Capitulation: What It Is in Finance and Investing, With Examples

For example, Bitcoin had a precipitous drop starting on May 2, 2021 when it dropped from $57,374.33 to $29,795.55 by July 17, 2021. This 40% drop was attributed to negative news coming out of China about Bitcoin mining. Hammer candles signal that sellers have capitulated, and the market is trying to find a bottom. Hammers have a small body, meaning that the opening and closing prices are similar, and they have a lower wick that is at least twice as long as the height of the body.

  1. Hammers have a small body, meaning that the opening and closing prices are similar, and they have a lower wick that is at least twice as long as the height of the body.
  2. Note that the stock was already down 15% in a day, suggesting others felt the same.
  3. While traders and professional investors may talk about market capitulation, long-term investors should stay focused on the long term and not try to jump in and out of the market.
  4. However, as the chart points out, and as will be discussed further below, the end of a capitulation tends to point to an attractive buying opportunity.
  5. Being a buy-and-hold investor can help you stay the course when capitulation occurs.

The resulting dramatic drop in market prices can mark the end of a decline, since those who didn’t sell during a panic are unlikely to do so soon after. This is a popular contrarian trading strategy that works especially well in bear markets as traders seek out oversold stocks to buy low in hopes of a bounce. So in a way, 7 phases of software development life cycle infographic the end of a capitulation period can be seen as a time to start feeling bullish again, or at least looking for bullish trading strategies like reversal patterns, inverse head and shoulders, etc. Of course, markets can always go lower, but when selling is exhausted it usually indicates a near-term bounce for the markets.

How Do Traders Identify Capitulation?

Real capitulation involves extremely high volume-or high numbers of traded shares-and sharp declines in stock prices. An example of a technical indicator and a candlestick pattern used by traders to identify the end of a capitulation period is the relative strength index (RSI) and a hammer candlestick, respectively. This is due to the opinion that everyone who wanted to sell has already done so. The end of a capitulation is difficult to identify, and traders generally rely on oversold signals from technical indicators or candlestick pattern formations to identify the pattern. A longer duration provides more reliable data which can be seen on a Japanese candlestick chart. Analyzing this data allows analysts and investors to spot trends in price movement.

It may occur after a stock market crash or amid a prolonged bear market. Of course, the massive sell-off leads the asset’s price to drop even further. However, the stock rebounded just as quickly, reaching $208 over the next six weeks, with daily volume at one point exceeding $1 billion. In retrospect, the final price drop represented a period of capitulation, as speculators accepted their losses and new investors assumed their positions.

A flush for a stock will typically come at the end of a long capitulation period of selling. The flush is the final move downwards where the stock will finally find a near-term bottom. Traders target a stock or market flush as an ideal time to hop in and buy, since these areas are generally where markets will bounce back higher. When a market selloff begins, there are often investors who come in and “buy the dip,” thinking a market will quickly rebound or that they’re getting a bargain-priced asset. However, if the market downturn continues,  traders may become increasingly short-term focused and concerned that prices will continue to fall. When traders reach this point of maximum pessimism and just want their losses to stop mounting, they sell their assets and capitulate.

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What Does Capitulate Mean in Trading?

Just like real candles, the candles in Japanese candlestick charts have “wicks” both at the top and bottom. The top wick displays the highest price achieved by the security over the course of a day, and the bottom wick displays the lowest price achieved. A candlestick without either a top or a bottom wick indicates that the opening or closing price was also either the high or low price. The longer the wicks, the greater the price volatility of the security.

In retrospect, we can identify mid- to late-March as the point when capitulation occurred. But at that point, investors had no way of knowing stocks wouldn’t crash further or that the stock market would recover quickly. The textbook definition of capitulation shows that traders have given up on the market and are selling their stocks at any price just to cut down on their losses. Capitulation is generally seen as the last leg down in a downtrend before a stock or market finds a bottom. is an independent, advertising-supported publisher and comparison service.

Market capitulation happens when investors and traders reach a point where they can no longer tolerate falling prices and sell their assets out of fear and panic. This happens in any asset class, like stocks, bonds, commodities, and is triggered by negative market conditions. While stock market capitulation could be assess via a variety of technical indicators, Japanese candlestick charts tend to be a popular choice. While it can serve as a stark reminder of how unforgiving the markets can be, it also provides contrarian traders with a window of opportunity. While everyone is selling their stocks, contrarian traders are looking to buy stocks at their lowest point. Although it isn’t a guarantee of a bottom, the end of the capitulation period is usually capped off with a flush, where a near-term bottom is then formed.

But capitulation occurs when investors are too spooked by short-term losses to focus on the long-term picture. When capitulation in investing occurs, it’s sometimes referred to as the shaking out of “weak hands.” In other words, it means investors without the conviction or means to hold an asset during turbulent times. Market professionals consider the capitulation phase as reflecting a bottom of a security or a market indice price, and that if investors could identify when capitulation takes place, it would signal the ideal time to buy. This is because everyone who wanted to sell the security has already done so, and only buyers are left. Capitulation typically follows significant downturns in price, which can take place even as many investors remain bullish. As the downturn accelerates, it reaches a point where the selling by the investors unwilling to suffer further losses snowballs, leading to a dramatic plunge in price.

There’s no set criteria for the length of a capitulation period, and some markets may take longer to recover than others. For example, the Great Recession of 2008 lasted 18 months, but it took several years for the economy to recover completely. Bear markets can feature repeat high-volume plunges in price and premature calls of capitulation. The truth is that the condition can be diagnosed conclusively only in hindsight if the price rebounds.