Saturday, November 14, 2009

Investor, Traders and Speculators Charts

Sun Tzu said, "If you know yourself and your enemy, you fight hundred battles with hundred victories." So it is important to identify yourself and other players in the markets before you do anything.

There are basically three types of player in the stock markets. They are the investors, traders and speculators. Because of these different types of player, the pattern of the charts will keep on changing.

Let say there is only investors in the markets and there are no traders or speculators. A chart of a growing company will be simply like the picture above. It is a pure straight line without any noise.
When traders come into the markets, the chart will look like the above. The price is going up and down in a trend. The green dotted line shows the actual growth of the company.

When speculators (who has big amount of money on hand) come into the markets, the chart will look like the above. The price is push up very high by these speculators in order to lure investors or other traders to buy at higher price. Once the bubble is formed and burst, the price will start to drop very fast. It may even drop below the fair value of the company. The red dotted line shows the actual growth (fair value) of the company.

One very good example for speculation is the above crude oil chart. You can see
that the blue oval highlighted portion shows that speculation has started. The price rose from US$80 to almost US$150. But is this the true value of the oil at that time. The answer is no. . After the bubble has burst (see red oval highlighted portion), the price fell rapidly down to about US$40. From about US$150 to US$40, that is more that US$100 drop. You can see that the speculators are very aggressive. If you are not able to value the price of oil, you might buy it during the speculation time at high price.
For a normal investor, we must know that traders and speculators are everywhere trying to earn money from us. It is not necessary a bad thing to have them in the markets. But you must try to protect yourself against them first. In order to protect ourselves, we must know how to value the company. Buy stocks only when the stock price is undervalued. If you do not know how to value the company, you will not know whether you have bought its shares at the high price or not.
Two quotes from Warren Buffett to illustrate my points:
"If a business does well, the stock eventually follows."
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

So don't be afraid if you have bought the stock at a low price and it went down further. But make that the company is good, before you buy its shares.


ZhuKoLiang said...

hi, i agree most of your posting.

i want to ask: r u an engineer as your background?

only engineers talks in your manner.

Freedom Achiever said...


Used to be one in a few years ago. :)


ZhuKoLiang said...

the way u talk definitely shows u r from engineering background.

Like u say: assuming there is no traders/speculators, only investors..

Just like in engineering u use superposition principle. If there are too many things, u do 1 at a time, then u sum them up.

ANyway, i LIKE YOUR posting.

Freedom Achiever said...

You are very observance!!! Thank. :)

Have you started your journey towards financial freedom?