True masters of the stock market know all the rules and abide by them. In addition, no investor ever learns everything. Those investors and stock traders that keep studying and learning, continue to increase their profits on a year over year basis. One of the best and most important rules to learn is the ‘Three Day Rule’.
Stock market investors always want to buy a stock that gets knocked down sharply. The ‘on sale’ emotion grabs us hard. For example, if a stock falls 20% on earnings, many investors rush in to buy the stock, thinking it will snap back. They think a 20% discount makes it an obvious buying opportunity.
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In reality, there are specific reasons why the ‘Three Day Rule’ tells you to wait a full three days to buy the stock. First, margin calls will likely trigger in some investment accounts. This will create further selling on day two and day three (following the initial day one fall). In addition, hedge funds holding the stock that are selling because of the change in outlook or negative news cannot unload their large positions fully in one day. In general, Wall Street takes a full three days for the sellers of a stock to exit completely and calm to reappear.
The ‘Three Day Rule’ tells investors and stock traders to wait a full three days before buying a stock that has been slammed due to negative news. By using this rule, investors will find their profit expand and losses contract.