Lack of a Price Reference Point.
The top question we always hear from traders is…”Where do I get in and where do I get out?”
Most traders have no idea if the price of a stock is good or bad, too high or too low. The principles of pricing they use in their everyday lives gets lost when they look at a financial product.
If you knew that a product you regularly purchase in your life consistently priced at $10 jumped to $50 would you buy it?
Of course not.
You would wait for the product to come back to its normal price or below. When is your favorite time to purchase this product? When it is on sale. Do you know when certain products you buy in the normal course of life will be on sale?
The answer should be yes.
Think about a vacation you wish to take. When is the best time to take any vacation? Let’s make the answer simple. The best time to vacation is when other people cannot. When there is ample supplies of planes, hotel rooms, cruise cabins, and amusement parks, excess supply drives prices down and we can benefit by purchasing at a lower price! Think of it this way. All markets we do business in will vary in price based on demand.
If demand is high for a product or service prices rise. However, if the market is over supplied and demand is low, markets will put their products on sale to attract buyers with lower prices. Why would we think the financial markets act any different? The economic principle of supply and demand drives all markets.