Capitulation? What Is Capitulation?
Capitulation is when investors give up any previous gains in any security or market by selling their positions during periods of declines. Capitulation can happen at any time, but typically happens during high volume trading and extended declines for securities. A market correction or bear market often leads investors to capitulate or panic sell. The term is a derived from a military term which refers to surrender.
After capitulation selling, many traders think there are bargain buying opportunities. The belief is that everyone who wants to sell a stock for any reason, including forced selling due to margin calls, has already sold. The price should then, theoretically, reverse or bounce off the lows. In other words, some investors believe that capitulation is the sign of a bottom.
While traders often attempt to anticipate capitulation selling or buying, the reality is that capitulations are after-the-fact outcomes that result from the maximum psychological and financial pain that can be endured by investors before liquidating their positions.
Investors can only identify capitulations after they have occurred