Ever thought of proverbs as a source of eternal wisdom, handed down from one generation to another? Turns out, traders have proverbs of their one, tested and applied daily by thousands of traders worldwide.
Don’t try to catch a falling knife
There are times when everything is against you. You seem to receive all the right signals from your technical analysis indicators, open the deal at the right moment but still end up with a losing position. Some may think it is wise to hold a losing position, expecting it to recover. Most often than not the acquired asset will continue to go down, making the incurred losses even worse. What most experienced traders tend to do in case of a wrong estimate is close the deal and start looking for news opportunities.
The trend is your friend
This common expression emphasizes the importance of trading with the trend, as contrary to trading against the trend. Being different from the rest of the crowd is not always good, and this is the case when going with the crowd can probably be more beneficial.
Why is it that important to go with the market? It is impossible for a small retail investor to influence the market in any meaningful way and affect the prevailing trend. The only choice individual traders are left with is to either go with the market or lose. Are there any exceptions? Yes, there are. Experienced traders with access to enormous capital can create trends of their own but this tactic is clearly not for everyone.
Be fearful when others are greedy and greedy only when others are fearful
Some experts believe that the market, being the product of people’s decisions, abides by the law of greed and fear. When things go too well, people turn greedy and forget about risk management rules and back-up plans, paving the road for the next financial crisis. When things get gloomy (as they did in 2008), people are too afraid to invest, losing an opportunity to buy valuable assets at a lower price. And at those times the majority of market participants act irrationally. As a rule, it is wise to sell when the economy is overheated and buy when the prices have hit the bottom.
Buy the rumor and sell the news
Both rumors and news can affect the prices of assets. Yet, when the news is officially released, it takes the market a few seconds to a couple of minutes to incorporate this newly acquired information into the price. Rumors work differently in this regard. Not all market participants act on a rumor, which means there is a grace period between the release of the rumor and release of the news itself. It gives risk-taking traders an opportunity to trade the rumor while still anticipating a sudden price move.
Bull markets climb a wall of worry
Not all market participants have to agree on a particular market movement for it to continue. The thing is, when more people are willing to buy a particular asset than to sell it, the buying pressure will push the price higher. And vice versa, when the number of people willing to sell an asset is greater than the number of people willing to buy it, the price can be expected to depreciate.
Traders don’t have to wait for an absolute consensus on an asset in order to open a position with it. Quite the contrary, when everyone says than the asset at hand is ‘the new big thing’ (as it happened with Bitcoin, dot com companies and other bubbles) it is probably already too late to allocate your funds to it.
We hope that these 5 little pieces will make you understand the nature of markets and market psychology better!
