Investment, especially investing in stock market can sound very intimating. The fluctuation of price, the gain and lose of the portfolio can make investors feel like out of control sometimes. However, if you look closer and long enough to it, you actually can find some useful info that help you to build a passive investment incomes. In fact, you have to learn to invest to bring you to a financial freedom and stocks are the easiest one to get into in owning a piece of companies. The learning of stock investment will only get you better and better each day and equip you with skills that can benefit your lifetime.
When I started investment decades ago, I tried hard to be thorough on analysis, understand the past cash flow, find any news around investment as possible, only to find that the same news to the same company at different time, stock price performed differently. There is no “if this happens, market will react this way” type of golden rule.
Then like many other beginner investors, I leaned to those “experts” to find their point of views, interpretations of the news and earning reports. However, this made it even more confusing and complicated.
First, experts might have some hidden agenda. When they hold a long or short position, they tend to send messages to the market to benefit their own portfolio.
Second, different expert can interpret the same message in completely different direction and meaning. It is not a strange thing to us that market can view “bad news” as in “we are already at bottom, things will get better” or “this is bad, need to react and sell”. I have written a different article “How to read news for your investment - good or fake news?”. Stay with the core of business and see if there is any fundamental changes to the business is what we are looking for.
So what is a good way to understand stock behaviors?
So after a while, I dive into analyzing behaviors in stocks and found that while the situation is complicated and overwhelming, there are ways we can stay on top by stay true to the value of the stock. I call it “recognize stock personality” to gain confidence in your stock picks.
So what do I mean by “recognize stock personality?
Like people, every stock has a personality.
It is important to know that it is human who stand behind every stock movement. Stock did not become a stock in the market until people buy and sell into it.
The reason that each stock has a personality at least for a certain period of time is because the majority shareholders are the same and their collectively behave in a certain pattern until the mix of shareholders significantly changed.
Over time, each stock develops some character traits that show similarities in its behavior for a period of time.
Like a person, we handle our change in life in a strikingly similar reactions even when we try to manage it differently because it is hard to change our thought process in a short period of time. When a stock handles break through situations, such as support and resistance prices, it will show the signs of behaviors that are similar to what it did in the near past. If recognized, it can help to project the trending of price change.
However, personality can change over long time.
Just like us, as we grow and learn new skills, theories, we tend to adopt into our behaviors. Stock’s behavior can change too, but it does not change frequently and overnight. If there is a strong volume involved, it is a sign of personality change for a simple reason, the owner mix or strategy of the trading stock has changed. Whenever there is behavior changes, it is an early sign of trend reverse.
Signs of the change are always there. Taking Weibo (WB) as an example, right now it is testing its supporting price. Notice the trend starting Oct 2018, the bottom of each wave stayed at the same supporting level. The wave went sharper and shorter with a exceptionally high volume. It is a signal of personality change that triggered a sell off. Since then the cheap price has attracted a great deal of investors and started to build waves again, only this time with supporting bottom trend up each wave after another due to different investors involved. If Weibo can continue to uptrend bottom build up, it will stay the trend of higher bottom and has a great chance to break $67 resistance pricing point. However if it breaks the patter that it has built in the past 7 months by closing low and without strong volume, it requires another round of the wave at least to make support stronger.
The volume represents the mix of investors who possess this stock. Their behaviors, as a group, demonstrate some consistency in terms of the directions of this stock performance.
How to start understanding the stock personality?
By understanding the price and volume changes in relation to the market news and company specific news. News itself does not necessarily means impacts to the stock, but the reaction to the news means the impact. Like a person, we have a habit in responding what happens to us. We could get upset or angry when we are confronted with bad news, or we could analyze it and make the most out of it. The reaction pattern stays with our approach in dealing with incidents and rarely change quickly. Knowing a stock is like knowing a person. The more we observe, the more we can predict what this person will do in some circumstances.
If you think investment is an intimated idea, learning personality can help to be more comfortable. Once you identified some companies that you believe in its strategy, growth and leadership, you should focus on identifying its trend, how it reacts to different situations, how frequent it changes some directions. You will be surprised how consistent sometimes it can be. 25%, 50% and 100% are magic numbers. If a stock goes up by 50%, some investors will start feeling the pressure of selling (would not you be too?). Many investors owning the same investment are just like you in terms of risk management. Just remember no matter how great a company or stock is, there will be volatility and trending both up and down. Learn to recognize personality can provide you extra confidence on your investment.
Simple Wealth For Women is a blogging website focusing on financial discussions. I help women to crush debt, learn how to invest and make more money. I show you simple approach and provide you with specific ideas to help you get to financial freedom and build an amazing life.
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