- What goes down doesn’t always go up
Yet the amount of people I’m seeing say some variation of this is sky high, both online and in my real life.
This isn’t to say that it can’t go for 1-cent to 10-cents. Money can be made in any kind of market.
The bigger lesson is that trying to catch a falling knife is a terrible habit.
It’s a psychological flaw in nearly all new traders. As humans, we benchmark things. We have a sense of what gasoline should cost, what an apple should cost and hundreds of other things. When things ‘go on sale’ we tend to want to buy them because humans have a deeply ingrained fear of scarcity.
Who among us didn’t think of ways to stockpile gasoline at the depths of 2020?
I real life these are generally good instincts and habits.
Currencies are one of the most-powerful examples of this. For a generation, traders relied on cable gravitating to 1.60. When it go too high, it was time to sell, when it got too low it was time to buy. If you went offside you could hunker down and wait it out.
It worked from the mid-1980s to the mid-2010s… a 30-year stretch.
In the currency market, there is some basis for that kind of thinking. The relationships between strong, developed economies rarely shift dramatically over a few years. There’s some mean reversion built in. But the combination of Brexit, the economic malaise in continental Europe and US dominance in technology appears to have broken the regime.
In assets without intrinsic value, or a strong floor, betting on mean reversion is diasterous. Just because something has fallen doesn’t mean it will bounce back. It’s like the periods of bizarre buying we’ve seen in bankrupt companies.
In a stock, you can find a level of price-to-earnings (hopefully forward earnings), where there’s a floor. Cash flows are cash flows and that’s intrinsic value.
But far, far too often traders think that because something has fallen from 200 to 100 that it will bounce back, even if the economic situation has changed.
Trading is often about habits and the better habit is to sell things that are falling and to buy things that are rising. If something is at an all-time high or an all-time low, it’s there for a reason.
This seems to be a lesson the new traders need to learn over and over. The trend is your friend. Resist whatever urge you have to buy things that are ‘cheap’ unless you have a strong and reasonable basis of value or a reason for a turn. Even then, what’s the rush? Let it level out first. Let the other guy have the first leg of gains.
It’s an emotional market right now. Don’t get caught in this classic trap.
