"Market Has Life" - Weekend Effect

Five trading days, ended on Friday begins again on Monday. The remaining two days of non-trading days contributes a significant impact on the following week opening. Most of them are affected by news during weekend or emotional recovery during these two days.

Since the topics here are about the psychological of stock market, let's talk about emotional recovery (emotional adjustment).

Some companies know such effect does give significant impact to the traders/investors. Therefore they like to release bad announcement after the Friday market closing hoping for the next two days will allows the traders/investors are emotionally adjusted.

Human has short memory. You may forgot what you have traded few months back (unless it is a significant trade). You may forgot some bad things about some companies after seeing their stock price surges. In the two days in the weekend, the traders/investors will go through thinking process that most probably diminishes his/her nervous bearish thought. So, the next following week opening, traders/investors might just hold and see how is the situation before reacts.

The matter will be more serious if the opening of the market is on the following days after the bad announcement is released. No time to react, the selling will be larger than the situation above.

Next, what weekend effects to the market in term of TA explanation?

Long term investors look at the weekly chart is mainly for the reason of stabilized price . During the weekdays trading (intra-week), the price is much more volatile compared to inter-week. The inter-week movement has stronger evidence for the trend. Therefore in most of the cases, gapping up or down in the weekly chart has a story to tell. Most of the TA practitioners think that a weekly gap is meant to be filled (eventually in the future) by the TA theory of "gap will be filled". Things are different than inter-day's gap, some of them may not filled if you checked the historical price chart. Try to change to weekly chart, most of them are filled.

Coming to weekend effect to index support. A Weekly Moving Average (MA) has stronger evidential effect as mentioned above. Short term players like to use 5 or 10 days MA to judge the current index trend. A 5 days daily MA is too volatile (market index is affected by tons of counters) therefore it is recommended to use 5 or 10 days weekly MA for market index analysis of trend.

Broken 5 Weekly MA in STI, the market tells you its trending downwards. Therefore 5 Weekly MA is one of the support for STI especially when the market is at uptrend (things can be different if market running sideline).

So, how does Weekend Effect affects you?

"Market Has Life" - In Between Greed and Fear

Many says,

Price = Greed / Fear

So who decides it and why should you obey it?

Today I am not feeling to write much on Psychological strategy but to share some scenarios that might very close to you or even happened to you before.

"Morning 10.30am, the market as usual nothing much external effects lately. A guy logged into his trading account after hearing one of his friend's recommendation on counter X. The price is 0.855/0.860. He has no idea on the fundamental of this counter X and only thinking to buy for short term riding on the bullish market. So, he queued 0.855.

After 5 min, he saw this X counter rise to 0.860/0.865 and then 0.865/0.870. He immediately thought of buying it at 0.865 by queuing into 0.865 queue but not 0.870 because he has a gut feeling when a counter rises, it will retrace a little once awhile and he hopes to save $0.005 by queuing slight lower."

Human is weird, first he queued for 0.855 because he is not really interested on counter X. Then when counter X surges a little, he changed his mind and decided to queue for 0.865 which is 0.010 higher than his previous queue. Moreover. he even has the gut feeling the counter will retrace a little so that he could able to get 0.005 cheaper.

What action he (as a human) has made (aside not knowing fundamental) which is questionable?

1. He does not set a buying price, thus does not buying based on the value.
   Even if you are not fundamental sounded, you should have to plan how much to buy and how much gain in the end of the trading. If you aiming for 20% gain, should you buy at one queue higher? Self contradicting. If you think the price will dips, why should you buy then? After analysis that counter X has a target price about 20% gain why should you bother about 0.005? (There is an exceptional case for range trader which he/she has set a range for Buy and Sell. Therefore range trader only buy at that certain price he/she set for Buy and will sell when the price reaches the Sell price).
   
   
2. He is affected by the price surge.
   Does this action affected by greed? We can't deny we always lose to emotion. Even you are experienced trader, emotion sometimes haunts you especially the price is surging by second. Are you technical analyst? Are you fundamentalist? Are you based on gut feel? Nothing wrong here but does the price surge so important to chase? Imagine bus ran away 5 minutes ago and just because you want to catch the bus you take cab. There are a lot more counters in STI (not enough can go to KLSE).
   
   Short term/intraday trading - Hardest part if you do not stay close to the screen. Market depth would helps a little. Concentrate solely on counter X would be better. Price surge or dips is out of the scope here.
   
   Medium/Long term - 0.005 is nothing compared to your projected return. If 0.005 is so significant to you as a Medium/Long term player, you should be questioning yourself.
   
   
3. He still queue for the counter at 0.010 higher than previous queue price even he knew that the price might dips later.
   Another self contradicting. One side of the brain buys because he believes the price would surge. Another side wants it to dip another 0.005. Do you want it to surge or dip? If you are not confident, do you think you need more time?
   

The above actions are questionable but no correct or wrong on it because trading habits can be different. Therefore basic rule of trading is important to control your risk.

Anyway, there are really a lot counters in STI is under-researched. Dig then you will know.

Psychological Index - Contra Index

Contra Index is a term used to classify the amount of market contra, leverage and margin play. In general, the higher contra index is, the faster small cap stocks will rise.

The reason behind is contra normally for short term play. This applies to high leverage and margin as well because high leveraging on a margin account has a greater amount of risk if dragged too long. Thus, they are more suitable for short term position.

Next, why small cap? Retailers like to contra because they do not have much money to pick up especially those speculative counter that not suitable for long term. Basically, if you are confident to a counter to perform in long term, you will pick up the stock or buying it using CPF. Besides, some risk takers might perform leverage trading to maximize profit versus time frame in this period as well.

Contra Index ▲ Increase value and vol of small cap ▲

Speculative small cap is not healthily to the market. Generally heavily trading on speculative small cap indicates that the market is moving towards a risker direction and could easily collapses (might be final wave of Elliot's Wave). Reasons:

1. Firstly, ever rising of speculative small cap generally increases the market price ratio against earning and fundamental value. This leads to gradually cashing out by fundamentalist to transfer to other low risk (low PER) regions.
   
   
2. Secondly, retailers will turns more radically high leveraging due to human nature - gambling, greed and pride. High leveraging causes high tendency of market crash when wave followed by another wave of margin call.
   
   
3. Thirdly, as trading volume increases, brokerage risk control will break loose due to the competitive business nature (or broker to increase trading limit for higher commission earn). Hence, investors' exposure definitely will increases by opening more positions.

Many reasons more but the above three are the major ones. Basically as a conclusion,

Speculative Level ▲ Market Health ▼

This summarize to:

Contra Index ▲ Market Health ▼

The general strategy for high contra index scenario is to sell and lock profit. Avoid speculative counters if possible. NOTE: Greed kills.

The cash you prepare after locking down profit is for bargain hunting. With waves and waves of margin calls, force selling and nervous selling, one shall able to collect and buy cheaper stock for long term. Another thing to remember is, never lose your capital.

Explanation of Strategy

When market's health going down, the risk is much more higher (price too high also contributes to high risk). Sell and lock profit for most of trades by performing target price and cut loss price. You can lose all your profit in one two bad trades hence trades within your risk appetite.

Why never lose your capital? A simple mathematic will tells you why. (Link for the simple calculation of Cost of Capital Loss)

Advanced Strategy

1. Contra index high. Reaction index low.
   In this case, it is double edges sword scenario. Market can ignoring bad news due to bullish sentimental. Take this opportunity to cash out while everyone is still buying.
   
   
2. Contra index high. Cash index low.
   Sell or short smartly. Those who believes in karma can buy Put warrant. If you wish to continue to trade, you may choose to hedge with Put warrant as well.

"Market Has Life" - Unique

This month and last month, if you keep losing money. Few things for you to ponder below, hope that this article can enlighten you something.

First of all, you lose not because market is dipping, or market is volatile, or market is whatsoever. The reason you lose because you are not unique. You think like what normal person think. Me myself sometimes can't help to think like general market does. Can't be help, it is human nature. So are you going to keep losing in this market?

Earlier on last month, I told one of the forumers - that the "market has changed". The first time he heard this sentence, I bet he can't understand what I meant. I described to him that the market is hungry last month and be cautious because he don't know this market. Until he lost the first few trades he admitted the market has changed.

In this market, general market players surely loses more than gain.

1. Because that the market corrected a lot, you afraid it will corrects even more.
2. Because that prices changed from red to green, you start to buy based on colour.
3. Because that people buy you buy, people start to worry and sell and you sell.
4. Because that Dow Jones surged triple digits you buy in the morning hopes that the market will rebound.
5. Because that last correction is a 'V' you forgot about false rebound.
6. Because that you yearn for another 5% gain you waited another day.
7. Because that you think you are still live in Feb 2007.

Ask yourself, do you know what is few basic rules in trading? You will be surprise you have forgot them rather than you don't know them.

Buy at dip, sell on strength (Look at No. 1, 4)
Avoid greed (Look at No. 2, 3, 6)
Technical indicator? (Look at No. 2, 4, 5)
Emotional (Look at No. 3, 4, 7)
Lower the price, lower the risk (Look at No. 3, 6)

So, you can list out even more basic rules in trading (as much as you like). You will simply found that bad news spreader, market volatility, shortist, are not to be blamed but you, yourself. You have forgotten them since the market surged irrationally before hard landing.

So ask yourself, are you unique? Or just one of the herd.

(After this, try to list out today's market condition and check with the basic rules to see whether it is worthwell to jump in)

Psychological Index - Reaction Index

Reaction index is how much does a trader react to the market either deep green or red. Reaction index is a human psychological effect that can be factored by news, sudden change of economical situation etc. The most common correlation for STI is Dow Jones results the morning before, Nikkei opening (-1 hr SG Time) and Hang Seng opening (+1 hr SG Time).

For your information,
Regional Market opening hours in SG Time. (PM me if I am wrong)

Nikkei Index - 8AM
Seoul Composite - 8AM
SSEC (China) - 9AM
Jakarta - 9AM
KLSE (Malaysia) - 9AM
Taiwan - 9AM
Hang Seng (HK) - 10AM

Therefore, when Reaction Index high means market is more volatile and more sentimental driven.

Reaction index ▲ Market Volatility▲

General strategy for high reaction index is to reduce short term holding. For long term investors, volatility is unavoidable therefore can be neglected if equities price does not trending downwards shown by other technical indicators.

For risk taker, more volatility means more risk and more gain. Turnover is faster but always take note of brokerage fees. Intraday shows volatility can be exploited as well.

There are a lot of general rule developed by the traders themselves when facing volatile market. Therefore it can be varied from an individual to another.

Explanation of Strategy

Volatile market is not good for new players because of emotional effects on them. If you notice, most of those who lose in volatile market is new players. This applies to contra players as well because when emotion takes control, human tends to act irrationally thus always end up at losing side. Therefore, avoid leverage, warrant, contra if the risk control is inadequate.

One good thing about high reaction index is good for picking up bargain from nervous herd. Whenever reaction index gone wrong and with some unique regional market movement, the first 5-15 minutes of market opening is good for bargain hunting.

Advanced Strategy

1. Reaction Index high with Cash Index high (for STI only)
   Smart money can be earned for the first 5 minutes of market opening provided some conditions are fulfilled. (Look for a clue for nervous market yourself, play at your own risk). When nervous investors try to jump out of the wagon, quickly grabs up some bargain buy and start to queue to sell. Holding period between buy in and queue to sell and sell price is case by case basis (NOTE: DO NOT greedy).
   
   
2. Reaction Index high with Contra Index high
   Be cautious. Force selling and margin call may followed by this. Cut loss when your target is reached. Money can be earned again but capital loss is a no-no. Take note of the volatile low cap speculative stock. Shorting can be performed if you don't believe in karma and skillful enough. If you do not have either one of these - skill, luck, money to hold, can consider cut, stop and wait.