad Education can help you reach your goals.
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