Exhausted Selling Model - Explained
What is an Exhausted Selling Model?
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Table of ContentsWhat is an Exhausted Selling Model?How Does the Exhausted Selling Model Work?Panic BuyingExample of Panic Buying
What is an Exhausted Selling Model?
The exhausted selling model is a method of pricing that investors use to estimate the security's floor price. It is a strategy that represents investors with a way in which they can maneuver in an already exhausted stock market. Investors can use the strategy to determine the appropriate way of making money whenever there is a price decline in the stock market. Statistics used in this model include volume, trendlines, moving averages, and stocks charts pattern.
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How Does the Exhausted Selling Model Work?
The strategy is used when there is panic selling in the market. It is common among those investors who trade based on trends rather than following other important practices. Panic selling is where securities in the market sell rapidly. A good example is when there is a quick unloading of gold, especially when its value goes down. In this case, the prices of gold will decrease, but its trading volume will stay high. The price floor is likely to be achieved after the rapid increase in selling slow down. When this happens, it is natural for orders purchase numbers to increase. When it comes to determining the price floor, it depends on an individual investor. They can as well use other indicators to reduce risks. For an investor to use the exhausted selling model, there has to be a drop in price. However, material events such as the downgrading of stock by analysts should not be the cause of price falling.
Panic buying is different from panic selling because it happens when there is an increase in demand, which results in increased price in the available security. Although this is good for security holders, it can lead to a reduced supply of the asset. It is bad for those investors who prefer investing in a trending stock. Panic buying takes place during a rapid increase in security or asset purchase. It occurs when prices in the market are fair or when unexpected news to do with the asset is released before sales, which are likely to bring a positive impact on trading and price.
Example of Panic Buying
A good example of panic buying is when there is a demand for certain goods ahead of the snowstorm. As soon as metrologists begin to predict how the winter storm patterns will be like, there is usually an influx of customers in the grocery stores where they buy products such as milk and bread in bulk. Other items that customers may want to purchase ahead of the snow are rock salt and shovels. Also, since there is the worry of power outrage that may interfere with water supply, sales of bottled water usually rise.