Are you losing money in the stock market because of false breakouts? This article could completely turn around your trading…
This behind closed doors secret about institutional traders will save you from being ambushed. This secret has saved me thousands of dollars and now I’m breaking my silence to show you how to do the same.
You are about to learn a low down dirty trick that institutional traders use against you.
After reading this article, these dirty tricks might make you angry.
It may even make you want to close this page and forget you saw it…
Read this entire article…
And you will be very thankful you did in the long run.
Because after you are done reading this article, you will have new insight into how to spot and avoid 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 traders buy and sell a stock, they commit emotion to the trade. It is their emotions that will keep a market trending higher or send it into a reversal.
When a stock takes a plunge, some of the crowd trading the stock will sell for a loss, some of the crowd will sell for a gain, and some of the crowd will hold on to their position.
A chart is really nothing more than the result of emotions coming from the crowd of people in that particular 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.
Let us say that a $20 stock drops down to $18 and stays there for a few weeks. The longer the $18 level holds, the more that traders believe that this is a good support level and buy the stock. Now right after buying, the stock falls to $15. Skilled traders will sell quickly and exit their position at $17 or at $16. Amateur traders will stay in their losing position until, one day, it rises back to their original entry level at $18. They will then sell this stock never to return. They eagerly jump out at the chance to “get out even”. Their selling will temporarily stop a rally and form a resistance level.
Regret Is A Reason Why Support and Resistance Lines Form
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.
Whenever you work with a chart, draw support and resistance lines across recent tops and bottoms. Expect a trend to slow down in those areas, and use them to enter positions or take profits.
Warning: 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.
Institutional traders love causing false breakouts because this is where they make the most of their money.
Institutional traders can see all the limit orders for a given security. You and I do not have access to this information. They know exactly how many buy orders are waiting to be automatically executed above a certain resistance level.
What institutional traders will do next is what is known in secret, behind closed door circles, as “running the stops”. A false breakout occurs when the institutions organize a hunting expedition 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.
False breakouts will knock you out of a trade. But don’t do what most amateur traders do which is to take a single run at a stock and once stopped out, go bipolar and say the stock is bad and never return. Obviously there was something you fundamentally liked about the stock in the first place and that has not changed. Professional traders will take several runs at a stock until finally nailing down the trade they want.
Written by Steve Wyzeck. When are you finally going to get tired enough of losing money in the stock market to do something about it? To make money stock trading go to stock market
Tags: business and finance, education, finance, investing, self improvement, stock market, stock trading, stocks