Happy Independence Day to my fellow American readers! I hope you have an enjoyable holiday. Now let’s talk about creating financial independence. Wouldn’t it be great if you knew someone who always entered or exited the markets at the wrong time? All you would have to do is the opposite action to ensure your position was successful. Well you may not know them personally, but as a group they are known as the novice traders.
The problem with the novice trader is that they believe they can become rich by reading books or watching a few online videos on trading. Even worse are those who watch business television to decide which stock to buy or sell. The airwaves are bombarded with information on stocks that have climbed drastically or dropped dramatically. This entices the novice trader to chase price and enter at prices that are likely to cause a loss. Books and web videos are nearly as bad. Almost every book that I have read about trading or investing has at least one section dedicated to trading breakouts. This is often a recipe for disaster.
Let’s examine a chart where we can see this happening. In the following chart, the trend is clearly moving down as evidenced by the red candles. Then, prices moved sideways for a bit when the candles became mixed between red and blue. Once prices broke downward to a fresh low, the novices jumped on their ‘opportunity’ to sell the breakdown as they are trained to do.
Because they were doing it in such a hurry and as a large group, they caused a larger sized red candle. This is due to the number of orders they were placing and the fact that there were few professionals or even other novices willing to buy in the area.
In this case, the selling was rewarded as prices continued lower. However, once more the novices pounced on the selling opportunity and exhausted all the selling pressure with a large red candle that marked the bottom of the trend. This candle was much more obvious as a large/novice candle.
The professionals can see this activity and look to profit from it. When these novices buy breakouts or sell breakdowns, there are often stop losses placed just before the breakout point. This allows the professionals to push price and stop out the novices before manipulating the novices’ emotions to profit.
Notice how, as price climbed back up toward the original novice breakdown candle, once again many novices panicked and raced to buy the security. This caused the large blue candle toward the end of the rally right into the supply zone we identified. The rush to buy is largely caused by desperate traders trying to exit before they lose too much on their shorts, and by novices trying to buy as they mistakenly think this correction is the start of a new uptrend they must participate in.
Our professional opportunity arrives once prices return to the supply zone. The rest of the buy stop losses from the earlier novice sellers are being cleared out by professionals shorting to them. When all the buyers are gone, prices will decline as we saw. This is where the novices again make errors and trade on emotion and not logic. They were stopped out only to see prices move in their favor once they had exited. This will usually cause them to re-enter the markets late and chase price. In our above chart, this created the final large red candle and told us to lock in a nice profit or even possibly reverse our position.
This pattern that exists to shake out the novices and profit from their losses is repeated day after day in market after market. You need to know that not every large candle is formed by the novice traders. Many of them are caused by the actions of professionals. You need to get the right education, so you know where the right opportunity is. Don’t lose like a novice, thrive like a professional in the markets. Get educated!