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Secret 17

Keep a cool head during blow-offs

Markets almost always seem to top out in the same way. When close to the end of a major move, markets become wild. Volume is huge, activity is feverish and erratic, and the imagination of most traders blossoms. If you've had the vision to ride the trend to this point, your payday has come; however, in extreme markets, men and women of reason lose all sense of proportion. They start to believe the propaganda that the world will literally run out of this or that, but it never happens. The Hunts ran silver from $5 an ounce to more than $50. They felt it would go up forever, but they forgot that at some price Grandma's silver candlesticks come out of the cupboard and drop into the smelter. The richest men in the world (at that time) lost all sense of reason and proportion and lost $2 billion in the process. The history of the world has shown that there has never been a time when there was a great demand for anything that a supply in excess of demand didn't develop.

Extreme markets are not the time to pyramid—they are the time to become alert for the end. All good things come to an end, and your mission is to jump before the big bump. At some point, all “the herd” will want to exit the same door at the same time—just make sure you've already left the room. When everyone wants to sell and all buying support disappears, profits can run into losses fast. In the stock market crash of 1987, profits made in the first 10 months of the year were wiped out in two days, and this was repeated in the dot-com mania in early 2000.


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