Last week there was a scary selloff in both equities and commodities when news broke out that Dubai World, a Dubai firm which has expossure in real estate companies investing in Dubai property market, asked for delay of debt repayment till May 2010. The total debts amounted to around USD 60 billiion!
According to mainstream media, this news created panic in 'investors' who rushed to sell whatever they had, equities, commodities etc. as this raised and renewd fears of 'bigger than what looks superficially' crisis. Well, my friend Abhijit told me one thing - "this should be real buying opportunity". He was right. It was definitely the kind of fall a bullish trader needs and those who bought the decline on Friday are in short term profits now and may get even more. However, this is not something new, in fact, this is what we know as 'Buy on Dips Psychology' and works very well during bull markets. Since Mar this year, traders who had this psychology have made very good profits.
So, what should we learn from this incident? A lot. As long as the underlying up trend is intact, traders will continue to benefit from this tendency to buy on selloffs but this is exactly what I think is important when markets change direction and the underlying uptrend breaks. This very tendency is alive even after a major reversal and traders buy initial 'dips' , then they buy bigger selloffs. Then, this tendency becomes the driving force behind reinforcing the 'reversal' as all those stuck traders sell their 'assets' on a bounce. This psychology does not disappear in early stages of that changed direction and traders gradually shift to 'sell on rallies' from 'buy on dips'.
Traders are not driven by news but its the embedded psychology that drives their decision. News is only a very small factor and does not have big effect on price but it is definitely something which savvy traders can use to look for opportunities. Those traders who take decision solely based on news suffer most.