Monday, 29 March 2010

Check the charts occasionally to sense mob hysteria or panic at work

Some people in the markets use graphs of previous stocks or commodity movements in order to predict future price movements.  They are called "technicians" or "chartists."  They spend a lot of time pouring over the historic price movements and the formations these show on their charts as a way to predict what will happen next.

Ordinarily, I do not use charts to trade.  Occasionally, I will turn to them as a way to see what has been happening and to check facts if I sense mob hysteria or panic at work.  

Charts sometimes reveal a beeline rise, an indication that prices have increased far beyond actual value.  It means that people have lost perspective.  It shows the level of the hysteria.  I know that prices will eventually return to the appropriate level, so I sell short.  You need to be careful, though, that you are not selling short simply because prices are high.  Never sell short unless prices are astronomically expensive, AND you detect negative change coming.  

You can see panic in falling prices when you see them collapsing straight down day after day for extended periods.  Historically, long periods of selling have ended in "selling climaxes" when everyone finally panics and dumps to get out of the market at any price no matter what the fundamental reality might be.  Large price declines across the board should attract your attention. 

A good rule of thumb is to sell during times of market hysteria and buy during times of panic.  Always remember to buy low and sell high.

Jim Rogers
A Gift to My Children

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