What's the True Value?
The release of PlayStation 3 consoles is like the tulip mania of 1636. There weren't enough game consoles to satisfy consumers; people believed they were valuable and the price skyrocketed. Some waited in line for a week just to get a console. But not all those people camping in front of electronics stores wanted to play video games. Many wanted to resell the products on eBay. Between the launch of PlayStation 3 and last Friday, over 14,000 PlayStation 3 consoles were sold on eBay for an average price of $1200. That's about twice as much as the list price. Is it worth it? It's all a matter of opinion. It's merely a function of supply and demand. Sound familiar?
In an interview with Innerworth, market observer Sam learned years ago from trading on the floor of the exchange that the financial markets are nothing more than the same kind of marketplace we see on eBay or any other auction. "When I saw how people made money on the trading floor, I realized it was nothing more than a marketplace. A buyer tries to take advantage of a seller and a seller tries to take advantage of a buyer," Sam observes.
What is the "true" price? It's all a matter of opinion. Buyers try to buy low and sellers hope to sell for a profit. But in the end, it's difficult to accurately gauge the "true value" of a stock, and thus, some traders win and some traders lose. As Sam observed on the floor, "You often see people buy something that is much too expensive, and see people selling at a price that, according to the chart, is much too cheap." It makes you wonder if there is a reasonable way to estimate what the optimal price of a stock is, but Sam argues, "The truly objective information on a price chart are areas of support and resistance. Support is where we find willing buyers. Resistance is where we find areas of willing sellers. Any time you see these facts, focus on them. And then focus on the trend." Trading profitably is often a matter of making an educated guess as to how much the masses will pay. Just like PlayStation 3, it doesn't matter what the list price is; all that matters is wh at people will pay at any given time. And that's how the markets work. If you can get in and get out at the right time, you will make a profit. If you buy too high, or sell too low, you will miss out.
Knowing when to buy makes all the difference. Sam warns, "I always remind myself how to make money trading: If I buy something, the only way I can make money is if others buy from me at a higher price. If I'm planning to sell something, the only way I can make money on a short position is if there are people who need what I'm trying to sell." But many times, novice traders forget these basic principles. They buy and sell at the wrong time. In the end, you can never know for sure when new highs will break through resistance levels or when a stock will drop to new lows. That is what makes trading a challenge: You never know what to expect next. The best you can do is realize "value" is a subjective concept, and that winning traders accept the uncertainty and figure out ways to profit from it.
