Investing after Panic Selling : NobleTrading Blog

Friday, September 18, 2009

Investing after Panic Selling

Panic selling or the madness of the crowd causes great decline in stock prices and might lead to investors losing their money. But it also creates opportunities for investors to buy stocks at lower prices and sell them later for higher prices. Investing after panic selling is a trading strategy which requires good planning, market timing, and courage as well as technical and fundamental analysis.

Investing after panic selling is a risky trading practice and investors should be well equipped and educated. Here are some tips for investing after panic selling.

The first thing is to make sure that there indeed is panic selling. Make sure that stock prices have fallen rapidly with high selling volume.
Next, make sure that the panic selling is over. You should use fundamental and technical indicators to ensure that the high selling tendency is over. Trend lines, moving average indicators, chart patterns/formations and volume based indicators are good for this purpose.
Confirmation of trend change and market timing is also important. Bullish indicators like a higher low, trend-change candlestick patterns, moving average crossover, and increasing buying volume can be helpful.
Position sizing and stop losses - these are two important risk management factors. Stop losses are extremely important (tight ones will be better) as the downtrend may continue.
Tip - for investors it will be better to use long-term moving averages (40 or 50-day moving averages).