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Today we’re going to take a look at an important thing in trading, and we’ll also touch the topic of day trading psychology. There will be episodes covering day trading psychology in detail later on, but I wanted to cover a topic that really emcompasses both trading psychology and price action. If you want to learn more about trading psychology make sure you subscribe to our channel as we will cover that in coming videos.
But today we’re going to take a look at “new highs”, and the market psychology or trading psychology that goes together with a new high in the market.
First of all “new highs”, or “new lows” for that matter, are always significant. Whenever the market makes a new high Everybody is talking about it. If you tune in to CNBC, Bloomberg or any tv channel covering the markets you will hear about it. If you read day trading blogs you will hear about it. If you participate in trading forums or discussion boards you will hear about it.
The S&P 500 just made a new high, the NASDAQ or the Dow just made a new high. Apple or Facebook made a new high. Or Google made a new high….
The same applies when the market is in bearish mode and makes new lows, or some popular stock is crashing and makes a new low. You will hear about it.
And when we hear about these things, when everyone’s talking about it – for sure there will be a lot of interest in trading that, and a lot of trading going to happen at these levels.
So, what are new highs really. Sometimes, during very bullish periods the market makes new highs almost every single day – and although that is something that leads to a lot of interest and a lot of demand – hearing about the market making new highs every day, and does not seem to stop. It is going to the moon.
But the most important new high is when the market has been in an uptrend, then pulled back and then breaks out of the previous high. That’s also the easiest time to be trading these situations.
Same thing in a down trend, the market rallies and then reverses and starts moving downward again breaking down through the previous low.
Now, all of this is usually more significant if you’re swing trading. Because swing traders are looking at the same time frame as the talking heads on TV and the general public. We have a lot of traders who both swing trade and day trade and I do recommend that because you get a whole new way to diversify and spread out your risk. But for day traders, any time period when there is a lot of interest in the market will bring more volatility, more liquidity and that’s good for day trading.
But you can and should be looking for New Highs in day trading as well, and new highs are usually found when the stock breaks out through resistance or support. The stronger support or resistance the more important will the New High or New Low be.
We covered this in an earlier episode. So what you will see is the market breaking through, and volume picks up – more and more traders notice the break out – the new high – and together push the security upwards, through, and away from the resistance because of all the demand that enters the market.
Everybody wants a piece of the action – that’s where the trading psychology comes into play. When you see a stock, currency or commodity make a new high – you see all the trading, all the volatility – then more and more traders get interested in trading that particular instrument.
Traders don’t want to miss out. Traders fear missing out on a big move. That’s what happens, that’s how the market psychology works in this case. More and more traders will start trading emotionally, they feel they have to get in, they have to trade, although the market already made a big move.
Then, once everybody who wants to buy have done so, there will be a pullback on lower volume. Why? Because there is not as much demand anymore. More and more traders or scalpers who bought at the top after the breakout, these guys will start selling because the market seems to head downwards and they’re not making any profit on their trades, and the reaction causes short sellers to enter the market. So less traders are buying and more traders are selling or selling short.
This is something we also covered before. This is a good time for you to enter your position: There was a break out and a big rally, then the market pulls back and again continues its move upwards. When that happens again, more and more traders will join in on the up move. If you buy when the market reacts and pulls back, then you will have no trouble getting in at a good price – you are not competing with a bunch of other traders for the best price.
We’ve had a lot of interest in our day trading mentorship program this month, so we have a new mentorship group starting soon. There are a few seats left, so go to DayTradeToWin.com to find the dates and reserve your seat. We have 10 different day trading strategies that we teach in the program.
We also have individual training courses, strategies and software available for you so you can get a head start in day trading.
More videos are coming, so make sure you subscribe you our day trading YouTube channel and please share with your network. Until next time, good trading.