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Author of Investcraft is a Financial Blog that focuses on helping individual investors navigate through the complexities of the stock market. Both individuals hope to provide keen insights on the trends of the market as well as individual stock analysis. If you’re looking for... More
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  • Investor Psychology 0 comments
    May 12, 2010 2:09 PM | about stocks: AAPL, GOOG, QQQ

     It's interesting to see how the psychology of the markets change on a daily basis. Just a week ago, everyone was talking about doom-and-gloom with Greece and Europe.  Now, all of a sudden, investors are focused on the improving US economy.

    I think I've been really pounding my fist about how I felt the US economy has been steadily improving this year.  It's nothing new -- all the data has been pointing to that.  However, investors will only see what they want to see.  Last week - Greece and the end of the world as we know it.  Today, the improving economy.  
    How do you invest in a market like this?  Investor psychology plays such a huge part in the daily market swings.  It's exactly this psychological aspect that creates such drastic volatility.  And this volatility may likely cause an average investor to be hesitant in putting any money into stocks.  
    If you're a daytrader (hopefully, playing the long-side), this is paradise.  If you're a long-term investor, this kind of market can be nerve-wrecking.  
    But fear not, there are still ways to play the swings while still investing for the long term.  On a down day (the 980 point drop is a perfect example), put some money in solid companies like AAPL, GOOG, or even ETFs like QQQQ -- that you might hold for a few days and sell on a good day.  But keep your core portfolio in tact.  I never recommend shorting unless you are an experienced investor and you know what you're doing.  As you know, shorting comes with unlimited losses and unless you understand the repercussions of shorting, I don't recommend it.
    With this strategy, you can take advantage of the swings while still maintaining your core portfolio.  It's something I've been doing lately but you really need to be watching the market carefully.  Don't get greedy -- if you make 5% in a couple of days, that's a GREAT return on your investment.  Hardest thing to do is to pick an exit -- as I've said before, it's never wrong to take a profit so trade cautiously and always keep your eyes on news developments that might swing the market psychology one way or another.

    Disclosure: No positions
    Stocks: AAPL, GOOG, QQQ
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