Finance Guru Speaks: This article will highlight the importance of a very important concept to remain profitable in the Stock Market - Buy on Bad News and Sell on Good News!
Share Markets are generally driven by 3 factors - Fundamental, Technical & News. Out of which, the News factor is the most powerful one amongst Fundamental or Technical factors. Whenever there is News or Rumors, it creates a strong sentiment in the Market.
If you are a Trader or an Investor in the Share Market, then you would definitely have experienced this aspect.
So, coming back to the article topic -
How Buying Bad News and Selling Good News Can Keep You Out of Trouble In Stock Market?
Markets around the world are driven by two strong emotions - Greed and Fear.
You might have heard the saying - Be Greedy when Others are Fearful; Be Fearful when Others are Greedy.
Sell on Good News:
During a strong Bull Market, you can witness good news from all corners. You open any Newspaper, News channels, YouTube channels, etc., you can hear "Experts" advising more buying because of "Good News" around you. As per them, this Bull Run is never-ending and earning from the Market is damn easy. You just buy a Stock or Index in the morning and by end of the day, you will get handsome returns because of the appreciation in the price.
Is earning in the Stock Market so easy?
Strong Players like Operators make the best use of this situation. When Retailers or Weak players are buying on Good News due to their greed, they slowly start distributing their positions. In other words, when you or I am buying enthusiastically, Operators are quietly selling us at high price levels.
Once the distribution by Operators is over at the high price levels, the market falls down rapidly without giving any chance to Retailers to exit their positions. This results in a huge loss to them and they get stuck at a higher price level in the false hope or anticipation of another bull run in that stock or index. Sometimes this wait can go on for months to years!
Also, during this "Good News" era, you can also observe so many IPOs floated in the market. Poor Retailers get lured by the dream of earning quick money and invest in costly IPOs without studying the fundamentals or future potential of the Company.
The solution to the above problems - Sell on Good News.
In order to avoid this trap, you should think and behave like the Operators.
You can follow -
- If you already have such Stocks in your portfolio, then you can start selling them in small quantities on every price rise because of "Good News". Do not be greedy and keep on holding them forever. Your idea should be to generate decent profits from the Stocks instead of marrying it for life.
- If you do not have Stocks, then check whether the current price levels are already in the Overbought zone. You can use Technical indicators like RSI or Stochastic to find out whether the current value is more than 70 or 80. In a strong bull market, the value can cross above 80 as well & remain there for quite some time, however, it gives an indication to be more cautious in buying new positions.
- You can also check for bearish divergence in the Price and Technical Indicators like RSI. If Price is making Higher Highs and Higher Lows, but RSI makes Lower Highs and Lower Lows, then it gives a strong indication of the end of Uptrend.
Buy on Bad News:
During a strong Bear Market, you can witness bad news from all corners. Every expert around will advise you to Sell and run away from the Market. As per them, this is the end of the World and the economy is doomed and cannot be recovered.
Strong Players like Operators make the best use of this situation. When Retailers or Weak players are selling heavily on Bad News due to their fear, they slowly start accumulating their positions in selected Stocks. In other words, when you or I am selling fearfully, Operators are quietly building their positions at lower price levels.
Once the accumulation by Operators is over at the low price levels, the market starts gaining rapidly without giving any chance to Retailers to enter their positions. On the contrary, Retailers keep Shorting such advancing Stocks which harms them more and more.
This results in a huge loss to them and they keep shorting at lower price levels in the false hope or anticipation of another bear run in that stock or index.
The solution to the above problems - Buy on Bad News.
You can follow -
- If you already have such Stocks in your portfolio, then you can start accumulating more in small quantities on every price dip because of "Bad News". Do not be fearful and sell them at cheap rates. Of course, the falling Stocks should be a fundamentally strong company before you decide to buy when it is falling. You can also check carefully on whether FIIs or DIIs are buying such Stocks.
End of day Delivery % also gives a good indication that Strong players are accumulating such Stocks when the price is falling.
- If you do not have Stocks, then check whether the current price levels are already in the Oversold zone. You can use Technical indicators like RSI or Stochastic to find out whether the current value is around 20 or 30. In a strong bear market, the value can cross below 20 as well & remain there for quite some time, however, it gives an indication to be more cautious in selling new positions.
- You can also check for bullish divergence in the Price and Technical Indicators like RSI. If RSI is making Higher Highs and Higher Lows, but Price makes Lower Highs and Lower Lows, then it gives a strong indication of the end of the Downtrend.
Conclusion:
As you have gone through the above explanation, I strongly believe that you are aligned with the below statements -
- Buy when everyone around you is Fearful.
- Sell when everyone around you is Greedy.
- Buy on Bad News.
- Sell on Good News.
I will keep on sharing additional aspects of Trading and Investing in future articles. Keep Reading!
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Finance guru Speaks