Stocks

All Shook Up and Out of Your Trade

BrandonWendell
Brandon Wendell
Instructor, CMT

Have you ever been shaken out of a trade only to see the price move in your favor once you were out of the position? Did it seem like the institutions attached a camera to your computer to see where you entered and exited so they could trade against you? Obviously, this is not what happened but it is frustrating nonetheless.

What happened is that you likely thought and traded like a retail trader. Retail traders tend to buy stocks AFTER the price has risen and sell AFTER they have dropped. In essence, they have been chasing price and only catching it when the momentum exhausts.

Look at the following chart of EBay. You can see that the largest green candle happens to be associated with the highest volume in the move upward as well.

ebay novices

This is a case where the novice traders got greedy and chased price as it was rising. It is funny that people do this as we wouldn’t think of paying a markup for everyday things we purchase in life. Most of these same investors and traders seek out sales or bargains on everything from toothpaste to cars to furniture. But when they deal with the markets, that common sense becomes less common.

The professionals know that novices like to chase price and they will trap you or take advantage of your naiveté when you trade the way all of the other retail traders do. In BBBY, you can see the increase in volume as the novice trader’s jump into the stock as price breaks out to new highs.

The novices jumping into the markets are often signaled by a large candle in the direction of the trend accompanied with high volume. This is a regular occurrence and offers an opportunity for the institution.

bbby novices

This is a case where the novice traders got greedy and chased price as it was rising. It is funny that people do this as we wouldn’t think of paying a markup for everyday things we purchase in life. Most of these same investors and traders seek out sales or bargains on everything from toothpaste to cars to furniture. But when they deal with the markets, that common sense becomes less common.

The professionals know that novices like to chase price and they will trap you or take advantage of your naiveté when you trade the way all of the other retail traders do. In BBBY, you can see the increase in volume as the novice trader’s jump into the stock as price breaks out to new highs.

The novices jumping into the markets are often signaled by a large candle in the direction of the trend accompanied with high volume. This is a regular occurrence and offers an opportunity for the institution.

Brandon Wendell- bwendell@tradingacademy.com

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.