Avoiding the Twin Demons of Fear and Greed

When the value of an investment, like a stock, is going up, it is easy to become greedy. And, when the value of that investment starts to fall, it is easier to become fearful. These traits are not limited to you, Ms. or Mr. Investor. They tend to be shared by the majority of investors. Successful long term investors have gone through many business cycles and have come to recognize some basic signals. None other than Warren Buffett has advised investors to be fearful when others are greedy as noted in an article by Investopedia.

Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.” This statement is somewhat of a contrarian view on stock markets and relates directly to the price of an asset: when others are greedy, prices typically boil over, and one should be cautious lest they overpay for an asset that subsequently leads to anemic returns. When others are fearful, it may present a good value buying opportunity.

The problem with applying this adage is market timing. For example, stocks have been on their way up for years. It is true that the S&P 500 is down on the day, week, and month. And it is unchanged from its value at the beginning of the year. But it is nicely up over 5 years and hugely up over ten years. In this regard, why do signals help you make smart investing choices? One good reason is that they help you avoid letting fear and greed drive your investing decisions.

The Market Follow-through

The stock market seems to be correcting, driven by a too-strong dollar, what is shaping up to be a permanent trade war, and the Trump tax cut stimulus wearing off. As such, many investors are adjusting their portfolios as witnessed by a flight to quality investments.

Each investment niche goes through cycles whether it is agricultural commodities, stocks, gold, or real estate. Basically, many investors think that the stock cycle is turning and they are hedging their bets, based on fundamental factors such as the trade war, tax cuts wearing off, higher interest rates and the dollar, and the risk of a global slowdown. But, remember that all investors are subject to the twin risks of fear and greed!

In regard to make smart investing decisions before and after a correction, we looked at an article in Investor’s Business Daily and a signal called the stock market follow-through.

The follow-through is a simple concept. It involves a significant gain in higher volume in the Nasdaq or S&P 500. After a serious correction on Wall Street, most follow-through days occur at least four days into a new rally attempt. IBD’s The Big Picture column flags these critical market turns. When it takes place, investors should actively search for leading stocks that break out from sound bases.

What these folks are talking about are opportunities to profit after stocks correct and before another rally takes place. (They also note that the signal is not infallible.) Nevertheless, it is a useful tool, but with it and others, why do signals help you make smart investing choices?

History Repeats Itself

The use of predictive tools to guide buying and selling in markets goes back a long way. Japanese rice traders in the times of the Samurai were using a tool they called a “candlestick” as a visual guide to trading, and predicting price movement in the rice market. Interestingly, a “bearish reversal pattern” in Japanese Candlesticks requires a follow-up confirmation day, just like the stock market follow-through. Both of these happen as a downward trend (bear market) starts to reverse, and both, when used correctly, can lead to impressive gains as the market or an individual stock heads back up.

How is it that both a modern “trading signal” and one that dates back to when there were still Samurai running Japan seem to be picking up on the same market movements? Technical trading signals are developed by looking at repeated market events and identifying similar pricing patterns that evolve in similar circumstances. We can assume that human emotions were the same for rice traders back in the days of the Samurai as they are today for those investing in and trading stocks. It would appear that the sum total of human emotions and human actions tend to reliably generate similar patterns in similar market situations. If you believe that history can repeat itself, perhaps you can benefit from some of these signals when this market corrects and then recovers.

Why Do Signals Help You Make Smart Investing Choices? PPT

Use Technical Analysis for Enhanced Profits

By investing with Candlesticks, long term investors can take advantage of periods of market inefficiency for profitable investing at the most opportune times and prices. For example, a growing stock may get caught in a market correction. All of the fundamental analysis in the world may not tell the investor what this stock will do in the next hours or days. If an investor wishes to avoid taking a big loss during a market correction he will often be best served by putting on his day trader hat and investing with Candlesticks. Using Candlestick patterns as a guide it is possible to anticipate stock price changes in even the most confusing of markets. Will the stock in question resume its rise or will the market take it down with a vengeance? By investing with Candlesticks an investor is using the past as a guide to the future. Because stock price patterns repeat themselves it is commonly possible to read the first segment of the pattern in order to anticipate the last segment. The market quickly discounts changes in fundamentals but big changes in fundamentals often lead to a period of market inefficiency. Using Candlestick charts an investor can buy, sell, or simply watch, based upon time honored technical analysis provided by the Candlesticks. Investing with Candlesticks as a guide is an excellent means of extending the profits that investors hope to gain with sound fundamental analysis and a balanced stock portfolio.

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The Hispanic Vote and Bipartisan Support on Immigration Issues

Republican efforts to unseat President Obama came to naught in the last election. A large part of that was the large majority of Hispanics who voted Democrat. It may well be that the Republican Party has decided to realign itself on immigration issues in order to garner more Hispanic votes in coming elections. Certainly, the issue of over ten million undocumented persons within the USA is a problem that should have been dealt with much sooner. As with all such issues compromise is necessary on all fronts. If both major parties can come to agreement we may see a wholesale rewriting of immigration law. That could greatly affect the issue of investing and immigration reform as it could make some businesses cheaper to run, some more expensive, some more profitable, and some more likely to lose money. How immigration issue will affect the national budget remains to be seen but that could be central to the issue of investing and immigration reform. Picking new winners in this matter may simply be a matter of looking for companies that process data effectively.

How Fast and How Effective

The President has outlined his plan for immigration reform. It would include illegal immigrants having to register as a first step toward possible citizenship. These people would “submit biometric data” which is code for being finger printed and having your photo taken. Applicants would have to pass background checks and pay fees in order to obtain a “provisional status.” Then “provisionals” would need to wait their place in the immigration line for permanent residency followed by citizenship. Considering the large number of people likely to apply for citizenship using this or whatever process is decided upon, investing and immigration reform may point to profits for those companies that can provide services to streamline this process and make it less expensive. The fact that many business leaders are positive on this matter fits with the assumption that an immigration fix will benefit the country as a whole. Certainly making it easier for immigrants to get work permits could reduce the cost of stopping people at the border. What is a good investment in this area? Look at what economic changes might result and invest accordingly.

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There are several candlestick charting techniques that can be used to predict which way you should go to buy or sell your investments. The Doji comes to mind. If the open and close are very close together or the same, that means that the bulls and bears are at conflict and should alert the investor of a major indecision. Now, if the Gravestone Doji is formed at the open and closes at the low end of the day, occasionally it signifies the bottom of the markets. The reason it is called this is because, it looks like a gravestone. Another of the candlestick charting techniques is the long-legged Doji.

Most Japanese believe that the signal of the long-legged Doji has lost is sense of direction and to use extreme caution. Now the Bullish Engulfing Pattern is usually formed at the end of a downtrend. A white body is formed that opens lower and closes higher. This means the buying frenzy disperses the selling pressure. How does this candlestick charting technique turn potentially money eating probabilities into money-making trading profits? It’s like this, the factors of signals can be made to align elements that make optimal option trades, signals, market direction and many other factors.

A few other factors to consider are direction, magnitude, and time. In direction, you study the candlestick signals. As you figure them out, your accuracy will vastly improve your chances of making excellent choices in your investments. Now in magnitude, you will analyze a stock trade and its potential price movement. One will need to look at the speed and magnitude of the move before it can be considered be a reversing factor. Another thing to look at is the congestion levels above the reversal area. Now on to time, which is the weakest area of the candlestick charting technique, probably due to human weakness and impatience.

Time and emotion are two factors that cause investors to lose their money in at least 80% of their investments. Try not to let emotion get in the way and use the Japanese candlestick charting method to make money off your investments.

In United States, OTC Bulletin Board is used for trading over the counter stocks. The OTCBB is an established service (started in 1990) that is regulated, reliable, and works in real time for those interested in getting the very latest information on stock quotes, sales, and which equity security firm is handling the most business. OTC securities, which generally don’t trade on a formal exchange, are also known as Bonds. Investment banks trade mostly in these financial instruments which create markets for specific issues. Investors should call the bank that makes the market in that bond, and they should get the quote if he is interested in bond investing.

Do remember to discuss penny stocks while you also discuss over the counter stocks. penny stock investing is attractive and popular because the possibilities seem endless; you don’t have to invest as much with them as you do with other stocks and the return can be both quick and lucrative. It is very risky to buy penny stocks because the price of these over the counter stocks can plummet considerably due to the potential value of the companies that are listed in OCTBB, which are also known as "pink sheets." Such companies have very limited financial history which makes it difficult to assess their actual value. Another reason it that some of the companies are exceptionally new and are extremely close to going bankrupt.  If you are really keen on trading in over the counter stocks, then make sure that at least those that you are trading are making an honest effort to move from OCTBB to major stocks like NYSE. You can certainly make some good return on investment with these type of stocks, but you must always remember that they are high risk stocks.

Trading and investing in over the counter stocks can bring huge rewards. However, even though you are only trading pennies, you should remember that there is still a huge risk of losing big money, while trading in over the counter stocks.