This article may be upsetting to new, often misguided traders who’ve been duped and preyed upon by ‘fast talking’ financial gurus and so called ‘stock analysts’.
This “insider” perspective on the stock market will reveal a most profitable truth.
If you’ve ever wondered why most traders struggle even to produce a few dollars whilst others rake in millions of dollars, seemingly with their hands tied behind their back, then pay very close attention to how I want you to look at and think about the stock market.
Let’s get started.
The price of a stock has little to do with the company it represents. Institutional investors will try and get you to think that the price of a stock is set by the company’s financials. This is not true. Again, the price of a stock has little to do with the company it represents.
The price of Google has very little to do with Google.
Price is where the supply and demand curves intersect.
The “ask” is what a seller wants to sell a stock for. The “bid” is what a buyer wants to buy a stock for. Sellers and buyers are always in conflict.
Sellers want to sell their stock for as much as possible.
Buyers want to buy a stock for as cheap as possible.
If members of both groups insist on having their way, no trade takes place.
A seller can wait until prices rise, or to accept a lower offer for his stock.
A buyer can wait until prices drop, or offer to pay more to the sellers.
A trade occurs when there is a momentary meeting of the minds of a seller and buyer.
Buyers are buying because they expect prices to rise. Sellers are selling because they expect prices to fall.
Buying by bulls pushes a stock up. Selling by bears pushes a stock down.
There is a crowd of traders behind every stock chart. When the crowd becomes fearful, the price jumps downward. When the crowd becomes happy, the price jumps upward.
When you look at a chart, you are looking at swings of mass psychology among the crowd. Each minute, hour, and day, is a battle between the bulls and the bears. When the price rises, bulls make money. When the price falls, bears make money. Looking at the market in this way reveals a most profitable truth. Your goal, when looking at a chart, is to discover which group, bulls or bears, is stronger and then to bet on that group. If you think the bull group is stronger, you buy and hold. If you think the bear group is stronger you short. If you can’t determine which group is stronger because both groups look equal, you stay out of that stock. Let the institutional traders with the big money fight it out. Only put on a trade when you are reasonably sure who is going to win the fight.
Price, volume, open interest and all technical indicators like the MACD, RSI, and ADX reflect crowd behavior.
Every trader tries to take money away from other traders by outguessing them on the most likely direction of the market. It is the pursuit of profit at each other’s expense. The market is a huge crowd of people fighting. Each member of the crowd tries to take money away from other members by outsmarting them. You are against everyone, and everyone is against you. However, two main divisions in the crowd exist that oppose each other: small individual traders and professional institutional traders.