We are going to start a series about common trading problems that cause losses and frustration.
Common Problem #1
You have been making good trades and good profits when all of a sudden you have a rash of losses. You are frustrated and confused. The strategy or trading system you had been using was great, now nothing you do works. Your trading buddy tells you it’s the “market makers” those evil dudes that are sitting around just waiting to take your 100 share or 1000 share lot order.
You’re sensible enough to realize that market makers aren’t sitting around waiting to steal a measly couple of points from you. The market is automated and market makers never see your orders. It has to be something else but the harder you try the more frustrated you get.
So you head off to the next free weekend seminar and learn a new strategy. Same scenario plays out a few weeks later.
What is going on? Why do great strategies suddenly stop working?
Market Condition
I am not talking about Market Breadth, or Market Trend, or Index Trend, or Advance Decline, or what the Dow is doing day by day.
Market Condition is much more than all of these things combined. It is the strength, direction, bias, energy, and price patterns that dominate most stocks at this particular point in time.
The Indexes follow or lag Market Condition. They do no lead price action, they react to it.
Below is a weekly chart showing how Market Conditions alter price action over time for this stock.
Chart 1
There are 6 Primary Market Conditions:
1. Velocity
2. Platform
3. Moderately Trending
4. Bottoming
5. Trading Range
6. Topping
Each Market Condition has a different energy and bias, strength and direction. Each occurs based on which of the 8 Market Participants are in control of price at that time. Some Market Conditions can last for months, others last only a few weeks before changing.
In order to choose the right strategy or trading system you must use Market Condition Analysis to identify which condition is underway at that time and how long it is likely to last.
All strategies and trading systems are based on a Market Condition and price action within that condition. So if you are using the wrong strategy for a particular Market Condition, you will lose money.
Example: if you use a SARs strategy during a platform market condition you will have frequent whipsaws that take your out of the trade at a small loss. This is a very common mistake many traders make.
If you are using an overbought /oversold strategy during a velocity or moderately trending market condition you will exit the trade just as the momentum and strong velocity action gets underway and you will miss out on all the great profits. This is also a common mistake.
If you trade a bottoming market with a sell short strategy, you will be trying to sell short against the huge influx of money flowing into stocks as big funds buy on dips and bottom lows.
Several times in 2011, technical traders were calling an ‘overbought technical pattern’ for the market and predicted a major sell off or correction was about to occur. So many retail traders rushed to sell short at that time and got whacked big time. Retail traders assumed the market was going into a correction that would last several months and go deep perhaps even test the lows of 2009.
If you had done Market Condition Analysis you would have known there was no way this was going to happen.
Why didn’t the market enter a correction phase and move down a lot when technicals were showing overbought conditions? Because the market was not in a topping pattern at this time but rather, was in a Platform Market Condition.
Chart 2
Platform Market Conditions resemble Trading Range patterns when viewed on an Index so most retail traders misinterpret the price action because they depend upon the indexes, which lag.
The reason the market shifted to a Platform Market Condition was because a huge influx of money was moving into the market in the first quarter of 2011. With so much money flowing into mutual funds, any dip or retracement became an opportunity for institutions to buy in at a better price. So while retail traders were trying to push price down for selling short, institutions were snatching up stocks as they moved down into their buy range. This action had nothing to do with market makers. Retail traders simply were trading against the institutions rather than with them.
There is a lot more to being a consistently successful trader than just a strategy or a trading system. You must learn what market condition is underway so that you can use the PROPER strategy for that market condition and trade with the institutions rather than against them.
Common Problem #1 solution: Learn Market Condition Analysis, trade with rather than against the institutions. Learn which strategies to use for each Market Condition.
Trade wisely,
Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner
(c)2011 Decisions Unlimited, Inc.
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