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
This
Stock Discussion and Training Lesson is sponsored by TechniTrader.com
MetaStock® Partner
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