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Politics : High Tolerance Plasticity -- Ignore unavailable to you. Want to Upgrade?

To: energyplay who wrote (23074)	5/13/2005 8:55:45 AM
From: kodiak_bull	Respond to of 23153

[from Innnerworth] Media News and the Behavior of the Masses As a short-term trader, your goal is to stay ahead of the crowd and let their money flow from their pockets into yours. The better you can anticipate the behavior of the masses, the better you'll be able to capitalize on their irrational decisions. The masses are notorious for over-reacting to media news. In an innovative study, behavioral economist Dr. John Nofsinger studied how media coverage influences the masses. It's not as straightforward as you might think. A popular theory in behavioral economics is that buying and selling by the masses is motivated by a powerful tendency to avoid regret and seek out pride. These emotional tendencies often lead to irrational investment decisions. Many investors, for example, hold on to a losing investment because they don't want to face feelings of failure and regret. Keeping losses on paper postpones the inevitable. Good news raises stock prices, and when prices rise as a result of good news, most investors can't wait to sell, take profits, and bask in the glory of success. Dr. Nofsinger's study, however, reveals that things may be a little more complicated. It may depend on the kind of news investors hear, rather than whether it is good or bad. He studied how investors reacted to two kinds of news, news about specific companies and news about the economy in general. Good news, whether it is about a specific company or about the economy in general, increases stock prices. And one would think that regardless of what kind of news raises a stock price, the impact on the masses would be the same. But Dr. Nofsinger found that the kind of news does matter. If the good news is about the specific company, the masses tend to sell, but if the good news is general economic news, they hold on to their positions. Bad news about the economy similarly has little effect on what the masses do according to Dr. Nofsinger. What are the psychological dynamics behind the behavior of the masses? In their pursuit of pride and avoidance of regret, the masses continually monitor their positions and deliberate as to whether they have made a good or a bad investment. If the news is bad about a company, they tend to blame themselves for choosing the wrong company in which to invest. They tend to believe that they could have cherry picked a better company had they done their homework. When they hear good or bad economic news about a company, it bears on their original decision to invest in the company, and they react emotionally. On the other hand, it's hard to blame yourself for a poor economy. What could you have done? A poor economy impacts all stocks, so the only thing you could have done was to avoid investing in the market altogether. It wouldn't matter what company an investor decided to put their money in since all companies are affected by a poor economy. In this case, the masses forgive themselves, and do nothing. The influence of emotions on the masses is powerful. By seeking out pride and avoiding regret, they allow their emotions to overpower their logic. As an astute trader, however, it's vital that you stay objective. Don't let your feelings of pride or regret influence you. Let the masses over-react. And when they do, capitalize on their irrational behavior and profit form it.

To: energyplay who wrote (23074)	5/13/2005 9:09:35 AM
From: kodiak_bull	Read Replies (2) \| Respond to of 23153

Ep, "And if the market is going the wrong way, you can close out on the first position with only one commision and bid/ask loss." I wish it was this easy. Let's say you are looking at an option spread and you think the RIMM Jun 70/65 put spread is the way to play. If you buy it now, you pay $4.40 for the 70 put and receive 2.10 for the 65 put, or a net debit of $2.30. You're paying $2.30 for the chance to get $5.00 in a few weeks; not bad if you are right. By legging in, though, you buy the 70 put for $4.40 and hope for a swoop down to take the 65 put price up to $3.40, so you can complete the spread for a net debit of $1.00. This is good, a nice 4 to 1 reward to risk ratio. But what if RIMM rallies tomorrow and the next day and goes up to $71.50 (or $71 but volatility drops). Now your long position value has fallen from $4.40 to $3.11, a loss of $1200 or 27%. If you put the spread on immediately, that counter move to $71.50 only erodes the position $500, thanks to the hedge. You're still not happy, but you're about $700 happier than otherwise. They don't make it easy, that's for sure. Kb