Why Are Stock Dropping Right After You Buy? | Psychology |

This article explains the stock market cycle and why you always end up buying at the top!.

So let's dive into the reasons of Why are stock dropping right after you buy!?

Have you ever noticed that stocks plummet right when you buy them! This is one of the most common rants on investing subreddits and the youtube comments section.

However this situation doesn't seem like it's limited to just new investors either, even seasoned investors with millions in the market like Meet Kevin and Graham Stefan have also expressed similar sentiments in the past so Why are stock dropping always when we buy them!?

Hype:

So this experience isn't just random bad luck! there are actually several legitimate explanations for this phenomenon, beginning with the Market Cycle…

All free markets in the world experience spread of positivity and excitement and segments of negativity and despair. And the truth is me and us retail investors likely get in during the worst time possible, stock rallies often start with genuine optimism for a fundamentally positive change for a given company. For instance, Tesla might have had their first profitable year, or Apple might have announced that they're increasing iPhone production!

These are both genuinely good signs for the company long term, and get many investors excited.

However if you're getting in after such news comes out, you're likely already late! here's the thing hedge funds and savvy investors have likely been frontrunning such news for weeks if not months! in many cases they have access to insider information, but even without insider information it's not too terribly difficult to be one step ahead of retail investors, this isn't to say that retail investors are stupid! but we have to keep in mind that big money guys have often been investing and trading for decades, and they do it as a full-time job, so it's not surprising that they would at least be a bit ahead of retail investors.

Anyways there is the Optimism stage of the market cycle and it is the most profitable stage. After this we head into the Enthusiasm stage, this is the time that more experienced retail traders as well as lacking big money gets into this stock, these guys don't always know why the stock is actually going up, but they see large amounts of volume buying and figured that bigger hedge funds and market makers know something that they don't, at this point the expected news hasn't even come out yet! but the smart money is already fully in and will likely not be adding to their position, and this is when we finally see the news actually come out.

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CNBC and Bloomberg will report that Amazon had a blowout quarter or Tesla's launching full self-driving.

Traders who are glued to the news will quickly jump onto the opportunity often leading to a sudden jump in stock price, momentum traders with alerts for some stock movements will also get alerted and jump on the train causing the stock

price to move up even further.

unfortunately, this is the point that the average retail investor will hear about the positive news, but by this time we have already completed the Optimism stage, the Enthusiasm stage, and the Exuberance stage.

Now all that's left is the Euphoria stage, generally this stage doesn't last too long as most cycles don't attract too many retail investors once in a while though we'll see a piece of news travel quite far through social media, YouTubers and tik-tokers might jump onto Apple making an electric vehicle, or Microsoft completing an acquisition, Elon Musk might even tweet about it, it's definitely possible to make money during this stage depending on how many retail investors jump on board, but there is really no logic behind the stock price anymore, it's really just a game of hot potato between retail investors, as long as people are able to flip shares for a higher price to other retail investors, the cycle will continue.

Despair:

At one point though either the retail investors will get exhausted from bidding up the stock, or the market makers will decide that it's time to rent in the party, considering that institutional investors account for 70% of stock trading volume it's not hard for hedge funds and market movers to ground stock after a massive run-up, moreover a lot of euphoric run-ups are fueled by low volume trading, so when a big red candle pops up in the chart it's clear that something is about to change! and this leads us into the Anxiety phase smart money has already started selling, but retail investors who think it's just a dip will end up buying the dip, and momentarily pop up the stock price despite their efforts though institutional selling will start to pick up speed as hedge funds look to lock in their profits before buyers dry up.

Lagging hedge funds and savvy retail traders will start to pick up on the beginning of a downtrend and they too will sell which leads us into the stage of Denial, people who bought at the top start to realize that maybe they were too late to party! but they still have a sliver of hope that maybe we'll see another tweet from Elon Musk, or that some surprising news will save them.

In reality, these guys were the people who ended up with the potato and the music stopped as more early traders take profits, the stock price will continue to move down, and will soon find ourselves in the stages of Fear, Despair and of course Panic!, some retail traders will wisely just cut losses and move on right when fear hits, but others will continue to hold on despite despair sending in.

Despair is the stage at which the stock price returns to the level at which it started to rally, and though traders who are still holding are down a decent bit, most of them believe that can't get much worse. However this is when hedge funds will step in once again, the hedge fund likely spotted another news opportunity coming up where they can make some more profits, but they don't want to reinvigorate a potential rally before they're able to fully get in, so they'll go out and sell some of their long-term position and maybe throw out some fear-filled articles to cause the stock price to dip just a little bit more, and this light push over the edge is all that's needed to cause a flurry of selling.

You see many traders will set their stop-loss just under the price at which the rally started,

hedge funds will take advantage of this and sell just enough to trigger these stop losses, which will quickly lead to a way of panic selling leading us into the stage of Capitulation and Discouragement.

In these stages, most retail traders have already forfeited trying to come out positive from the trade and have sold out their positions for a loss, but just as this may start to set in, hedge funds will buy back the positions they sold to create the panic selling in the first place, and as they start to front-run the next news cycle we'll start to see hope relief and optimism re-enter the stock market causing the cycle to start all over again.

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Buy Low Sell High:

As you can see institutional investors aren't using any voodoo magic or anything like that! they're just buying low and selling high just like everyone else.

However, the key difference is that their entry and exit point cycle is exactly the inverse of retail investors, which often results in retail investors buying right at the top and selling price at the bottom! This brings up another question though: How is their entry and exit points always the profitable ones?

Well, aside from being professionals they have another key piece of technology under their sleeve, which is Algorithmic Trading! is exactly what it sounds like, this is when hedge funds or individuals trade based on recommendations from an algorithm, these algorithms aren't based on news or financial reports or anything fundamental about the underlying company, rather these algorithms are based on Volume, Stock Price and most importantly Human Psychology.

Long-term stock investing is all about the fundamentals of a company and an industry as a whole, but short-term stock trading really has nothing to do with the underlying company, sure good fundamental news may act as a short-term catalyst.

However, the key to long-term profitability as a stock trader is understanding human psychology! How much does the stock have to go up before people start coming in?

Once people start coming in how long will Euphoria and hype last!!

Remembering Pain:

Similarly how fast does a given stock have to drop before people start to panic!? and how long will panic selling last?

Speaking of human psychology, something else to keep in mind is that you're much more likely to remember the time you were down on a trade as opposed to the time you were up on trade because our brains are wired to remember the pain! so that we don't repeat the same mistakes, as we just discussed when we're looking at stock's movement over the short term, it's really just a coin flip as to whether it's going up or down! thus you were likely down right after you bought roughly 50% of the time even if the stock recovers

and you make a ton of money down the road, you're likely to always remember how you were down right after you bought it, and this simply feels like a notion that stocks go down right when you buy them! In reality, you actually made a great call and it's simply impossible to perfectly time the market.

Fighting Big Money:

Anyways over the years, big money and its algorithms have mastered how humans behave under various circumstances, thus they are able to pretty consistently make money while 80% of day traders lose money, even if you're not a day trader and simply trying to build out a long-term position you'll often find yourself in the same boat, you buy into what you think is a solid dip buying opportunity, but the stock just continues to go downwards because hedge funds and their algorithms are once again one step ahead.

The difference here is that long-term investors will simply continue to average down and have no problem holding the company until it recovers because they have a strong conviction in the business, with traders on the other hand most of them aren't disciplined and don't have a game plan which often ends in them panic selling and blaming the stock market, you might think that what big money does is unfair! and it is true that many of their practices are predatory and really are unfair! but at the end of the day, the stock market is simply a game to transfer money from someone else's account to your account, and when you enter the arena you have to keep in mind that there are so many pro players who have been added for decades.

So why are stock dropping always right when you buy them?

Well, you either bought in and the hedge funds market makers and their algorithms got the better of you either momentarily or permanently, or you coming in and didn't have a plan.

Have you guys ever bought stocks? and if so, have you guys ever experienced a phenomenon of stock dipping right after you buy them? Comment that down below.

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