How Bubble Traders Sow The Seeds Of Their Own Destruction
There is nothing wrong with making a quick buck in the market. Although the real issue in times such as these is not whether one can make a quick buck; it’s if one does make a quick buck, what next?
Ultimately the folk rushing headlong into the most gut-wrenchingly volatile stocks in BubbleMania 2021 Edition are, for worse or much worse, inexperienced traders.
The sad truth is that most of the people who make money, even a lot of money, in these heady days will go on to lose it. It’s even possible to quite accurately predict how they will lose their massive winnings.
1) They left it as paper gains and rode the price tsunami all the way up, and then all the way down. Why wouldn’t they sell out as prices kept running higher?
Because they kept thinking that prices would rise even higher. Even as the stock is down 20%, they think 20% is nothing given the volatility seen in the previous weeks.
Now the stock is down 50% and their emotions take over with: “no pain no gain!”, “winners don’t quit!”, and ride it all the way down.
2) They refuse to sell out even as prices turn down and the market notches a few big down days in a row.
Why wouldn’t they sell out as prices started crashing back from the moon to earth?
Because they kept thinking that each successive low was a chance to buy more, and even if they did not buy more, they believed that others would come in to buy.
If people were buying at $200, and the stock went to $300, SURELY now that price is at $150 it’s a bargain! BUY BUY BUY
3) They took profits on their position, and then saw the market continue to surge.
Armed with a much larger trading account, they take a much larger position than before, thinking they can ride the market up again… only to find themselves in scenario 1 or 2.
4) They took profits on their position, re-entered, made even MORE money, and sold out again.
Confidence is sky high now, it’s almost as if God himself anointed the trader to be the Hero of the Market. So the trader goes long again, and comes face to face with scenario 1 or 2.
Adding fuel to the whole situation is the fact that all of these folk also have to deal with the euphoric high of making more money than they ever thought possible, in the span of days.
Turbocharging this euphoria is the herds of other new buyers stampeding into their position(s). The feeling of being rushed along with the crowd while watching one’s PnL continue to skyrocket is pure exhilaration.
One feels on top of the world, that one can never be wrong. And that’s when the trouble starts.
Markets do not care about right or wrong. The same ruthlessness they applied to squeezing the shorts will be turned back on themselves… by themselves.
After all, the inexperienced people who, in this late stages, bought stock to get long, did so from other inexperienced people swept up in the current mania. And when the tide turns, as it inevitably does and these longs sell, it will be once again to other inexperienced people who still believe that the market can do nothing but shoot higher.
Ultimately, BubbleManias sow the seeds of their own destruction.
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