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Trading Psychology

Buy Panic The Right Way

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Written by Timothy Sykes
Updated 7/26/2022 6 min read

The reason why most people fail at investing and trading is that they do the opposite of what they should.

For example, they’ll buy at the highs and sell at the lows.

And that’s because it’s hard to control your emotions in trading.

FOMO, anger, greed, and fear can all wreak havoc on an individual’s trading.

Once you discover how to control your emotions, you’ll soon find out that some of the “riskiest” strategies you’ve been told your whole life to stay away from … offer some of the best chances to make consistent and profitable trades.

For example, have you ever been told not to “catch a falling knife” and avoid stocks that are in free fall?

I know I have.

But guess what?

It’s one of my bread-and-butter strategies. In fact, I’ve found several ways to identify when a stock is bottoming and is set up for a bounce, even when it looks like the stock is in free fall.

While I normally reserve this kind of education for my millionaire challenge students, I’m going to give you a sneak peek.

And show you how to profit from buying a stock that’s in free fall.

Where Did We Start?

I want to start with a stock that I never trade to demonstrate the power of these lessons.

Below is a chart of Peloton (NASDAQ: PTON), which I assume needs no introduction.

This is a stock that went parabolic and then crashed back down to earth.

I drew a white line where the stock opened during its first day of trading.

Years later, it found support at that same level when shares came crashing down.

If you can identify the breakout points for parabolic moves, they often act as levels of last resort for support.

Here’s an example with Emergent Health Corp. (OTC: EMGE).

In this chart, I drew a white line at the open of the first day when the stock went parabolic.

Over the next week or so, shares held that level, albeit on light volume.

However, I want to zoom in on the 19th.

That same price level, which comes in at around $0.01, acted as key support when the stock opened higher, ran up, and came crashing back down.

You can identify support levels several different ways:

  • Breakout zones
  • Prior day’s close
  • Consolidation areas
  • Fibonacci retracements

There are dozens of different ways to locate these spots.

Here’s what you need to realize.

Support levels are areas where a stock is likely to stop.

We need to see buyers step in for it to hit that brick wall.

Watch Price Action

I found there are two ways to really fine-tune support levels.

First is to look at the volume and price response.

Say I identified a key support level. If a stock falls like a stone, a pickup in buying volume should hold the stock right there at support.

Let’s use SIGA Technologies Inc. (NASDAQ: SIGA) as an example.

In the chart above, I extended two white lines from different consolidation areas that could act as support.

Now, let’s dig into the day when shares were in freefall.

I highlighted the two areas were the stock met the support levels.

At the first spot, shares pushed through on heavy volume. There were no signs of slowing or an reversal.

At the second support, price glanced trendline and then moved away.

The volume here wasn’t great but was higher than the previous candlesticks.

Ideally, when a stock finds support, I like to see a pickup in volume and a green or truncated red candlestick.

Here’s a good example in Evofem Biosciences Inc. (NASDAQ: EVFM).

Notice how heavy the volume was on that large red candle, and then was quickly matched by the following two which held around $1.00.

That’s the kind of price action reversal I want to see on a support level.

It’s all about identifying when buyers show up.

Another way to do this is by using Level 2 data, especially on OTC stocks.

Level 2 data shows the current buy and sell orders. Market makers are a bit less likely to manipulate these on OTC stocks.

When I see a heavy amount of buyers or sellers, I can use that as another indication that a stock is about to hold the line.

In the example above, you can see a wall of buyers at $1.54, amounting to 4,500 shares compared to only 500 at $1.56.

This tells me that the stock will struggle to push through $1.56.

The Bottom Line

Each of these adds another weapon to your arsenal.

The most powerful traders use them with the trade patterns I teach.

Learn them, study them, and practice them.

–Tim


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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”