Registered: Jan 2006
10-26-06 04:44 PM
I would like to mention a group of traders. These are the foolish longs. Let me explain what a foolish long (or short) is. This is the trader that is overextended and has held on without using a tight stop initially. (overextended and highly leveraged traders must use stops). Most retail /public traders are overextended and highly leveraged. He has already gone well past his 2 percent of portfolio stop guideline and is now looking at his summer vacation money, his kids college money and/or the next mortgage payment etc slipping away from him( or may have to tell the wife). He then sells his position and gets out just near the bottom. He has feared that he is in front of a freight train and the next move down will destroy him(or his wife will). Of course, he has been in front of a freight train all the time and because of the overextension, he has put himself in this position. He must get out. These foolish longs sell (humans are built the same, there are other foolish longs selling near the same time that he is), and when they sell, it creates the final downward thrust as the divergence traders eyeing the chart are preparing to buy in. Then the foolish longs watch the price retrace upwards as they watch their fresh short positions getting whacked and they hold on to those. And the cycle goes on and on.
Note: Nowhere in this discussion do I mention anything to do with fundamentals.