CHARTPATTERNS
Outsider Speculation = Trading Blind
Bonanza Bottoms
by Scott Brown, PhD
TO succeed in the stock market you must buy low and sell high. Why is this so hard to implement for most investors? In this article, we'll find out by examining the forces driving stock prices and how to identify the real deals in the stock market, all through bonanza bottoms.
WHY BUY LOW AND SELL HIGH?
The only way you can get rich is to buy low and sell high or sell high and buy it back low. You will be pitched many different strategies as an investor, but wealth-building ones, as opposed to income-producing ones, simply amount to acquiring an asset at a lower price than you sell it.
It's mainly due to your social wiring that buying low and selling high is so difficult to implement. You have learned that when something you buy is a real bargain it is most likely of inferior quality -- defective or spoiled or out of date. This helps you as a shopper but hurts you as an investor. But if something is priced high, we normally assume it is of higher quality.
FINANCIALLY HARMFUL SOCIAL WIRING
Experienced investors buy stocks when the outlook for those stocks looks bleak. In fact, when the stock market really stinks, like after a severe bear market, successful investors go on a buying spree while the uninformed public shy away from stocks.
So why does the stock market go up and down so much? There are three major forces. The first is the inexperienced investor that reacts rashly to the market's actions; second, corporate executives who force their boards of directors to "gift" them with employee stock options for low prices after a market crash. These managers then dump their options at stellar prices after they hype the price up. The third and last force driving the market is pools of investors who buy stock low to corner the float to force up the price and sell high.
...Continued in the June issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the June 2007 issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.
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