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Stock market for Beginners - Taking Advantage of Capitulation

In this article I’d like to talk about a common phenomena which occurs to most if not all stocks at some point, and that is capitulation.

It’s great because it scares the living daylights out of the dumb money and presents an opportunity to the smart money to take a position in a stock which is about to reverse direction from a very deep low.

It is a strategy covered in more detail in the Secrets Of Successful Traders review.

Capitulation is an opportunity worth mentioning and may present itself when you could risk taking a live position (i.e. without waiting for the stock to turn and break resistance first). It’s called capitulation, and it’s a reasonably low risk way of catching the stock at the lowest possible point, thereby profiting from that ‘shortfall’ as well. Let me explain.

To perhaps over-simplify it a little bit, stock prices can reverse direction in two ways, either they have a ‘rounded’ perhaps choppy turnaround by bouncing along some sort of bottom, or they have a single-day short sharp spike downwards, which they recover from very quickly, usually the same day.

The sharp single-day spike downwards is called capitulation. It is when the last blocks of losing traders throw in the towel. These sellers would include the dumb money who actually bought when we just set our initial (unfilled) buy order at the peak. This includes buyers who bought on hype (maybe lots of them) and traders who got too close. They have all seen their stock price tumble 20% or more in just a few weeks.

‘Capitulation day’ is when a stock is reported negatively after an extended downward period. Traders who are holding losses (as opposed to investors who just hang on no matter what the stock does) see the news and hear the analysts slamming the stock. This, after watching their losses accumulate over the last few weeks, causes them to decide its time to bail.

It really presents a fantastic opportunity to buy at this point but takes nerves of steel as all you here around you is to sell.

A lot of traders were bailing all the way down from the peak anyway, but capitulation brings out the last of them, in one big panicked block.

This is when the smart money lines up ready to buy. This is when we want to buy.

Stock Trading Strategies.

Disclosure: No Positions