Technical Formula for Understanding MARKET PSYCHOLOGY
I lost a lot of money in Tehran Stock Exchange. Because simply I arrived too late. I read a lot in past year and now I can say why I lost a lot of money and how can prevent it in future.
It's simply the psychology of the market. Retailers like me get in when everybody says that something is good and profitable; Seriously Everybody!
Tonight I was thinking about a technical formula of analyzing market psychology to find better entries in markets and I came up with this.
There is 4 waves in every market/stock/digital coin/etc.
Wave Zero:
Smart money come here. It happen in things that are very cheap and nobody talks about them. Wealthy investors never buy expensive thing, remember!
On the chart you can se a slight rise in overall volume but price do not show a big rise. It respect the resistance. Price don't break it's prior resistance but the bottom price rises.
You can see higher lows in the chart but no higher high. Smart money controls the price and didn't buy a lot in one week. Because they don't want people get noticed yet. So they keep buying a long period but their positions sizes are low.
After buying 75% of their desired volume, they but the other 25% faster. So you can see a rise in price, higher highs and higher low and finally the breakout happens and first wave starts.
Wave One:
Obvious rise in price and volume but still not everybody knows. News agencies don't talk about it yet. The only group who find out are seasoned traders. They are going to buy in the pullback of this wave. So this wave has the shortest retracement. Because there is not a lot of rise in price and experienced traders have bigger money than retailers.
Wave Two:
This wave has the longest candles and biggest gain. Everybody is happy now and enjoy the profits. At the end of this wave news agencies start to talk about it. Gurus publish some analysis and say that it can go even higher. Slowly retailers getting noticed. But they are not confident about it yet.
Smart money starts to sell about 50% of it's positions. Because retailers don't have a lot of money it takes time for them to buy the pullback so we have a longer retracement than Wave One. Notice, smarter retailers come here and others just come when the Wave Three starts.
Wave Three:
This is Euphoria. People are exaggerating about the stock. They think it worth a lot higher and they think it can go to the moon. Here we see lower volumes than prior waves because in this stage retailers move price higher and they don't have a lot of money. Slowly sells rise. Volume keep rising but the price lose it's momentum and the candles getting short until red candles and dojis show up. BOOM! Smart money and the experienced traders start selling all of their stocks.
From here you can see price getting down and people get nervous. This is the real sign of down trend.
So summary:
How to find out where is smart money?
Go search cheap things in weekly timeframes. Find something that is consolidated and you can see a slight rise in overall volume. Price shows higher lows but no higher high; inside consolidation. It's not a good entry for retailers because price can stays here for months. There is no sound about this stock in market.
How to recognize first wave?
Obvious rise in price and volume. Price broke from a consolidation lately. Nobody noticed it yet; it's very important! Don't look in news and guru groups for good stocks/digital coins/etc because if they know we are not in first wave. A few knows about it and they are hopeful. It's Optimism phase. The last sign is that retracement doesn't last longer than 4-5 weeks. After breakout from top of wave one, buy the pullback to the broken resistance. It's the best entry for retailers.
When to sell?
When news start talking about your stock sell 50%. Highest candles, highest volume, longer pullback, people who have it are joyful and excited and non experts look for opportunities to buy the stock. These are signs of second wave. It's the excitement phase.
After another breakout from top the last wave starts. You can see retailers are super optimist about the stock. No bad News about the stock but you can see decreased volume. You can sell other 50% here. It's the Euphoria.
People who invest in long term can benefit from above explanation.
One last tip: traders who work with Elliott waves, the first wave is the first Elliott wave, the second one is the third Elliott wave and the last wave in my explanation is the fifth wave in Elliott theory.
Tell me if it helped you or you have other ways to recognize market psychology by technical analysis.
It's simply the psychology of the market. Retailers like me get in when everybody says that something is good and profitable; Seriously Everybody!
Tonight I was thinking about a technical formula of analyzing market psychology to find better entries in markets and I came up with this.
There is 4 waves in every market/stock/digital coin/etc.
Wave Zero:
Smart money come here. It happen in things that are very cheap and nobody talks about them. Wealthy investors never buy expensive thing, remember!
On the chart you can se a slight rise in overall volume but price do not show a big rise. It respect the resistance. Price don't break it's prior resistance but the bottom price rises.
You can see higher lows in the chart but no higher high. Smart money controls the price and didn't buy a lot in one week. Because they don't want people get noticed yet. So they keep buying a long period but their positions sizes are low.
After buying 75% of their desired volume, they but the other 25% faster. So you can see a rise in price, higher highs and higher low and finally the breakout happens and first wave starts.
Wave One:
Obvious rise in price and volume but still not everybody knows. News agencies don't talk about it yet. The only group who find out are seasoned traders. They are going to buy in the pullback of this wave. So this wave has the shortest retracement. Because there is not a lot of rise in price and experienced traders have bigger money than retailers.
Wave Two:
This wave has the longest candles and biggest gain. Everybody is happy now and enjoy the profits. At the end of this wave news agencies start to talk about it. Gurus publish some analysis and say that it can go even higher. Slowly retailers getting noticed. But they are not confident about it yet.
Smart money starts to sell about 50% of it's positions. Because retailers don't have a lot of money it takes time for them to buy the pullback so we have a longer retracement than Wave One. Notice, smarter retailers come here and others just come when the Wave Three starts.
Wave Three:
This is Euphoria. People are exaggerating about the stock. They think it worth a lot higher and they think it can go to the moon. Here we see lower volumes than prior waves because in this stage retailers move price higher and they don't have a lot of money. Slowly sells rise. Volume keep rising but the price lose it's momentum and the candles getting short until red candles and dojis show up. BOOM! Smart money and the experienced traders start selling all of their stocks.
From here you can see price getting down and people get nervous. This is the real sign of down trend.
So summary:
How to find out where is smart money?
Go search cheap things in weekly timeframes. Find something that is consolidated and you can see a slight rise in overall volume. Price shows higher lows but no higher high; inside consolidation. It's not a good entry for retailers because price can stays here for months. There is no sound about this stock in market.
How to recognize first wave?
Obvious rise in price and volume. Price broke from a consolidation lately. Nobody noticed it yet; it's very important! Don't look in news and guru groups for good stocks/digital coins/etc because if they know we are not in first wave. A few knows about it and they are hopeful. It's Optimism phase. The last sign is that retracement doesn't last longer than 4-5 weeks. After breakout from top of wave one, buy the pullback to the broken resistance. It's the best entry for retailers.
When to sell?
When news start talking about your stock sell 50%. Highest candles, highest volume, longer pullback, people who have it are joyful and excited and non experts look for opportunities to buy the stock. These are signs of second wave. It's the excitement phase.
After another breakout from top the last wave starts. You can see retailers are super optimist about the stock. No bad News about the stock but you can see decreased volume. You can sell other 50% here. It's the Euphoria.
People who invest in long term can benefit from above explanation.
One last tip: traders who work with Elliott waves, the first wave is the first Elliott wave, the second one is the third Elliott wave and the last wave in my explanation is the fifth wave in Elliott theory.
Tell me if it helped you or you have other ways to recognize market psychology by technical analysis.
Comment:
Inside the chart I wrote the first wave correction is under 5 candles. I mean under 5 weekly candles not daily. Because I published the chart in daily timeframe that mistake happened. Sorry for that :)