MARKET PSYCHOLOGY & PATERN RESEARCH (FOR TRADING) Updated 01.29.17 by reallyoldsoul
The stock market is a beast that take no prisoners. We can’t explain why FDA approval on a medication leads to an instant 4-5 point loss or how a R/S sometimes results in a stock going “to the moon”. As I being my research, I am learning more and more how the passive trader’s brain works in patterns, and we subconsciously are finding patterns but also rely on emotion to make a quick decision. This often causes unpredictable behavior in the market, but also sets the stage for what can be expected more often than not. This is NOT trading advice, nor a recommendation. I am simply working on research and hope to collect feedback/information from the Enhanced Investor crew so we can create a new “think tank” for understanding the market from other perspectives. Furthermore, I am NOT a writer or editor. I want this to be good but I cannot guarantee it will flow, read, and present itself as beautifully and organized as it can be. This is a work in progress that I am sharing with the crew.
Many traders are in permanent “fight or flight” mode when it comes to stocks and making informed decisions. The idea of spending an evening (or weekend) to do DD on solid trades does not come natural. They subscribe to the get rich quick mentality. This can help and hurt us as better informed traders. In essence, in addition to catching the “hottest plays” we can go against the trend, and look for stocks that are quietly waiting to retrace or make new highs. Fight or flight is a human instinct that applies to every part of our lives. We choose to confront and execute, or stay back and not participate. For clarity, let us replace “fight or flight” term with the “buy or sell” concept. How the BUY (or fight) Can Helps Us When a trader goes on their charts and social platform to figure out what is moving, their FOMO kicks in, thereby telling them to BUY asap. A few things confirm this: -
Significant Volume (compared to average) Price climbing/creeping on an uptrend News/catalyst that sounds good People yelling “to the moon” on Stocktwits
This is NOT advice. I am NOT making recommendations of any kind. All trading strategies are used at your own risk.
MARKET PSYCHOLOGY & PATERN RESEARCH (FOR TRADING) Updated 01.29.17 by reallyoldsoul
How the SELL (or flight) Can Help Us When a trader brews up fear while a stock is tanking, their suspicions are confirmed by a few factors: - Low Volume—not all the time (usually closer to average) - Price beings a downtrend or gaps down on the daily - News/catalyst that is negative (i.e. public offering) - Sentiment on Social Media with low morale (people claiming the stock is a POS) Understanding the way the passive traders mind work on a specific stock allows us to look at its history in correlation with volume trend, news, and sentiment. This helps create a better picture of what may or may not happen. Example – 01/22/16 SGYP released FDA approval news which usually is a GOOD thing but the market did not respond well. Why? Technical can tell quite the story, but I am not as well versed on that. This is what I think. 1. The Passive Traders mind will activate BUY or SELL as soon as news drops no matter what. This shows the sentiment of a stock. What happened when SGYP drop news in AH the evening before? This screamed SELL. One could argue that this was an extreme reaction to pending news going south but this is also a great indicator on the traders collective mind. This says no matter what the news, traders are hesitant in SGYP. This now becomes a history of bag holders and individuals who do not feel strongly about what this stock can do. 2. SGYP created a new LOD after the AH LOD Considering that history is bound to repeat itself one way or the other, it was no surprise that the combination of Bag holders and lost sentiment caused the negative reaction. This resulted in a painful climb back up. Now someone could say what about the day before leading up to this pending new? Why not buy? My speculation is the following: The stock was mimicking stairs going down. The day leading up to the news in the AH showed a climb back up, but it was not strong enough to show a reversal on this stocks “collective mind”. It showed hope, gambling, and hesitation. (See next page for chart overview)
This is NOT advice. I am NOT making recommendations of any kind. All trading strategies are used at your own risk.
MARKET PSYCHOLOGY & PATERN RESEARCH (FOR TRADING) Updated 01.29.17 by reallyoldsoul
Now what happened leading up to news? Huge interest in AH for selling as oppose to buying as the stock climbs up. This to me means increased hesitation.
Going into the first 2 hours of trading post FDA approval news the stockjumps from 6.7 range to 5.75. Why? Let’s break it down: 1. Stock History means something. 12/9 SGYP soars in the premarket after positive trial results. Great. But ended on a red day followed by 3 MORE red days. 2. Traders forgive but NEVER forget. SGYP has blessed and screwed a lot of traders. The former applies to those who are passive and jump based on BUY or This is NOT advice. I am NOT making recommendations of any kind. All trading strategies are used at your own risk.
MARKET PSYCHOLOGY & PATERN RESEARCH (FOR TRADING) Updated 01.29.17 by reallyoldsoul
SELL mentality. These guys become bag holders, hoping for a climb back up so they can empty their bag. 3. Retracement from previous highs need to be significant. If a piece of news can’t bring significant gains, people won’t trust/come over especially with a shaky history on the chart. 4. This always applies, except for when it doesn’t. We can all speculate on why things is, and its true, but not always the case. I want to be clear, this does is a WORKING theory and does not mean you should ignore other plays or even your own gut. Please always trade at your own risk. Despite the example of SGYP and predicting its down fall from the AH the day before, it does not mean this is a POS or it will go “to the moon”. This is simply understanding trader psychology and sentiment. In response to a user commenting on SGYP going up at open:
OK now on to a more positive example. AMD.
AMD has received shaky news on a patent case but trader sentiment overall is a positive one. Institutional support. Positive bag holding, price retraced from a new low and flirted with the 50% mark. This is all signs of a BUY mentality from the passive trader’s mind.
This is NOT advice. I am NOT making recommendations of any kind. All trading strategies are used at your own risk.
MARKET PSYCHOLOGY & PATERN RESEARCH (FOR TRADING) Updated 01.29.17 by reallyoldsoul
You may ask why AMD is acting this way over SGYP? Well part of it is trader sentiment, but it is also understanding: -
The Sector (what is it’s potential and history) Competitors (how are other stocks in this world performing i.e. NVDA) Reaction to negative/positive news in the past Value of a stock and how it is treated once a new low is posted (do people get scared or do you see a new swarm of buyers coming in?)
These are questions that are worth answering before you consider making the trade. I do want to speak a little bit on pattern research. I have learned that Moving Averages, MACD, RSI, are VERY important to confirm a trade, but they are also lagging indicators. They confirm what is already happening. I ask you to consider a leading indicator, the Fibonacci retracement, in order to plan a proper trade. I will go over the basis in the next section.
Fibonacci numbers are the sequence of numbers starting as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 337, 610, 987… Each number is a sum of two previous numbers (two to the left). Look at number 3. It is the sum of number 2 and number 1, because 2 and 1 are to the left of 3. Based on the sequence, we can calculate the ratio. The Fibonacci ratio is counted by dividing a number by the number that follows it in the sequence. Let’s take a look at some examples: 5/8=0.625 The most important ratios: 23.6%, 38.2%, 61.8%. A ratio is also called a retracement level. It is because there is a chance that a price will stop and reverse at one of those levels. Traders like to use a few levels more, so the list of most popular full retracement levels is as follows: 23.6%, 38.2%, 50%, 61.8%, 78% The 50% retracement level does not come from the Fibonacci sequence, but it’s an important level. Traders tend to react when a price is near half of the previous swing, so they added it to retracement levels.
This is NOT advice. I am NOT making recommendations of any kind. All trading strategies are used at your own risk.
MARKET PSYCHOLOGY & PATERN RESEARCH (FOR TRADING) Updated 01.29.17 by reallyoldsoul
A good example of this is AMD itself. Despite hitting the 50% mark after its new low of 9.42, the price did not correct and hold, thereby making its way back down to the 23.6% mark. The current pattern shows it is likely to test 9.98 again or treat the 9.77 as the new resistance on its way to touch 9.42. Now when I combine the idea of the passive trader’s mind along with history and volume I see this:
I expect a bit of channeling and likely bouncing from the 9.50s to 9.70s until a breakout touching 10 again is successful. The above is mere speculation and I will update this should this information be incorrect. UPDATE: one week later and I was off. The channel was 9.77-10.00 followed by multiple breaks. Uptrend has continued on
This is NOT advice. I am NOT making recommendations of any kind. All trading strategies are used at your own risk.
MARKET PSYCHOLOGY & PATERN RESEARCH (FOR TRADING) Updated 01.29.17 by reallyoldsoul
With the understanding of Fibonacci numbers and patterns, consider this. The numbers 2, 3, and 5 mean something in the market. Stocks in a strong uptrend will move up 3 days, then down (pullback) for 2. Stocks in a strong uptrend will move up 5 days, then retrace for 3 days Stocks in a strong downtrend will move down 3 days than rally for 2 Stocks in a strong downtrend will move down 5 days, then retrace for 3 If you see a stock on a strong downtrend for 4 days, there is a good chance the 5th day will be red. Lets take a look at SGYP:
Granted there are MANY factors that affect the day trade, including FED meets, News, Sentiment, Indicators, etc. This is not always accurate, but in some situations, can apply well. I will update this when I can find a stock in a proper stepping up pattern.
This is NOT advice. I am NOT making recommendations of any kind. All trading strategies are used at your own risk.
MARKET PSYCHOLOGY & PATERN RESEARCH (FOR TRADING) Updated 01.29.17 by reallyoldsoul
Other indicators to note: 1. 2. 3. 4. 5.
Stock is moving on an uptrend Presently climbing up their 20 or 50 Moving Average in a stepping pattern (stairs) Have pulled back for 1-2 days Have overbought/oversold indicators that signal bullish divergence Show strong volume on the break out OR weak volume on the pull back (this sometimes is hard for me to notice but noting in any event)
I hope I was able to explain a bit on psychology/pattern but I must note that is not ALL to confirm a good trade/swing. You also want to consider: 1. 2. 3. 4.
The stock is in a group/sector that is on an uptrend (http://finviz.com/groups.ashx) In their group, the stock is a leader Market futures/conditions show bullish activity It is the stocks first or second day up from the breakout (whatever percentage you prefer). I like 34%-50% but that is RISKY
Working scanners I am testing out: Small Cap Swings: http://finviz.com/screener.ashx?v=111&f=cap_small,sh_avgvol_o1000,sh_price_u10,ta_ beta_o3&ft=4 20SMA Swings: http://finviz.com/screener.ashx?v=111&f=geo_usa,sh_curvol_o200,sh_price_u10,ta_sma 20_pa&ft=3 Earnings Swings (sell right before ER): http://finviz.com/screener.ashx?v=111&f=geo_usa,sh_curvol_o200,sh_price_u10,ta_sma 20_pa&ft=3 Fundamental Swings: http://finviz.com/screener.ashx?v=111&f=fa_debteq_u1,fa_epsyoy1_pos,fa_ltdebteq_u1, fa_peg_u1,geo_usa,sh_avgvol_o300,sh_price_u10&ft=4
This is NOT advice. I am NOT making recommendations of any kind. All trading strategies are used at your own risk.
MARKET PSYCHOLOGY & PATERN RESEARCH (FOR TRADING) Updated 01.29.17 by reallyoldsoul
Thanks for reading all this! Forgive me on grammar/typos etc. This is a work in progress and I hope to organize and adjust in the future for personal study. I encourage you to develop your own trading strategy and test it with stocks in the market. Take out small positions or paper trade to see if you are on to something. Track your progress and report as you go along. These things help us all in the chatroom become better traders.
This is NOT advice. I am NOT making recommendations of any kind. All trading strategies are used at your own risk.