- Courtesy of Chuck from Rebel Traders -
Someone once asked me...
If you like the stock so much why don't you buy it now when it is cheaper?"
Well that is a question that any sane person would ask, and it makes perfect sense why someone would ask a question like that. Isn't the whole concept of buying stocks to buy low and sell high? The answer is that even though you may believe a stock (and the company behind the stock) is good we traders need to know how the market thinks of them. It does not matter what we think, but what does the people in the market with money think... that is the key!
Perhaps you have heard good things about a company and their products, maybe something about a good management team, or perhaps they have released some incredibly good sales data. Some nice starting points for any investment research. But what does the market think about them? I'm not talking about analysts at the big investment firms (who may have their own agenda) but what do the people with money in their pockets and big investors think of the company?
To answer that question we read the tape. Yep, reading the tape (technical analysis of the charts). Understanding the price movement of a stock is reading right into the minds of the investors putting their money into (or taking money out of) the stock. It is important to remember that any stock price moves up or down for only one reason. And that reason is people moving their money... in or out of the stock.
The science of technical analysis of stock charts is the study of human behavior. By interpreting the movements on the charts we are seeing the greed & fear behind the scenes of the people with the money. When we see a stock price begin to fall and the number of people selling is tiny compared to when the price was going up that tells us that as a collective the majority of the money is "sticking with it". Only a small amount of people are taking money out. On the other hand when we see a large number of people (volume) taking money out as compared to the volume when the price was going up then we have a big warning sign before us. It is telling us that the mass collective thinking on the stock is to "get out".