These sayings
carry important lessons about the markets.
Many trading advice
expressions have been coined to describe the dynamics of the stock market.
These adages remind us to avoid traps and
seize opportunities. Here are some of the most common ones that reflect
important insights about the markets.
The trend is your friend
Some traders believe they need
to behave differently in order to make smart investment decisions. The
challenge is that the trend is reality. It represents the collective actions of
all market participants.
When the broad market is trending
higher or lower, so are most of the stocks in it.
Rather than bucking the trend, acknowledge the direction of the overall market
and plan your trades accordingly.
Don't try to
catch a falling knife
This saying applies to buying
a stock that is falling sharply. Just as it is dangerous to try and catch a
knife falling to the floor, it can be just as risky to buy during an aggressive
sell-off. If your analysis indicates
that now is a good time to buy it, act accordingly. But, don't buy just because
it is "on sale." We've all seen that item in the store that is marked
down 10 percent and three weeks later is marked down 25 percent or more.
Purchasing these "sale" items early on can put a dent in your trading
account.
Buy the rumor and sell the news
This adage reminds us that
rumors can drive a rally or a sell-off in
a stock. People speculate on the impact of a rumor, and this speculation gets
baked into the stock's price. If the rumor is proven to be true, then the
impact might already be reflected in the price. If the rumor isn't true, then
the stock is still likely affected. In short, remember that stocks often move
on speculation and then adjust when the news is official.
There are long-term uptrends
and downtrends but at a certain point the market pendulum will change
direction. Timing is difficult but it is worth noticing when a company can
seemingly do no wrong or do nothing right. During these times, think like
a contrarian and
don't become complacent.
This expression is counter to
the idea that "the trend is
your friend," but it is really more of a
reminder that every trend will ultimately end, and it often seems to happen
just when it feels like it will go on forever.
Bull markets
climb a wall of worry
This expression highlights how
markets often trend in spite of how people are feeling.
What keeps a market moving higher is that there are more buyers entering the
market. The opposite is true when a market keeps moving lower. If you're waiting
for everyone to agree on the market, you could be waiting for a long time.
Markets can go up when people are still queasy and can fall apart during
seemingly good times.
