Educational Section


The charm of the financial investment never fades!
The opportunity to increase the invested capital frequently encourages small investors to make significant, sometimes excessive, investments on single stock titles or index and often in the worst period in order to make profit.
It is known that ordinary people invest when the market is with maximum values and frightened sell when the values are minimum.
The dynamics are always the same and as years go by, situations, excuses and news change, but the results for small investors are always the same.
I am going to shortly explain the 8 steps of this technical and psychological process that influences the investments in the stock market.
Step 1 – Accumulation

During this period of some weeks or few months, big investors increase their stock titles or index holding.
How do they do that?
If the investors started with big capitals, the quotes would rise thanks to the ratio supply and demand and they would risk to pay for a too expensive title.
They actually act step by step in the following way:
They buy 100 titles, the price rises because of the considerable market demand. Later they sell 50 titles and, as a consequence, the price goes down for the increasing market suplly. The result is that the big investors own 50 titles with a very low price.
This process goes on untill their titles portfolio is full.

fase accumulativa


Step 2 – First bullish aggressive increase.

After the first accumulation phase big investors stop selling big amount of titles pushing the title or index value to a bullish trend.
Usually, at this step, even the brokers, who are the most active players in the market, start to invest.

prima gamba rialzista


Step 3 – Intermediate correction

It generally follows an intermediate correction caused by some profit cash in, but the main bullish trend does not change

correzione intermedia


Step 4 – Irrational excitement

Then we reach a market cycle phase in which ordinary people start to invest, but at this point prices have gone sky-high.

fase di euforia irrazionale


Step 5 – Distribution

During this phase big investors have got huge profits and sell their titles.
If they sold their entire portfolio in a short time, however, they would cause a value plunge taking a loss of their profit.
Although they sell in a gradual way:
for example, they sell 100 titles, so the price goes down for the increasing market supply, later they buy 50 titles and, as a consequence the price rises again.
The result is that big investors sold 50 titles and the price remained high.
This step (that is just the opposite of the accumulation step) can last for weeks or months.

fase distributiva


Step 6 – First bearish leg.

At the end of distribution phase big investors, with empty titles portfolios, push the title or index to a bearish trend.
This first important bearish leg astonishes mall investors giving birth to the first losses and usually during this period news are still positive.
It is exactly this optimistic economic environment that reassures small investors despite their not yet considerable losses.

prima gamba ribassista importante


Step 7 – Brief bullish correction

The bearish main trend briefly interrupts giving the wrong impression that it is finished. For a few weeks small investors see their titles recovering some of the losses, but instead of benefit from this situation and get out of the market they choose to hold their position hoping for a definitive recovery.

fase di reazione temporanea


Step 8 – Final correction and panic.

After a short break the bullish trend gets its direction again with one last, violent impulse that generates panic and causes the sale of the titles in the portfolio of small savers now when the losses are huge.
The market thus reaches the real minimum from where the accumulative step will restart again.

You can find this didactic example in the market reality as in the following S&P500 diagram.

Knowing these dynamics helps you to understand what hides behind market movements.

correzione finale e panico

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