#TuesdayTip - The Volcano (Part 1)
Here's a question for you;
What are investors and traders best at?
- Overreacting
Have you seen a video of a volcano or done those volcano experiments in school?
A volcano is quiet for a while. Sometimes for years together.
Then one fine day all of a sudden there's a movement.
Huge massive rush of fire and heat suddenly surging with all speed towards the top, as if aiming for the moon!!
BOOM! It explodes and erupts strong and mighty.
But after all that, in a few moments, gravity just pulls it all back down and leaves nothing but a cloud of smoke and ash above.
You may have often heard people talking about a stock that has got some good news, and on that day the stock just shoots up.
Suddenly many people seem interested in it and start buying and price of the stock goes up.
But have you ever checked what happens to the stock the next day?
In most cases the stock price just fizzles out and drops back down.
Why? Because people overreacted and drove the prices higher than they should've.
History repeats itself, yet some never learn.
But you and I, we are smart and we will learn.
If the price is going to drop, we could make money by selling the stock expensive and buying it cheaper right?
Think about it, you know that price of something is going to fall from where it is now. So how do we make money from this?
Say today the price is 100.
Tomorrow the price may fall to 90.
If we sold today and bought tomorrow we'd make Rs. 10!
(If you didn't understand this, I think you missed out on my previous post, read it by clicking here.)
Here are the trades taken in this strategy of the last three months.
I've calculated return on Rs. 5000
Of course you can say that these were returns for just three months.
Yes that is true. Past returns do not show any proof of the future. But then, remember we are traders and we work on probability of success.
The probability of this trade strategy working is higher than 50:50 and so this strategy is useful to us.
The volcano is my favourite trade and I want you to understand it very well. For this reason, I am breaking up this post in two parts. The next part will be out in three days.
Think about this post for a while. In the next post I explain the indicators of a volcano and how to take the trade.
Also, I am planning on launching a new idea I've named "Buy me a coffee"
I'm excited about it but more on that in future posts.
Loads of great content coming out soon!