Friday, March 28, 2014

TechniTrader Weekly Stock Discussion for MetaStock: “Adjusting Indicators for Downtrends”


MetaStock® SPRS Series - Week 164 – March 28, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

The uptrend and downtrend are not mirror images of each other, nor can you use the exact same indicators, indicator period settings, or subordinate indicators.
Many retail traders assume that if they learn the upside price action that when the trend turns down it is just the opposite price action.  That is why so many traders struggle to exit stocks before the trend tops and runs down.  In addition it is why many retail traders who try to sell short as well as options traders who buy puts, take so many losses in their trading.
If you are a position trader, you will be trading the uptrend and sideways trend.  If you are a swing or day trader you must trade the uptrend and downtrend, and adapt for the sideways trend.
Swing and day traders must be able to take advantage of both the upside and downside price action to net profits, that are close to what a position trader can achieve.  However, the position trader will generally always have far higher returns.
The sell side or downtrend is very different from the uptrend or sideways trend because there are fewer market participants.  Giant pension funds and giant mutual funds do not sell short. They may buy option puts or ultra-bear ETFs, as a hedging or mitigating strategy when the market goes down as they are longer term investors.
Smaller lot investors, most institutions, corporations, billionaires and other wealthy individuals and foreign funds do not sell short.
High Frequency Trading Firms, Professional traders, and some retail traders sell short or use options to make profits during a downtrend.
That is why the downside trend is so very different than the upside or sideways trend.  The downtrend often has much steeper angles of descent immediately causing a severe drop in price, and often gaps as HFTs trigger on news events.  The Downside also has larger rebounds as it bounces off of support. 
How fast the price will fall is dependent on many factors but the most important factor is always the number of HFTs that trigger the sell-off.
The downtrend can drop with low volume, and can at times gap down through technical support levels. This is due to how and where the retail crowd and the smaller funds set their stop losses.
A common mistake that many investors and traders make is to use a percentage stop loss.  Since everyone in these groups all use the same percentage stop losses, there are many strategies used by HFTs and other professionals that cause these percentage stops to trigger.  When this happens many retail traders get very angry, because the stock usually hits the stop loss then rebounds back up.
Many retail traders assume this is the “market maker” searching for their orders and taking out their stops.  
Instead it is the “Cluster Order Syndrome” which triggers HFTs and other algorithms, searching for orders that are clustered around a percentage.  As a stock drops, stop losses are triggered and the stock plummets.

 


The above chart shows a how a 10% stop loss triggered a huge down day.  It was driven by very high volume, which is the foot print of HFTs and sell short automated orders. These trigger on algorithms designed to locate cluster orders.
Summary
The downtrend behaves very differently than the uptrend because not all of the 9 market participants sell short.  More than half of the market participants hold stocks for the long term.  On the downtrend, algorithms dominant and many search for anomalies in order flow called “Cluster Orders.”
When retail investors, retail traders, small funds, and other groups all use the same percentage such as an 8% or the more popular 10%, it creates a huge cluster order at that price range.  Algorithms can search for these cluster orders that then cause huge sell downs, because of the combination of selling short AND stop losses firing off at the same time. The stock plummets within seconds often when the stop losses trigger all at once.
For information on Indicators for Selling Short go to: http://goo.gl/Iuolx0
Trade wisely,
Martha Stokes CMT
Chartered Market Technician
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader Stock Market Courses
For additional training visit http://technitrader.com
This Stock Discussion and Training Lesson is sponsored by TechniTrader.com
MetaStock® Partner                                                                 

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