Monday, February 11, 2013

Upside and Downside Action

MetaStock SPRS Series - Week 105 - TechniTrader® Stock Discussion for MetaStock Users - Upside and Downside Action - February 11, 2013
By: Martha Stokes C.M.T.
Many retail traders make the mistake of trying to trade the sell side exactly the same way they trade the upside. This can cause chronic problems and disappointing results.

Uptrends and downtrends are NOT created equal. Price moves up in a certain way with specific patterns, and price moves down in a certain way unlike how it moves up. The upside and downside are NOT mirror images.

The first thing to learn is why price moves differently from the upside to the downside. This has to do with who buys and who sells, and why they buy or sell.

There are more people who buy stocks than traders who sell short. Even though the number of traders who sell short or “trade both sides of the market for short term profits” has been growing over the past few decades, there are still more buyers than sell shorters. This causes an imbalance in order flow right from the start, and imbalances always alter price action.

As an example the huge pension funds and mutual funds who control vast amounts of market money and stock holdings, generally do not sell short. They are buyers holding for the long term with charter requirements, in other words they MUST hold certain stocks by regulation. So even if they know the markets are due for a technical correction, they do not dump their big name stocks.

What they do instead is hedge either by buying puts, or by finding other offsetting derivatives trading instruments to buy or sell. In this way they can mitigate any short term losses for their funds without selling their stock or selling short.

High Frequency Trading firms on the other hand sell short all the time, intraday and whenever an opportunity presents. They are so sophisticated in their trading models that they can sell short an intraday retracement. Most retail traders can’t because HFT trades fire off in the millisecond and most retail traders trade at the minute level.

Below is a chart showing several of the key differences between upside price action and downside price action.

Chart 1
  1. The first day down in a downtrend is usually an extraordinary long candle or a big gap down.
  2. The first up day in an uptrend is a smaller candle. This is the opposite of the downside.
  3. As price moves up the white candles get longer and longer during a momentum move.
  4. As price moves down the first day is a big momentum day followed by smaller and smaller candles until the final day before a bounce.
  5. To the upside, momentum patterns will form stair steps at the start and move to a velocity run.
  6. To the downside, momentum patterns will form vertical drops with minor peaks and valleys more often.
These are just a few of the differences between upside and downside price action. Yes, there are exceptions but most of the time you will find upside momentum behaves quite differently than downside momentum.
When you can see these patterns more easily then you will be able to identify a topping pattern sooner, even before the top completes.

Practice studying the two different trends to learn to identify the differences.

Chart 2

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner
©2013 Decisions Unlimited, Inc.

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