Monday, October 26, 2015

102315 MS Weekly - Differences Between the Uptrend and the Downtrend

Differences Between the Uptrend and the Downtrend
How Stop Losses Trigger High Frequency Trading
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 Participant Groups.
List of Market Participant Groups that do not Sell Short:
  1. Giant Pension and 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.
  2. Smaller lot investors
  3. Corporations
  4. Billionaires and other wealthy individuals
  5. Foreign Funds
List of Market Participant Groups that do Sell Short:
  1. High Frequency Trading Firms HFTs
  2. Professional Traders
  3. Some Retail Traders do, 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.  Here is a Here is a list of Downtrend characteristics:
  1. 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.  
  2. The Downside also has larger rebounds as it bounces off of Support.  
  3. 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.
  4. 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 Loss.
A common mistake that many Independent Investors and Retail 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 the stock usually hits the Stop Loss then rebounds back up.
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 Downtrend behaves very differently than the Uptrend because not all of the 9 Market Participant Groups Sell Short. More than half of the Market Participant Groups hold stocks for the long term.  On the Downtrend, algorithms dominant and many search for anomalies in order flow called “Cluster Orders.”
When Independent 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. A stock often plummets within seconds when Stop Losses trigger all at once.
Trade wisely,
Martha Stokes CMT

Instructor & Developer of TechniTrader Stock and Option Courses
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