Psychology at 52 week highs/lows

Discussion in 'Psychology' started by dafong, Jan 29, 2008.

  1. dafong


    Hey guys,

    I'm interested in what you guys think about psychology for the average investor and the average institutional player when:

    a stock hits a new 52 week high
    (do they sell, buy, what?)

    a stock hits a new 52 week low
  2. Yes, I think psychology naturally comes into play here - people will be more positively excited at new highs, and gloomy and bearish at new lows -
  3. either more excited, or on the opposite camp throwing in the towel after repeatedly getting taken to the woodshed.

    I recall when I said that I thought the four horsemen were way overvalued on a TA short term basis. I remember everyone on the board thought it was absolutely insane to be short any of the four horsemen as that would be pure suicide. Not long after they all tanked quickly and abruptly.

    The moral of that story, was that traders were definitely not feeling great and positive about the top during the time.
    They were simply too tired of getting their heads decapitated on short positions.

    I suspect the opposite behavior occurs on bottoms.
  4. markus26


    I think you have to look at whether or not the person/institution is "married" to the stock or not. If you let emotions get to you at either level you could find yourself with less money in your account. You would think being an "Institution" they wouldn't get so attached to stocks but I have seen it happen so many times. An experienced trader/investor will make sure this does not happen and look objectively and without bias at the holding.

    To answer your question more directly I would have to believe that the "average investor" is always more willing to buy at the low rather then sell at the high. Selling is a difficult thing for an average investor to learn. The mind is always saying average down on the 52-week low and hold the 52-week high. That is why the average investor should not be buying individual stocks.

    As for the institution they will punish the average/unlucky investor by exploiting the decision made at highs and lows.

    dafong, any particular reason for the question?

    Good trading,

  5. dafong


    just curious... trying to create a daytrading strategy from these answers.

    There are instances, where a stock will just shatter their 52 week/low intraday, and there will be those that will completely reverse.

    I was thinking of buying/shorting at these extremes and have stop losses if the stock doesn't continue pushing new highs/lows.
  6. markus26


  7. dafong


    i agree with you that the average investor will probably average down on the lows and hold at the tops, but who really holds the majority of the money to move stocks?

    i would say experienced institutional investors/traders hold the majority of the money and would likely take the other side of what the average investor/trader is doing (institutions selling the shares to suckers at 52 week lows, buying shares from average investors at 52 week highs).
  8. markus26


    I have seen so many bad trades by both institutions and individuals that I don't know the answer to your question. The minority is right a majority of the time. Hence, once I narrow down, and rank, the "stocks to watch" for the day/week I leave it primarily up to risk management. I am a believer in the KISS strategy. Minimize your risk by only taking high percentage trades.

    Good trading,

  9. dafong


    I know a stock move depends on a lot of things, but holding everything else constant, would you rather buy at a 52 week low or 52 week high (for short term moves) / would you rather short at a 52 week low or 52 week high (again, for short term moves)?
  10. Insanity baby, pure insanity.

    Logic takes the back seat, greater fool theory rules.
    #10     Jan 29, 2008