There is a substantial risk of loss associated with trading Derivatives . Losses can and will occur. My methods will not ensure profits

Friday, November 23, 2012

Anchoring

If you visit Kerala during monsoon season ,you can find many hawkers from North India selling blankets and sweaters.They come in groups and sell their stock door to door.They follow a unique selling strategy. First Some of them will go to the villages and quote shockingly high prices for their products.They wont reduce their price and will not be able to sell much.

After a few days another group will come. They will move down the price and convince villagers that they are selling at a discount because the season is over and they have to go back to their native places.People think this  price as bargain comparing with the old price and happily buy out.

This behavior is called Anchoring in behavioral finance.Investors are anchoring when they buy a stock that has fallen a lot without a second thought. They are mentally anchored in the price it was trading before the crash. That makes the present price look like a bargain. Such Anchoring could be injurious to your financial health

Price action trading works because of Anchoring. Traders notice the price levels where the market turned earlier and act there again.These are the ideal locations to initiate trades with the lowest risk.Decision Points and Flip Zones are  nothing but anchoring points.

Half of the battle is won if you know where to initiate the trades.

8 comments:

  1. Thank you for flip zone explanation, had gone long on Nov 22 at point A got stopped out.

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  2. Rajesh

    The whole method is built around price flips.Don't ignore it

    ST

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  3. Do you consider bar volume in your trading?

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  4. Augu Bhai

    Only for BOF
    More volume means very large number of traders will get trapped and will be forced to reverse their trade

    ST

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  5. hi
    I have a doubt regarding trading bof,suppose there is IR low and high formed and we take the bof of IR low,price goes to IR high pulls back then breaksout..how do you come to know whether its a breakout failure of IR high or a pullback?

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  6. Akshay

    "how do you come to know whether its a breakout failure of IR high or a pullback?"
    Sorry, I could not follow your question properly. If price goes above IRH and fails to maintain that level it is a BOF. Price may just test the level, pullback and attempt another breakout,which may or may not succeed

    ST




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  7. hi
    Do you use volume spread analysis ..?What are your views on it?


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  8. Akshay

    NO. I have not learned it.

    ST

    ReplyDelete

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