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Profit From the 90% Who Lose

"We simply attempt to be fearful when others are greedy
and to be greedy only when others are fearful."
-Warren Buffet

How To Capitalize On Other People's Mistakes

So how exactly do you take advantage of the fact that so many trade at the wrong time? Simply speaking, there are certain signs that a stock is about to go from being loved to being hated.

Greed then Grief

Stocks and the stock market in general suffer from a "greed then grief" cycle. The key is to determine when a stock is going into a new greed or grief cycle -- and then take action.

How Do You Identify The Greed and Grief Cycles?

The tough part is finding out when a stock is actually in a greed or grief cycle. It took me many years of looking at charts every single day to figure that one out. There is just an incredible amount of information out there...I had to filter through a lot of garbage before I found the useful stuff. What I found in my research was very exciting...

Here are some examples:

+61%

Lightpath went through several months of grief before coming back up in January 2001. The stock went from 16 11/16 to 26 15/16 in just 5 trading days...that's a 61% jump.

+56%

Yahoo was in a long-term up trend until early 2000. The bursting of the Internet bubble smashed this once popular stock. This is a good example of why we never marry a stock. After falling hard, Yahoo fell even harder. After the grief signal, Yahoo fell another 56%. You would have made a nice profit if you had shorted the stock.

+50%

MRVC got smacked around when the telecom sector tanked. The stock was cut in half within 10 days of the grief signal. Yet another short sell opportunity.

+56%

Qualcomm was one of those stocks that showed many greed cycles before it was beaten down. In eight trading days, the stock went up 56%. That's a nice "swing trade" profit.

Make Money When Others Are Losing

As you can see, there's plenty of opportunity to profit from the greed cycle. You can also make money in the grief cycle by shorting or buying put options. Making money when others aren't is an exhilarating feeling. I remember when a friend of mine came up to me in '97 and said "Dan, the Dow went down 500 points! I'm going to sell my stocks tomorrow before I lose more."

What?!?!?

I couldn't believe what I was hearing. What I thought was crazy was the idea that my friend wanted to sell after the biggest decline since '87. That's simply how the masses think. They say "oh no, the market took a dive. I better sell." In fact, the market went right back up the next day after those on margin were forced to sell.

Turn Illogical Thinking to Your Advantage

You can apply that illogical thinking to your advantage. Traders will practically hand you their money as you snatch up the stocks they just sold -- then they will turn around and chase those same stocks up, buying them back for an even higher price. It's human nature.

Learn the Rules

To play the game, you first need to learn the rules. Simply jumping into stock trading is like learning to sky dive without an instructor -- you're going to get killed. To learn about winning trading methods, you need to follow what works...

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Trade well

Dan Murphy, COO
FinancialPicks.com