Capitulation (Investing) - Explained
What is Capitulation?
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Table of ContentsWhat is Capitulation?How Does Capitulation Work?Key pointsUsing Technical Analysis to Identify Capitulation
What is Capitulation?
Capitulation occurs when an investor does not take any previous gains earned from securities, and rather sells his or her position in the diminishing stage. Though there is no specific time set for capitulation, but it usually takes place when there is trading going on in big volumes, and in case of added fall in securities. When the market adjusts or rectifies its position, or usually the bear market influences investors to capitulate or make a forced sale. This term originates from a military term that signifies surrender. Once the capitulation selling takes place, traders have a belief about the presence of many negotiation purchasing opportunities in the market. This means that anyone who is willing to sell their stock no matter if the purpose if forced selling or anything else, has already made the sale. Then as per the theoretical approach, there arises a reversal of prices which signifies capitulation as a symbol of a low. There are many traders who seek to make predictions about capitulation buying or selling. However, the truth is that these capitulations are the result of final outcomes based on the financial and psychological pressures borne by traders prior to liquidating their position. This means that investors have the potential to figure out capitulations once they have happened.
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How Does Capitulation Work?
According to the definition, capitulation stands for surrendering or giving up. In the financial industry, this concept is considered to depict a position when investors are no longer interested in making efforts for reacquiring lost profits owing to the declining prices of stocks. For instance, the value of a stock that you bought has declined by 10%. In this case, you can either patiently wait for the stock price to shoot up again, or realize the loss by selling it in the market. When most of the investors opt for waiting for the price rise again, there will be stability in the stock price. On the other side, if most of them plan to capitulate and sell the stock, the price of the stock will fall steadily. This pattern, when being highly visible in the market, causes market capitulation. As per many traders and financial experts, capitulation takes place when the stock prices are in the bottom, and when this happens, it gets feasible for purchasing stocks. This is because the selling of stocks in big volumes results in price fall, and the buying in huge volumes results in increasing the prices. With almost every investor who wished to sell stock has already sold it, there are only purchasers or buyers left in the stock market. And, there is maximum probability that their presence will raise the stock prices. The only drawback of capitulation is that it is almost impossible to predict it. There doesn't exist any specific price that can be associated with capitulation. Generally, investors will only nod to the prices after the market capitulation has already taken place.
- Capitulation in the market occurs when investors surrender previous profits from any security when the prices fall, and ultimately, sell their positions.
- Many financial experts relate capitulation with a fall in prices, and ultimately, a feasible time to purchase stocks.
- One can only identify capitulation after it has taken place.
Using Technical Analysis to Identify Capitulation
Capitulations signify a big turning point in terms of price of underlying stocks, securities, and other financial instruments. Candlestick charts make it possible for technical experts to find out the capitulation stage. When the prices are least, hammer candles are formed in the bottom of a selling frenzy, and this is where capitulation comes in the pictures and gives a hint for a price bottom that follows a reverse movement on large quantities. Investors would sell stocks when they start panicking. And when they start overcoming fear, they could see a reversal in prices. On the other hand, a shooting star candle gets formulated at the bottom of a buying frenzy. This happens when prices have reached the maximum point. Here, investors complete their wish of buying a position and their anxiety of missing out has gone to the maximum levels. The quench of getting a position anyhow begins to fall with a decline in prices. When the final set of buyers witness a decline in their positions, a fear begins to appear in the market. With prices continuing to fall, buyers who made early purchases begin to sell their position with a view to save left profits or minimize the losses. There are different chart-based time intervals that determine the extent of capitulation in the market. It can range from a one-minute chart to a 1-month chart. However, the bigger the time period, the more reliable the capitulated figures are. It is so because it gives enough time to investors and analysts to ascertain the final outcomes of price movement.