Throughout the history of the markets, there are timeless rules professional investors have learned to follow.
These rules have served as guidelines to every person who has ever tried to invest his/her hard earned money to the markets. You can also do the same. Read on!
Mean Reversion
This rule states the market returns to the mean over time, whether it faces positivity or negativity. The markets will always return to more appropriate, long-term evaluation levels.
Reversion generally puts the market back to its former state. So, for individual investors, the lesson is clear cut: stick to the plan.
Use your best judgment when measuring what’s going on around you and do not get swayed by the daily chatter and noise of the market.
Excess Leads to Excess
Overcorrections happen when the markets overheat. A correction is said to happen when the market moves 10% of its peak price. Thus, an overcorrection means bigger movements.
Market crashes offer investors enormous buying opportunities. However, they also typically overcorrect in either direction (up or down).
For the smart investor, these times are times when patience becomes super important. Also, the investor should have a carefully planned course of action.
Excesses Do Not Last Forever
Many investors have the impossible notion that when things are going well, they will continue doing so, and therefore the profits are limitless.
Nothing lasts forever, and this statement is particularly true when it comes to the financial markets.
So never count your chickens before they hatch, whether your taking advantage of great buying opportunities or soaring high.
Fear and Greed are Bad for Investing
Fear and greed are basic human emotions, but they are the greatest enemies of investing.
A disciplined approach is key to profits, whether you’re a long-term investor or a day trader. Every time you trade, you must have a trading plan.
Also, know when to exit the trade. However, this step is incredibly difficult to do. In theory, it can be done using steps.
In reality, however, fear and greed can act quickly to distort your reality, especially if the asset you hold is extremely volatile.
Bear Markets, Three Stages
Expert market analysts have found common patterns in both bull and bear market actions.
The usual bear market pattern involves a sharp selloff. During these times, markets tend to drop 20% or more.
In most instances, whole indexes are affected by bear markets. And these markets usually happen because of slowing or weak economic activity.
Then, what follows is the “sucker’s rally,” where investors flock into prices rising quickly before making another correction to the downside again.
And the final stage of the bear market is the painful meltdown to levels where valuations become more reasonable and a general state of depression dominates the investment world.
Investors Love Bull Markets
Of course. Who doesn’t love optimism when it comes to investments? This is true for most investors, since prices continue to rise during such periods.
But if you’re a short seller, you might prefer bear markets, where you can bet that stock prices will drop and you’ll gain from the stock’s losses.
The key to success is awareness. That’s why you need to go and check Finance Brokerage educational websites available. And you can choose the one that suits you the best in the Online Trading Courses offered.
