Successful day traders understand the concept of volatility and capitalize on it when they see it. Volatility is a technical term used to describe the relationship between a particular price and its counter-price. When you see a stock price drop, its volatility is also affected by the same amount. When you hear the word “volatility”, your first thought probably is of volatility indices.
Vectors track the market like a fader on a winning streak: you can place your pick inside or outside the swing. Volatility is a term of endearment to traders.
They are the best to watch out for. They can seem very volatile, especially when they are trading on the up. Often, traders will not be around for very long to see the difference. To put the volatility to use, simply put, volatility is the ability to predict the direction of the market.
You will see these traders trading the markets 24/7. They are not present during the day, they are always with their computers. To make matters worse, many dealers are taking advantage of the new electronic implant market to offer these traders the chance to win thousands of dollars.
So, how do you spot a hype cycle?
Look for stock price reversals that resemble a cat out of hell. Most cycles start out in the upper mid to low 90s and quickly deviate from trend. Most cycles end in the lower teens or low 20’s.
Hype cycles are composed of two parts: the initial hype, and the correction. The initial hype is the low number of shares that are changed during the course of the day. Most importantly, it is always a REASONABLE number of shares that are changed! Many early adopters to the stock markets will run the numbers on a given stock and ask if it will go up or down.
The high number of shares that are changed during the course of a trading day is the major selling point many experienced traders have.
They look for these low numbers of shares to be the buying pressure they need to continue trading. They will NOT buy low they need to continue trading. For the inexperienced trader, a low number of shares is a big selling point.
Often times a trader will take a chance on a stock that shoots up after it’s hype has died down. Often times, when a stock does not go up, the high number of shares that were changed stays the same.
It’s as if the trader did not made a move. This is a classic example of the Hype and the Contradiction. Often times the HIGH number of shares that are changed stays the same and the low number of shares that were changed is the opposite.
Often the answer is obvious. Closely scrutinized charts will show you a trailing ten minute uptrend followed by a trailing ten minute decline.
Often the answer is “yes” to both of these questions.
There is only one winner in these transactions, the HYPE maker. Those that bought the hype bought low and those that listened to the advice to sell high.