the effects of traders’ actions

You have surely noticed that when you buy a product, you are making a purchase transaction, and when you want to sell the same product, you are making a sales transaction.

The same thing happens in the market. When you perform a long trade and now intend to sell it, you must exit through a selling transaction, which is called a sale. Conversely, when you perform a short trade and wish to close your position, you should exit through a cover-to-buy transaction.

If you think that "sell to cover" creates a downward flow and "cover to buy" creates an upward flow, you are mistaken. Why?

Because traders' persistence and stubbornness in trading do not exist even at worse prices; rather, it is quite the opposite.

Short trades are short-selling transactions. For example, I do not own the stock but want to sell it because I believe its price will drop in the future. Cover-to-sell transactions are also sales, but in this case, I already owned the stock and am selling it because I think its price may not rise any further.

Short trades occur when we believe the price is going to drop lower than its current level, so we enter a selling transaction. On the other hand, when we believe the price won't rise any further and the market might become range-bound, we close our buying transaction.

When you want to exit your long trade, any attempt to close it at a worse price effectively reduces your profit, and the same applies to short trades.

Consider a scenario where you bought a car for 500 million tomans and the price of the car is now falling. Now you intend to sell it; would you be willing to sell your car at 480 million tomans or at 450 million tomans? Definitely at 480 million tomans.

You would never be willing to sell your car for 450 million tomans if there is a buyer willing to buy it for 480 million tomans. Right? So, while selling your car creates supply in the market and drives the price lower, you do not have persistence or stubbornness in letting the price fall further. You prefer to sell your car at better and higher prices, not at worse and lower prices. Because your profit is not at worse prices.

Therefore, it is often a mistake to assume that exit transactions create upward or downward pressure.

In a short trade, you sell an asset you don't own with the expectation that its price will decrease. You plan to buy it back at a lower price later, thus making a profit from the price drop. This type of trade is used when you anticipate a decline in the asset’s price.

In a long trade, you buy an asset with the expectation that its price will rise. You hold onto it until you believe the price has reached a satisfactory level for selling, thus making a profit from the price increase.

When exiting a long trade, if you sell at a lower price than your purchase price, you are reducing your potential profit. The goal is to exit at a price as close to or better than your purchase price to maximize profit.

When closing a short trade, you buy back the asset at a lower price than you initially sold it for, realizing a profit. However, if you need to close the position at a higher price than what you sold it for, it will result in a loss.

Price Perception and Decision-Making: Traders often prefer to exit positions at higher prices rather than lower ones to preserve or maximize profits. This preference stems from the psychological tendency to avoid losses and secure gains. Traders’ reluctance to accept worse prices aligns with the principle of seeking better outcomes and minimizing perceived loss.