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Profit From the Big Money/ Human Nature Combo

July 26, 2012 by   Filed under Trade Like A Pro

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Some people try so hard to keep swing trading a mystery. Ever read one of those books that are hundreds of pages long that make your head spin? Technical jargon and impossible equations coupled with contradictory statements are enough to make you want to punch a wall. Ridiculous.  

If you are interested in making money swing trading there are just a couple concepts you need to understand.  I promise these are simple common sense concepts that you can take to the bank.  We are more interested in educating you than trying to sound smart.

Swing Trading works because of a combination of big money and human nature.

Concept #1 Big Money Moves Markets

When I say big money, I mean hedge funds, mutual funds, pension funds etc. These are institutional investors. These institutions have many millions to many billions under management and they need to put that money to work.

One difference between retail traders and institutional investors is we (retail traders) can get in an out of positions quickly and easily, institutions can’t. Because they take such large positions they just can’t open up their etrade account and hit buy. If they did, the stock would go crazy so they tend to scale into positions over a day or to try to get the best price possible.

Well guess what happens if a couple (or many) institutional investors decide to get in or out of the same stock over the same few days? Prices move !

Concept #2 Human Nature: The Fear of Missing Out

Are you familiar with the term “herd mentality”?

Basically it means that most people are not comfortable unless they have the company of others. Everyone wants to be a winner and no one wants to be left out. This is a very powerful driver and explains many actions we all take.

Well, lets think about how the fear of missing out or herd mentality manifests itself on Wall Street. After a long day on the trading desk, money managers head out for a beer after work with their buddies. The talk turns to the stock or stocks that ran that day. No one wants to say to his buddies, “I missed that one.” He wants to be able to high five his buddies and get a pat on the back like everyone else. How about the fund manager worrying about his boss popping his head in the door after seeing that ABC is up big on the day? Hey did you get a piece of that run he asks? Everyone wants to say yes.
Everyone on Wall Street has a  “Fear Of Missing Out”. No one wants to be the only guy that didnt buy or sell ‘that’ stock. Even if it means they are late to the party. This is the herd mentality and that’s why you see these stocks run for a few days at a time.

Profitable swing trading is about entering with the first wave of big money and selling before they are all done buying. That way we take advantage of movement created by the herd but because we are small and nimble we can move quickly booking profits the institutions can’t.

What we do is look for chart patterns on the brink of triggering technical indicators which could cause a favorable price reaction based on human nature and people’s “fear of missing out”.

Concept #3 Why Technical Indicators Work

Technical analysis is no mystery. It also works because of the herd mentality.  Over time people have recognized certain patterns on charts. In addition many indicators such as Fibonacci, Stochastics, and Moving Averages have become common place. Every book on trading discusses certain chart patterns that are highly predictable as well as how to trade them.  So, because so many people use them when certain things happen in the market many people end up taking the same action of buying or selling based on that chart set up, fibonacci, or moving average that price ends up doing exactly what is expected. Not because this analysis has any predictive abilities but because if enough people believe they do and take action the price moves in that direction. It is almost a self fulfilling prophecy.

 

 

So there you go, simple enough right?  You don’t need to be a finance major or mathematician to understand and utilize swing trades, follow us and we’ll show you the best swing trades around.

 

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