Stock Market Survival Tips: Avoiding Institutional Traders

Finance

Written by SteveWyzeck

Monday, 24 August 2009

by SteveWyzeck

Are you losing money in the stock market because of false breakouts? This article could completely turn around your trading...

I am going to tell you a stock trading secret that is so powerful, it will save you thousands of dollars. I should know, that is how much it saved me.

You are about to learn a low down dirty trick that institutional traders use against you.

It might get you angry.

It may even make you want to close this page and forget you saw it...

But I'll make you a promise - stick with it, hear me out...

And you will be very thankful you did in the long run.

Because you will learn an entirely new way of looking at the stock market and in particular false breakouts...

We must define support and resistance and then look at in more depth what false breakouts really are.

Learning the how and why resistance lines and support lines form will help protect you against false breakouts.

When most traders buy and sell, they make an emotional commitment to their trade. Their emotions can keep a market trend going, or send it into a reversal.

When a stock falls, some traders jump out and book profits, some traders jump out and take losses, and some traders hold on.

What you see on a chart is the emotional commitment, or lack thereof, coming from the crowd that is trading that stock.

Pain Is the #1 Reason Why Support and Resistance Lines Form

If someone trading a stock is still holding that stock when the price finally comes back to their cost basis, they are likely going to sell. It is painful to be in this stock and the trader simply wants to get out. This pain relief will temporarily stop a rally. These painful memories are why support and resistance lines form.

For example, suppose a stocks falls from $30 down to $25 where it trades for a couple of weeks. The longer the $25 level holds, the more that believe $25 is support. Suddenly, after a couple of weeks of trading at $25, the stock falls down to $20. Smart traders will sell quickly and get out at $24 or $23. Amateur traders will hold on and sit through the entire painful decline. Some amateur traders will get out at $20. Other amateur traders who haven't given up at $20 will be the first to sell when the stock gets back up to $25. They will happily jump at the chance to "get out even." Their selling will temporarily stop a rally and form a resistance level.

Support and Resistance Lines Are Caused By Regret

Traders who come across a stock that has spiked up feel as if they have "missed the train." If the stock drops back to a certain level, these traders who feel regret for missing the first move will jump at a chance for a second move. Their buying forms a support level.

Take your stock chart and draw resistance and support lines at recent tops and bottoms. You should anticipate the trend to slow down at these levels. Use these support lines and resistance lines to either buy (at support) or to take profits (at resistance).

False Breakouts Are Caused By Institutional Traders

A false upside breakout occurs when the market rises above resistance and sucks in buyers before reversing and falling.

A false downside breakout happens when a stock falls below support, attracting more bears just before a rally.

Stocks that have a high percentage of institutional ownership often form false breakouts.

False breakouts provide institutional traders with most of their best trading opportunities which is why institutional traders most often are the ones who cause these patterns to form in charts.

All limit orders are displayed on the screens of Institutional traders. They have the exact number of buy orders above a given resistance level.

Institutional traders have a secret practice they call "running the stops". A false breakout happens when institutions engage in hunting expeditions to run stops.

Take the following example: when a stock is just under resistance at $20, the buy limit orders come flowing in near $18.50. The institutions calculate the liquidity ratio which measures how much the stock will go up if all buy limit orders are executed at $18.50. They calculate that the stock will run to $21 if all the buy limit orders at $18.50 are executed. They short the stock at $20 to push it down to $18.50. At $18.50 they cover their short position and go long as the wave of buy orders are automatically executed pushing the stock up to $21. If greedy traders start piling in, the institutional trader will stay long the trade. As soon as the buy orders start drying up, they sell short and the price falls back below $20. A false upside breakout will show on your chart.

If you get stopped out on a false breakout, dont be shy about getting back into a trade. Beginners tend to make a single stab at a position and stay out if they are stopped out. Professionals, on the other hand, will attempt several entries before nailing down the trade they want.

About the Author:

Written by Steve Wyzeck. To improve your trading in one evening go to stock market

Add this page to your favorite Social Bookmarking websites