When you’re a new investor, it can feel like you’re always the last one to arrive at a party. You hear in the news or on social media about stocks or cryptocurrency making huge gains in a short time period. After getting excited about a big profit and buying some for yourself, your portfolio quickly starts to lose money.
It’s almost like all of the other investors knew you were a newbie and waited until you bought to drop the price to teach you a lesson to stay away. In reality, this is not true, but it can certainly feel this way when it happens to you over and over again. This is a very common mistake, and it’s easy to fix.
By understanding why this happens with such a high-frequency, you can avoid losing money this way and even put yourself on the profitable side of these trades. I’m going to break down this entire scenario for you in this post. Once you learn why this occurs, you’ll almost laugh.
Stocks & Crypto News
This problem mostly exists because of news and the media. It’s a big business reporting on financial markets and investing related subjects, so thousands of companies and even more individuals are all constantly looking for something else to talk about and publish. Speed and timing are everything in this industry.
The first company to break the news to the world will often get flooded with website traffic and backlinks. However, a lot of independent news can be slower and may be a day or two late. When you read about it, you may not know whether something just happened or occurred a few days ago. No matter the timing, your brain interprets it as a brand new event, so you react to it instantly without really thinking about it.
When you’re new to investing, you probably decide to get serious about it. Telling yourself that you can do a good job without experience by keeping yourself up to date with financial news can actually be the main thing that causes beginners to lose a lot of money with their first investments. I’m going to talk more about exactly why this happens, but there’s even more that makes this problem even more complex.
Social Media Hype
People are naturally susceptible to popularity bias. When you see a large group of other people doing and saying the same thing, you tend to believe what you’re hearing. Social media has complicated this problem in recent years since billions of people are now connected instantly. All it takes is for one person to make a statement and there is a potential for it to spread like wildfire, even when that statement is complete garbage and lies.
This especially becomes an issue with investing in the modern world. Beginners seek out content and discussions to learn more to avoid losing money and to try to book big profits. Fear and greed are two of the most powerful motivators and drivers of humans. Combine that with a community that can perpetuate false information as though it was true, and you have a recipe for disaster.
Just like news, social media hype can lead you to believe that you’ll make a lot of money if you buy a particular stock or crypto. It could be people going crazy about Amazon, Apple or Tesla stock. Sometimes it’s crypto hype about Bitcoin, Ethereum or the latest altcoin to rally. When you see a lot of other people posting about making big profits, you gain FOMO (fear of missing out) and join the party.
Buy the Rumor, Sell the News
Your choice to buy likely wasn’t wrong, but your timing was off. By the time you see news outlets and social media going crazy about a big rally, you are likely already too late to take advantage of it unless you want to short the asset instead of buying it.
Investors that owned stock or crypto before a massive price rally will often sell at a peak price to take profits. This is basically happening when news is coming out about those big gains. As a result, you end up buying it from those profit takers. They make money, while you lose cash watching the value plummet.
I’ve seen this cycle happen again and again, it’s almost amusing at this point. The next time you have a gut reaction to a news story and feel inclined to make a purchase, write the price down on a piece of paper and sit out the trade instead. Just wait and watch what the price does. Once you do this a few times and watch the price drop, you start to realize that you have to control those gut reactions if you want to be a profitable trader.
Professional investors actually depend on the inexperience of beginners to make easy profits. The market doesn’t go in a straight direction up or down. Prices basically move like a roller coaster. This works against you when you’re trading based on reacting to news and events.
As I mentioned before, when you enter a trade when news is released, you’re likely just giving profits to the professionals. As the price falls and you lose more and more money, you reach a point where you cut your losses and sell at a loss. Guess what just happened? That same professional trader that made money off of you before probably just bought your shares back from you at a lower price to repeat the cycle all over again. This is known as swing trading.
When you can stop reacting to these situations and think about them from this next-level position, you can actually join the professional traders to trade with them instead of against them.
The real key is proactive trading and not being reactive. Research the fundamentals of companies and the price action of their stock to figure out the smart entry points, especially when you want to open long-term positions. If you’re buying to hold, then hold it and don’t check your account balance each day, which will only tempt you to sell.
Observe how prices flow up and down over different timeframes. You can usually identify levels that contain the prices. Instead of blindly buying when you hear news, aim to buy at the bottom of one of those containment levels and then sell again when it gets close to the top. This is something that can be repeated over and over again, but you need to be careful about breakouts and reversals that can cause the price action to go beyond those levels (set a stop-loss outside of your containment levels to automate this protection).
By practicing some of these trading strategies and controlling your emotional reactions, the next time a situation like this happens you may find yourself being the one that is selling and taking profits from other beginners.