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Why Markets Fall Quicker Than They Rise

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    Why Markets Fall Quicker Than They Rise

    All markets move in both directions (up and down), and as professional traders, we do not care which direction the markets are currently moving, because we can make a profit by trading in either direction (long or short). However, there is one difference between the two directions that is interesting to professional traders.

    The difference is that most markets tend to move down quicker than they move up. This applies to all types of markets (stock indicies, futures, individual stocks, currencies, etc.), and to all timeframes (fifteen minutes, hourly, daily, etc.). The reasons for this tendency are the human emotions that are associated with rising and falling markets.

    Fear and Greed

    The non trading public (which includes most buy and hold investors) have been conditioned to believe that rising markets are good and falling markets are bad. When the markets are going up, the emotion of greed is in control, so the public buy stocks, which gives the markets short term momentum to the long side. When the markets are going down, the emotion of fear is in control, so the public sell their stocks, which gives the markets momentum to the short side. Initially, these two emotions would appear to balance each other, however, fear is a much stronger emotion than greed, so the reaction to the fear is much greater than the reaction to the greed. It is this reaction to the fear that propels the markets downwards.

    For example, long term investors hear some news about company XYZ, so over several days they buy shares of XYZ at various prices that they consider reasonable. This slow accumulation of XYZ causes its stock price to increase, so the long term investors hold the stock thinking that the upward price movement will continue (the emotion of greed is in control). However, once all of the long term investors have bought XYZ, there is no further upward pressure, so the stock levels off and then starts to decline. The long term investors now see their profits disappearing, so they all sell their shares at any available price (the then current market prices) in an attempt to keep some of their profit (the emotion of fear is now in control). As the panic selling happens in a shorter time span than the buying, the price of XYZ falls quicker than it rose.

    Professional Traders

    Professional day traders experience the same emotions (fear and greed), but hopefully they have learned to keep their emotions under control, so they do not react the same way (this is easier said than done by the way). Professional traders will follow their trading system regardless of what emotions they are experiencing, and this allows them to consistently make a profit in market conditions that amateur traders lose money in.

    Professional traders also know about the fear and greed cycle that the public experiences, and they will trade to take advantage of this. Continuing the above example, when the professional traders hear the same news about XYZ, they may wait a few days, and then take the opposite trade (i.e. a short trade). The professionals' selling also adds momentum to the stock's decline, thereby increasing the speed at which the price falls.
    Quran 2:32. "Glory be to ALLAH, we have no knowledge except what You have taught us. Verily, it is You, the All-Knower, the All-Wise."



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    View PostAyub, on 07 March 2013 - 02:14 PM, said:

    Why Markets Fall Quicker Than They Rise

    +1, Jazak Allah Ayub sb for sharing handy Article.

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