The Equity Trader’s Corner – The Danger Of FOMO And When To Get Started

In today’s Money Morning… hot or overheated?… Pilbara Minerals is in full swing… beware of the false epidemic… live trading… and more…

Hot or overheated?

There is a lot of action in some areas of the market right now. The metal battery / green energy theme has been taken up a gear with punters chasing anything that has a shade of green.

Many other sectors drifted to light volume as you would expect just after Christmas.

If you haven’t been in the rally, you’re probably starting to feel a bit of FOMO (fear of missing something).

If there’s one piece of advice I can give you right now, it’s that chasing stocks that have already doubled or tripled in a few months rarely pays off.

Pilbara Minerals in action

Lithium stocks now price lithium well above where they are currently trading. Things are starting to get a bit hot.

PLS appearing stretched

The trading model I told you about in these Trader’s Corner articles is based on waiting until traders and investors have been shaken up and then jumping on it as soon as the momentum turns.

Pilbara Minerals SA [ASX:PLS] is a great example of the types of trades I’m looking for. The green box above is just the 75-87.5% retracement of the entire highest wave in PLS from the listing in 2014 to the high reached in late 2017 (labeled “2” in the chart above ).

This is what I call the “buy zone” of the wave because it is the point where most traders gave up hope and left the positions they had taken during the rally phase. If you see a change in momentum from this area, there is a greater chance that it could turn into something bigger than a rally in the short term.

The sale of PLS ​​took two years and prices went from $ 1.25 to 13.5 cents. It’s quite a fall.

If you had bought the stock at, say, 50 cents in 2016 and cranked the price up to $ 1.25, then saw it slowly sell for two years at 13.5 cents, I guess you would have given up in disgust and thrown the action at some point.

This cyclical process where traders are tempted to take positions on big rallies and then rocked, goes on all the time.

Would you like to buy PLS near the buy zone in the chart above or buy it now as it hits new all-time highs?

Beware of the false break

The other thing that I have taught you in these articles is that prices have a lot more false breakouts than breakouts. Hobbyists are well known for chasing breakouts. These are cannon fodder for professional traders.

Look again at the chart above and imagine what the prices looked like when they broke the high reached at “1” and rallied to “2” (the arrow in the chart above). It was at this point that the amateurs pounced on themselves by buying the stock.

Then the music stopped and a false breakout from high to ‘1’ occurred and a new downtrend developed slowly shaking all the traders who had paid too much for the action.

We are now in a similar position, with prices hitting the old all-time high at “2” ($ 1.25), after rising 300% in three months.

If you know that false breaks happen more often than not, what do you think are the chances that the PLS will break the old all-time high and continue to rally?

Even if prices are ultimately on the rise, there should be chances that we are close to seeing a correction from the huge rally that will shake loose hands.

If you’re feeling a bit of FOMO because you’re not surfing hot areas, don’t jump out of the pan and into the fire chasing actions that might be close to a fix.

A direct trade

It’s fine to show you a chart and tell you where you should have bought the stock. We can all do it. Harry Hindsight is the best trader in the world after all.

So I will show you real exchange sent to members of my sales department Pivot trader.

We managed to jump on another lithium stockpile Orocobre Ltd [ASX:ORE] before the start of the great gathering.

A direct trade

The setup was similar to that of the PLS in that a large correction had brought prices back into the buy zone of a major bullish wave.

I waited until I saw confirmation of a monthly buy pivot to give me a sign that the momentum was changing, then did another calculation that gave me the exact entry price and we jumped to $ 2.83.

We actually spent almost two months lightly underwater on the position, but then the fireworks started and the prices went into orbit.

We then sold a third of the position at the original target of $ 3.80 and remain long the rest.

Blindly chasing bullish stocks is the easiest way. Diving a little deeper into the mechanics of price action and the logic behind it can allow you to prepare well before the hordes have built up. And then you take profits just as the frenzy starts.


Murray Dawes,
For Weekend money

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