The Psychology of Trading

Did the retail crowd go away in May?


The retail mindset kicks in from the start of any newly observed ticker symbol. The retail buyer is drawn to the crowd like a moth to a flame and if the crowd is here then there must be something worth going after. This thinking is rewarded when the stock rises and hopefully the retail seller makes a profit and moves on. Some get caught in the momentum of action and constantly look to repeat the cycle with other symbols thus leaving a very active stock in its infancy and handing over large profits to other more astute traders. Another version is the trader who comes in and buys into the hype but never leaves with any profits even after months or years of following along through highs and lows. These traders invariably have dreams of 100 baggers dancing in their head and want to turn their five thousand dollar investment into freedom 45.

The experienced retail trader sees himself as having many tools of choice when selecting trades but often gets caught in the "crowd draws a crowd" mentality as well. This is a reality in the markets and in the chat rooms across the nation, but what is driving this mindset to stay in or get out? This is where things get a little tricky. Whatever you think you know about the markets, you can bet someone has thought of ahead of you and is preparing for your reaction. I am not necessarily talking about short sellers but rather the guy who is accumulating the stock you are hoping to flip. We have all heard the term "the market is a hungry beast", well that simply means that a lot of traders constantly want to be fed news and reassuring press releases that help sustain upward momentum. How realistic is that?

Companies can't keep spinning out news these days without painting an obvious picture that their business plan is only about releasing headlines that grab attention. I personally don't look for that as a reason to stay in but if the pattern is already set up then a lack of feeding should hint to you the crowd is about to head to the exits. The guy working to accumulate may be plugged in a little better than you or he knows a bit more on the psychology of trading.

When the news pattern breaks on a hype story or even  a legitimate stock the short term result can be a mass exodus, even though the business plan is on track to deliver. I often think a company can be a victim of its own success in the fact that the constant surge of positive news and uptick followed by 2-4 weeks of silence leads the crowd to feel this train has some how jumped off the tracks.

This is where your institutional buyers and more astute traders step in to gladly take your shares from you as you are leaving. The reason is not because this is about to pop tomorrow, but because this is that one long term high growth story you always dreamed of but it just needed more time to mature. Most stories take time to grow and they will go through all the aches and pains that come with growth. The retail trader is rarely along for that ride because he has trained himself to look for the wrong signals of a true 100 bagger in the making. I have seen chat rooms turn ugly based on the absence of news for 2 weeks on a story they were recently spoon fed to that point. Companies can't hold back material news, but they should not get caught in trying to feed the hungry beast. News for the sake of a headline is not something I like to see. I would rather my favorite stock went a little dormant until significant milestones are hit. This also gives me an option to try to bottom feed while day traders look for an exit point. I don't reward sellers, so my bid is down there somewhere.

Summer came and I forgot to go away in May. I tell myself every year that I am going to take next summer off, but next summer never comes. I can't stop watching the markets even on a bad day. Once you have some success at any level it becomes an addiction that can push you every day to find another deal. Don't be in a hurry to make money. The right deal for you is out there. Chat boards can be a good place to find a lead but don't look for solid advice. I have also learned how many intelligent and active traders are on Twitter and that they can inadvertently pass you the tip of a lifetime if you are watching. The best thing a new trader can do is to get out into the world and connect. Reach out and ask questions, mingle with the in crowd and find out what they are looking at and why. This is a good start point for your own due diligence and you may often find the same winners in the same high flying stocks.