For a fleeting moment in college, I thought I might be a psych major.
That didn’t end up happening, but it turned out that in my career, I’ve “majored” in market psychology.
As Liam Neeson might say, I have “a very particular set of skills.” For several decades, I have studied and used technical analysis.
Technical analysts use charts to measure investor psychology – and, most importantly, identify the times when that psychology changes. Those are the best points to enter and exit positions.
For example, in April of last year, I recommended Samsara (NYSE: IOT) to my readers.
The stock had taken a nasty fall from $40 to nearly $30. However, it was still in a longer-term uptrend and inside of what is known as an upward channel, which is my favorite chart pattern to trade.
The reason it’s my favorite is we’re buying the stock low, after it has come down. If we’re wrong and the stock falls below the bottom line of the channel, we know that the psychology of the market has changed, and we get out quickly with a small loss.
In this chart, since December of 2022, whenever the stock fell back to the trendline, the bulls took over and pushed the stock back to the top of the channel.
In April, I bet on that occurring again.
Look what happened.
We made a quick 31% in the stock in just over three weeks and a whopping 301% on the call options that we added at the same time.
Also, when stocks are falling like they are now, you can trade the downside. When you follow chart patterns and investor psychology, you always have the opportunity to make money.
You’ll recall that stocks rose immediately after the election in November, but then they began to decline about a week later.
Shortly after that, I added a bearish position in Schlumberger (NYSE: SLB).
The stock had been falling, making lower highs and lower lows and trading in a downward channel. With the stock near the top of the channel, I shorted the stock and bought put options, expecting Schlumberger to continue to drop toward the bottom of the channel.
Just over a month later, with the stock near the bottom of the channel (just as I’d expected), I closed out the position for a 15% winner on the short of the stock and 246% on the puts.
More recently, I helped my readers more than double their money on a long position despite a tanking market.
Just last week, on March 6, I recommended readers buy CNH Industrial (NYSE: CNH) because it was at the bottom of its channel. It was a low-risk, high-reward trade.
Four days later, we cashed out with a quick 12% winner on the stock and a 140% gain on our options – despite a miserable market.
I trade quite a few different chart patterns, but the channel is my favorite. It’s easy to understand, we get to buy low, and the risk-reward ratio is excellent.
I don’t have to know the theories of Freud, Maslow, and Skinner to know what investors and traders are thinking. All I have to do is look at a chart, and I get a visual representation of their behavior and a better understanding of what is likely to happen next.