Why hype is the worst enemy when trading stocks as a newbie

Stock trading is a very popular market around the world and there are many people showing interest in investing every single day. This is especially true now, in the middle of the Covid-19 pandemic. Because many people are stuck at their homes, without anywhere to go, the number of investors is increasing very fast.

But, it should not be forgotten that we are living in an era where everything is changing very fast. Among many things influencing the changes of stock prices is the hype created online. We all remember what happened around GameStop stocks – a company believed to have had a strong negative momentum skyrocketed in charts, namely because of the hype created online.

As much as many people managed to generate some profits from this situation, it also had some losers. Traders with little to no experience jumped on the wagon very quickly, believing that they could have made huge profits. But, things didn’t turn out that good for many.

What happened around GameStop stocks was that one of the Reddit blogs decided to go against the short sellers of Wall Street. After this, the short sellers of GameStop, which were hoping to make profits from the decreasing price of the stock, were forced to sell their shares. This process, as you might already know, is known as short squeeze. Around the world, while short squeeze stocks do not happen every day, it can occur somewhat frequently.

Although some traders made some profits in the beginning, some of them ended up losing money after the situation got back to normal. This is just one example of hype not working out for newcomers.

The thing is, changes happen in the stock market very fast. A simple statement or a report can change the direction of prices. Making trading decisions simply because there is an artificial hype created online might not be the best thing to do.

What is short trading?

The process of short selling is a trading style when a certain investor decides to borrow shares and immediately sell it afterwards. When doing so, the traders believe that the price of the stock is going to decrease in the near future.

If this happens, the trader will buy back the shares at a lower price, give it back to where it was borrowed, and make a profit between the selling and buying prices. However, this process is very risky and should not be done without enough experience and knowledge.

In the majority of the cases, those who are short trading stocks have a very good understanding of the market and are trading in higher quantities to make huge profits. In fact, many of them are WallStreet hedge funds with years of experience in the market.

How does hype work in the stock market?

While there are many actual reasons driving the stock prices in the market, there are other reasons that can influence the changes as well. One of them is hype created online. This actually happens quite frequently, especially if we consider the past few years and it is not only stocks that are influenced by the hype.

The price of shares, or even other assets, can be driven by an artificial hype, or sometimes called buzz, caused by the price rise and fall of trends in the market. The hype is not only created online, but can also be caused by huge press coverage, rumors, speculations, and even by statements of influential people. Regardless of the attention being justified or not, it does have a huge effect on the prices. The influence can be positive as well as negative and it should not be forgotten.

There are many people who are causing such hype every single day in numerous markets. For example, one of them is Elon Musk, whose comments made on Twitter are very frequently causing price fluctuations in different markets.

For example, you might remember what happened around Bitcoin after Musk’s statements. While the drop in the Bitcoin price might also be influenced by other factors, the hype created by Musk had its own part in the developments.

So, before you simply follow the trends that you find online, whether it is created by one person or even the whole media, it is always a good idea to try your best to stick to the things that can actually matter in the long term.

Something about the hype that you should always remember is that it does go away. One way or another, things will go back to normal, and you do not want to be one of those people sticking to the initial impact believing that you can still make huge profits just because the price skyrocketed once.

What to look for when trading stocks

If you are someone who wants to make huge profits while trading stocks, you should be aware of some of the things that can actually cause changes in the market. For example, you can use different types of indicators and strategies to better determine the possible direction of the prices.

As a stock trader, you can use fundamental and technical analysis to view different sides of the market. While working on your fundamental analysis, you are essentially looking for the actual events that could possibly cause the price movements.

As for the technical analysis, this gives you the ability to check the technical side of the market using charts and different types of indicators.

Now, this does not mean that hype is always bad – in fact, it can help you make some quick profits. However, it is very important to always stay critical of the ongoing events in the market and make sure that you understand the risks that you are taking really well.

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