Price and the Role of Emotions in Trading.
by, 10th-May-2008 at 06:20 PM (1501 Views)
The “PRICE” of a stock at any given time is due to the buyer and seller of this particular stock reaching a mutual agreement with regard to its current value.
When the price goes up it is because the seller thinks it is worth more or there is a short supply of stock available.
The opposite happens when there is an excess of stock available, this effectively pushes the price downwards. So the current share price is an accurate gauge of the market value of the stock at this point in time.
PRICE is involved when you buy the stock, your potential exit price to limit losses [stop loss] and potential exit price to make your profits.
GREED will push the price up. FEAR will push the price down.
A low priced speculative stock is often priced as it is because it has not attracted the interest of a wide section of the market. Price is effected by as much by Inaction as well as by Action.
The closing price is a reflection that shows how traders are relating to that stock. It is a reading of whether there is “excitement” or “rejection of that stock.
When you are buying a “stock” you have four options open to you.
1. You can stay with your original price and wait for the share price to come down to you.
2. You can chase the price and collect the shares you have decided on.
3. Still chase the price but keep the same dollar value but get fewer shares.
4. Buy your stock at the asking price.
Remember our decision to buy does not happen if there is no one wants to sell at that price.
We are also powerless if someone is bidding a higher price for the stock than we are.
They will get the stock unless you put in a higher bid. (This is dependent on how much stock is available at the time.)
THE TWO MOST COMMON EMOTIONS ENCOUNTERED.
The most common is” FEAR and “GREED.”
And what effect do they have?
Here is a “Classic” example of what is happening on the stock market every day World wide.
Firstly Greed pushes the stock price upwards and Fear has the opposite effect by pushing the share price downwards.
Greedy traders start rushing in to get the stock at any price so they won’t miss out.
Then finding the share price suddenly reversing as “Smart traders are taking their profits” which then has the effect of causing the stock to commence sliding backwards as excess stock is now available.
This is the time when Fear sets in. The traders start to panic and start selling so as not to take too big a loss.
This puts more stock into the market, which only accentuates the price slide downwards even more quickly.
The smart traders who sold out at the “high” are now buying back the same stock at reduced prices.Ready for the next run upwards.
As I have said before. How often does this happen? Every day somewhere in the Market this is occurring.
How do I know? I have been caught myself when I began trading and no doubt I shall get caught again. But now I am more aware of these “EMOTIONS” and the part they play in daily trading.