Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
Market psychology is mob psychology.
When equities begin to rise, people get excited. They see green, and they think buy.
They won’t stand idly by while others make money.
And when prices drop, fear kicks in. Red everywhere!
They sell as fast as they can press buttons.
“It’s herd mentality at its finest, not much different than the crazy crowds of people trampling one another at a store trying to get the best Black Friday deals.”
The technical indicators in my Alpha Hunter algorithm drive my trades, not market sentiment.
However, sentiment has its uses.
If sentiment is high and the charts indicate an upside potential, you might be able to skim quick profits off the end of a big run.
Sometimes I’ll take day trade or overnight hold on this basis.
But the actual value of market sentiment is that it helps you pick the best entry and exit points.
So how do you use it?
Go against the masses and use the sentiment as a contra-indicator to your trades.
Let me explain.
When frenzied buying continues on stocks that have already made the most significant part of their move, ask yourself, who’s selling?
It’s big money players and retail traders like me who follow in their footsteps.
Commodities have had a big run recently, and I’ve made my share on tickers like CORN and URA. The hotter the market sentiment and the faster the price rise, the less I wanted to stay in the trade.
I work in probabilities, not greed.
Whenever a stock is over-extended, the odds favor a reversion to the mean. Thus, a pullback is far more likely than a shot to the moon.
Getting in at those levels is terrible trading.
However, I’d be happy to sell my calls or shares to you if you’d like to buy them. I’ve already made my money.
At most, I might leave a portion of my original position on just in case it keeps going.
Let’s look at the converse situation.
When sentiment falls on companies with solid fundamentals like GOOGL, I’m scouting for opportunities to get back in.
Learn to dissociate red with bad.
I’ve said it before, there’s no such thing as a bad market if you’re positioned correctly. Personally, I love down days because they give me opportunities to get into trades at a low price.
Consider it a sale on options contracts.
Scour lagging sectors and stocks for your favorite set-ups. Then, keep them on your watchlist and be ready to buy when big money starts flowing back in.
It’s always better to be two days early than one day late.
Just this week, my clients and I have scored some TRIPLE-DIGIT wins on GLD.
We saw the set-up building over the past few weeks and kept scaling in so that we were able to bank some excellent gains during this most recent pop in price.
Don’t go chasing that trade now.
It’s played out.
Several web services track market sentiment, but you don’t need a subscription service to find these opportunities.
What you need are watchlists and attention to detail.
Understand that money flow into and out of sectors and stocks is rotational. So if you want to get in on the big moves, identify them early.
GLD gave us ample warning that it was about to move.
We saw a double bottom chart pattern, our technical indicators were flashing buy, and bullish candlestick confirmed the impending channel breakout.
Here are some basic guidelines.
Find the set-up and start a pilot position. This could be 1/3 or less of your total intended allocation.
Give the trade 7 days to do something. If it stays flat, but the signals remain strong, then remain in the position.
On the other hand, if the stock starts to move towards profit, add in the rest of your position at pre-defined price targets.
If it starts to move against your position, cut it quickly.
These basic ideas are the bread and butter of successful trading.
Remember, it’s the early bird that catches the worm.
Always strive to be first in line for profits, or you’ll be stuck with the leftovers.
For more great information on my method, check out Rogue Investing’s YouTube channel.
Also, if you’re ready to really start making some cash, then become an Alpha Hunter and sign up for my newest coaching and alert service, The PayCheck trade.