Tuesday, 15 January 2013

Why is this security moving the wrong way when it's guaranteed to make a lot of money in a couple of days?

It can be frustrating when you are holding an investment that is a sure thing - like a moviestock approaching delist, or a starbond approaching adjust - but the market is moving the price in the opposite direction.  It seems not just counter-intuitive, but idiotic.  Why can't people be patient and cash out at the accepted time designated by the calendar?

The main reason this happens is that small, active traders are cashing in their gains and moving onto a more profitable investment.  As the price falls, this impacts other traders.  More small active traders will move their money into something more profitable in the short term, calculating that they can buy back into this opportunity later.  Other active traders will follow the movement and play the players.

There are two ways of coping with this.

The first is to follow the movement.  This offers higher gains, because hopefully you'll make money as the investment moves in the contrary direction, and then more money still.  There are two chief risks here - that the gains from flipping will not cover your costs in commission, and maybe the price will turn back in the "correct" direction when you're not expecting it and you'll miss the movement.

To mitigate the risks, you'll want to study how price swings work in practice.  Most price swings follow predictable patterns - or so the dark masters of the day-trading arts claim.  So study price swings, and observe how far prices move in the "opposite" direction, and figure out when the price movement switches back to the correct direction.  Once you're comfortable with how price swings work, you can also use limit orders to pre-position your trades according to your expectations.

The second is to accept that your investments aren't going to move in a straight line the way you want them to, and patiently wait for your guaranteed profits to roll in.  It's less rewarding, but you don't have to put any effort into it.

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