Roller-coaster thrill of a trade.


Just as a roller-coaster being pulled up to the top of the first mount before being released, today, same as in many market tops of the past, there are a number of equities being pulled higher and higher by the “engine of market forces”. And just as there is a top where potential energy of the climb becomes kinetic energy of the ride, many of these “can do no wrong” equities will once again take us on a breathtaking ride. Unlike a roller-coaster where each loops and turn is a calculated, equity ride is constructed each minute by the fabric of market forces or more precisely by the will of few individual capital managers.

In any publicly traded equity, the top 50 positions are made by accumulating majority of the shares early, at the beginning of the ride. The goal is to pay as little as possible for as many of the shares that can be acquired at a discount price. This is not a trivial process and can take many months, even years to complete for a top position. While this initial institutional accumulation is taking place, there will be very little positive mentions in the media about the equities future brilliant outlook, and no one will seem to know what world dominance scheme the company is brewing.

After this period any additional shares added to an already sizable position holding will be made only during critical technical levels once the equity has broken through the previously established ceilings. Everyone already in the equity by that time will be showing a profitable position, and there will hardly be any large positions selling and every small buying push will keep driving the price higher.

During this phase the “engine of market forces” is beginning to work as other smaller players begin to exploit this presented opportunity. More and more brilliant notices in the press will appear and more justifications will be given for out of line equity valuation. This goes on for as long as the initial top 50 positions observe the view, feel safe and are happy about how high the roller-coaster is taking them.

At some point it time everyone riding this roller-coaster will be starting to notice that the height is beginning to feel slightly scary and start wondering when the top will be reached. Everyone on this ride knows that while all top 50 major position holders are still on this ride, they must continue to hold their breath.

The top is almost reached when a few of the major position holders will start to lock-in their profits. At some point in time a number of capital managers will decide that the risk no longer justifies a profit potential opportunity somewhere else. This is a moment where depending on the number of top riders wanting to exit and size of their positions the climb will end and the top will be set.

As the financial news fills-up with rosy pictures and better things to come stories, top positions are starting to exit the ride.  A “bigger fool” is always loved at the top to buy the shares when top riders start selling. Just as during the position accumulation, it is a process that takes a long time and advance trading strategy. After all, even to keep trading at the same volume going up requires an ever increasing investment. And trading with volume is required to lock-in the gains. As others begin to understand that the top has now been clearly reached, and begin to look for exits, loosing positions will start to appear.

This is where the ride downward starts. When more positions taken near the top start to show position losses and more riders decide to lock-in the gains they have, or at the very least avoid a major loss, the selling is intensified. The downward ride is unpredictable from day to day and full of excitement. A new downward ride releases the acquired energy, keeping you breathless until the thrill fades, and new experienced riders feel safe to enter this roller-coaster again.