The market can only ever do one of three things – go up, down or sideways. However, in comparing the ups and the downs, there is a particular difference between the two that is interesting to market participants.
The difference is that most markets tend to move down quicker than they move up. In fact it is said that markets move down 3 times faster than they go up. This applies to all types of markets (stock indexes, futures, individual stocks, currencies, etc.), and to all timeframes (fifteen minutes, hourly, daily, etc.). The reason for this tendency can be pinpointed to the human emotions that are associated with rising and falling markets.
For example, when the markets are going up, the emotion of greed is in control, so the public buy stocks, which gives the markets short term momentum to the long side. When the markets are going down, the emotion of fear is in control, so the public sell their stocks, which gives the markets momentum to the downside. Initially, these two emotions would appear to balance each other, however, fear is a much stronger emotion than greed, so the reaction to fear of loss is much greater than the reaction to greed. It is this reaction to fear that propels the markets downwards as people rush to sell their stake for fear of accumulating losses.
Professional traders experience the same emotions (fear and greed), but they have learned to keep their emotions under control, so they do not react the same way. Professional traders will follow their trading system regardless of what emotions they are experiencing, (and believe me, they are experiencing the same emotions) and this allows them to consistently make a profit over time through market conditions that amateur traders lose money in.
Professional traders also know about the fear and greed cycle that the public experiences, and they will trade to take advantage of this. For example, when professional traders witness a market panic, they may wait and then take a shot at the bottom being in. Buying the dip after the panic is subsiding. As Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets.”
So now is not a time to panic, especially when you consider that before today 72% of companies reporting earnings actually beat estimates. My, we are a fickle bunch!