Everyday life has a way of revealing a better understanding of your most puzzling problems. Early on in my stock trading career, I wrestled with producing consistent profits. So much that, I decided to get away for a while and clear my head. I decided to visit New York City. I needed a break from the mental frustration of experiencing so many losses. All of this will make more sense shortly, so just bear with me.
New York is incredible. There are people everywhere you look. I grew up in an urban area but I had never experienced anything quite like this. All five of your senses immediately come to life. As I walked, more like side-stepped, down the busy sidewalk I could here the faint sounds of music playing in the distance. I love music, especially live performances. I was curious so I followed my ear. The closer I got to the source of the music, the more I noticed how many other people were moving in the same direction. We were all being funneled down the sidewalk. A much smaller number of people were moving against the tide.
The volume and clarity of the music increased with every step I took, as was the size of the crowd moving with me. Eventually, I arrived at the source of the melodic commotion. A band was performing a live set and hundreds had gathered for the free concert. I couldn't see a thing! I recall saying, I should have gotten here earlier. Eureka! Stock trading manna had fallen from the sky. It all made sense now.
Stock market trading is a lot like the concert in New York City. The band represents, in this case, institutional buying. In essence, the party starts with them. Secondly, there is the audience and those moving in the direction of the music source. This group consists of investors, traders, speculators, and gamblers. And lastly, there are those moving in the opposite direction of the crowd. You will be shocked as to why they are leaving so soon. Below is a break down of each groups role starting with:
1. The Live Band
The band is the catalyst for every major stock price movement both up and down. They are the big time players in the game. It only makes sense to follow their lead. Institutional buying and selling greatly affects volume. Always be on the look out for the band because they perform many unscheduled shows. Their influence on the stock market is inarguable.
2. The Crowd
This group comes in waves once the band begins to perform. Some of the most savvy members of the crowd are there as the band sets up the stage (hint, hint). When the band begins to play, those within earshot of the music come from blocks around intensifying the vibe in the air. The bandwagon effect is now in full swing. I arrived late to the party and missed most of the performance (upward stock price movement). It literally PAYS to get there early.
3. The Party Poopers
This last group is completely in tune with the band. While hoards of people are flocking towards the musical performance, they are quietly leaving the scene. Why would they be leaving now? The answer is in the question! Party Poopers exit at the climax of the show. In other words, they are cashing in their profits. Who are these contrarians of the stock market? You have already been introduced to them earlier in this article. They watched as the band set up their equipment. They enjoyed front row seats for the show. And we hardly noticed them as they walked right by us on our way to the show. Surprise.
There you have it. This is a true account of how a short hiatus from the stock market allowed me to experience a stock trading epiphany by means of an everyday life experience. As a trader, be mindful of everyday events that can help improve your trading. We sometimes need a real world example to make it all click in our brains. Even though this example spans a period of one day, this process can take place over several days and in some cases several weeks. Remember this story the next time you come across a fast moving stock. Fight the temptation and find another party that's just getting started. Be a party pooper.
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