Trade with Market Crowd Psychology
Crowd behavior can be handled through master key terms referring to crowd behavior. These terms are accumulation, distribution, changing our position and breakout movements.
Accumulation means either to buy for the first time or add to positions.
Distribution means disillusioned about the prospect of their stock price rising result in sell stage called as distribution.
Changing your position means reducing the position or squaring off the positions and getting into cash position.
Too far moves means breaking support or resistance and entering zone also called as “breakout moves”.
When prices surpass a normal limit defined by an indicators then it is called as extreme. In uptrend when everyone want to buy which already bought causes overbought condition while in downtrend when everyone want to sell that already heavily sold called as oversold condition.
Every crowd is different. One crowd may always respect a support line while others enjoy breaking the support lines by the just a little to induce selling so they can buy at cheaper level.
A move in the opposite direction of the main trend is called as a retracement. In uptrend, a retracement always a drop in price also called as correction. While in downtrend a retracement is always rise in price called as pullbacks. Sometimes retracement can get out of the hand and transform themselves into trend reversal. An ordinary retracement caused by position squaring but it turn into full-fledged reversal rally if news comes around support zone, this commonly happens day to day in trading world.
There is no reliable rule to tell when correction will stop and when primary trend will resume but you can see sometimes early signals on indicators and oscillators on chart. There is not fix rule but professional trader’s uses some common finding as rules for this and those are retracement won’t exceed significant prior high or low. Look for round numbers and 30% rule.
Sometime professional traders uses Gann’s 50% retracement rule or Fibonacci retracement theory or Elliott wave theory to predict correction and reversal. But these methods requires lot of practicing experience to make them work.