Why bulls ride escalators. Why bears love pressing the down button. And the logic behind why both work.
This article was originally published at vigtec.io/learn
Which is better: slow and steady or fast and swift?
In the turtle vs. the hare race, slow and steady was better and won the race. When it comes to the stock market game though…it’s both.
There’s a common saying in finance that “markets take the stairs up and the elevator down.”
Huh…what does that mean?
When you look at a stock price chart, the price usually rises gradually like an escalator. However, when it falls suddenly, it generally goes down vertically and quick like an elevator. This pattern of stock prices causes more damage than people realize.
The sudden change in stock prices equates to a higher perceived volatility. When the price suddenly drops or the perceived volatility rises, our flight or fight response is initiated and our fear of loss overcomes our rationale, leading us to decide to sell hastily.
In other words, fear is fast and swift, but greed is slow and steady.
In addition to the global pandemic panic, we’re also having to process the panic caused by the ferocious decline in global stock markets back in March that led many stock markets into bear market territory. But the volatility didn’t stop there, we turned right around and started another bull market stair step style on March 23rd that is still technically in motion now. (A bear market is defined as a price decrease of more than 20%, while a bull market is defined as a price increase of more than 20%.)
In order to win big when trading the markets, it cannot be a one way street. We must learn to recognize both patterns (bullish stair stepping trends and bearish elevator trends) so that we can be patient during the bull markets and let them appreciate and be swift and actionable in bear markets and use strategies to remain in the game (buying puts, selling calls, learning to trade volatility and adhere to stop losses and other solid risk management components).
We never know when the stock market will top out or vice versa when it will hit rock bottom (beware of anyone who says they do). Remember your long-term goals, your financial plan, and ultimately look at the vigtec Live Charts because they tell you the story on what is happening in the market at the current time.
We never been in a bear or bull market forever, it’ll always alternate. Train yourself to look for the patterns — the stair step bull market and the elevator bear. This will help you make money in both types of markets and in both directions.
Next time you see a sudden drop and start to panic, remember, a wise man named Warren Buffet once said, “Be fearful when others are greedy and be greedy only when others are fearful.”
