Investing and Trading can be a tricky endeavor, and there are many tricks and traps that can cause the novice to lose money. Before you do any trading or investing, it is important for you to recognize these dangers, so you do not get hurt. In this article, we will explore into some of the most common market traps.
Are you on the right side?
Before we get into the traps, it is important to understand the markets are a net sum zero game. That means for every buy transaction, there must be a sell and for every sell transaction, there must be a buy. When money is lost in the market, it does not just disappear. It just transfers into someone else’s account. Trading is just simply a transfer of money out of the accounts of those who do not know what they are doing into the account of those who do. The goal is to be in the right side of the trade. Over the years these banks and institutions have created common traps to get the novices to buy when they want to sell or sell when they want to buy. The goal is to recognize these common traps, so we do not get hurt by them more importantly learn how to profit from them.
Technical Indicators – how useful are these?
Some of the most common traps come from traditional technical analysis, specifically indicators and oscillators. You may have heard of moving averages, MACD, stochastics, RSI, CCI etc. All of these are lagging indicators. Someone created an algorithm that pulls in price and volume information into a math equation. When this information comes into the equation it creates an indicator or oscillator on the chart. That means that the price and volume action must occur first before the line can update, so when you are using these tools, you tend to get in late and out late every single time. Furthermore, the banks and institutions understand that the novices are using these tools and create the signal that novices are using to buy so that they can sell. They know the novice playbook and use it against them. Here are few of those indicators. To get more technical indicators, you can go to: Investopedia Link.
Common Chart Patterns
Another common trap comes from your traditional chart patterns. You may have heard of double tops, double bottoms, cup and handle, head and shoulders etc. Every single one of these patterns are teach people to buy when prices are rising and sell when prices are falling. That is the exact opposite of how you make money in any market. The goal is to buy low and sell high not the opposite.
Support & Resistance
One of the most popular forms of technical analysis is called support and resistance. This is one of the most subjective forms of technical analysis out there. Let’s say I did an exercise where I give 100 people the same book on support and resistance and have them read it for a week. After the week was up, I then ask them to draw the support and resistance levels on the same chart. When I review the charts, I will have 100 different answers. No two people will analyze the chart the same. if they were all reading the same book, they should be coming up with the same answer, but they are not so that is telling us that the method is subjective. You cannot build a rule-based strategy around a method that is subjective. Also support and resistance is where you will find most of the common traps. The reason why is because the institutions know where the novices are drawing their support and resistance lines and use it against them. These are called bull traps and bear traps. You will often know if you are getting caught in these traps when your support and resistance lines break, you stop out for a loss and then the price reverses quickly on you.
How about Fundamental Analysis?
Many investors like to consider fundamental information before they trade or invest. Fundamentals are considering things like earnings, growth rate, balance sheets, PE ratios, products and management team. Here is the problem with that analysis. When all the information on the company is amazing, is the stock going to be high or low? Often, time when the information is the best prices are high. We do not want to be buying high, we want to be selling high. The best opportunities are usually when the fundamentals are poor. Don’t we want to be buying when prices are low? Fundamentals have investors doing the opposite.
Upgrades and Downgrades by analyst is another place you will see traps. Every day, you will see analysts putting upgrades on stocks. They are telling us that based on their analysis, that these stocks are great investments. This encourages the novices to buy in. We must be incredibly careful, because often these banks and institutions will upgrade stocks that they are looking to sell and downgrade stocks that they are looking to buy. Remember, since everything is net sum zero, they need some to take the other side of their trade.
Conclusion
So, in conclusion, these are just a few of the common market traps that are out there. There are more than what we have listed. You may have been caught by some of these already. The institutions are setting these traps everyday to get you on the other side of the trade. Before, trading and investing in any market, it is important to recognize them so that you do not get hurt. Now you may have heard the old saying, if you cannot beat them, join them. That is what we do here at the Pinnacle Institute. We teach our members how to recognize where the big banks and institutions are buying and selling, so we can trade with them instead of against them. Therefore, when these traps are created, we can turn what used to be a loss for someone in the past into a profit.
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