Investors Reaction To A Change In The Market Trend

When the market trend starts to go downwards, it continues to go further down because of the retail investors who begin to believe that this trend is permanent and as a result, they keep on selling off all their holdings.

The bottom or top of the trend

The trend that gets formed in the market keeps continuing. After the market gets obstructed, initially, a downwards trend will start for a while. The first few percentages of the fall will take a while because there is a fight between the bulls and the bears. However, after that, the fall will mostly be a free-fall. It is at this time that the trend is the strongest. It is also the time when the retail investors will enter into selling even more.

When more and more retail investors start to sell in the market, it will be almost time for the downtrend to end. In most cases, retail traders will enter the market only during the last stages. After the market has had a free fall, the prices either reach too high or too low. Read this useful reference to understand further.

The reversal of the trend   

The move up in the market is, however, different. The first few percentages of the up move do not face any obstruction because the investors always like the buying momentum as compared to the selling momentum. After a certain amount of momentum starts to build up the fight between the bulls and the bears begin again. It causes the gains to get smaller and the competition to get fierce. The direction that the trend is following is known. However, one cannot predict the time that each stage of the trend will take. And this is what leads to volatility in the stock market in the shorter time frame.

How to deal with the trend movements in the market

The best way you can participate in the trend in the market is to stay away from it. Short term investments mostly end up in loses as it is difficult to time the market correctly. Though, it is not impossible.

If you want to invest in the market, then you should keep an eye on the fundamental scenarios that are affecting the market. It will give you a clear picture of whether the market is undervalued or overvalued. The trend may not always give you the right signal, and in turn, it could erode your wealth.

Investors should also be careful that they have enough risk tolerance when they invest in risky asset classes. If you want to make an investment into equity and then liquidate it when there is a slight movement in the market, then this is a sure-shot way to lose money.