Common problem in Selling Short: The Bounce.
Not preparing in advance for bounce action in a downtrending or correcting market condition.
Many traders want to learn to sell short and if you are a short term trader, learning to trade both sides of the market to make money even while stocks move down.
Stocks move differently on the sell side than they do on the upside. This is because there are different market participant groups that buy stocks than those who sell short.
The sell side bounce is a common pattern that often can cause problems for traders learning to sell short profitably.
Bounces occur for a variety of reasons.
1. Stocks hit technical support levels that are exit areas for sell short traders to take profits.
2. Stocks hit a fundamental support level and bargain hunters rush in to buy up low priced stocks.
3. Stocks hit quiet accumulation trigger prices where giant funds move in on stocks based on long term fundamental values.
4. Stocks lack sufficient selling activity and bounce due to low liquidity.
5. Stocks enter a High Frequency Trader formula zone.
6. Stocks being bought up by “buy on the dip” investors, sometimes late.
When viewing a chart in MetaStock for selling short, you should study the downtrend bounces. These take the form of white candles, resting day patterns, indecision candles, and gap ups.
Below AT&T is showing a technical support area that has caused a minor bounce that is forming a consolidation.
Chart 1
KO is showing bounces due to buy on dip investors moving in late. They are fundamentalists, smaller investors who believe a retracement is a great time to add to their position. However they are unaware of the overall market condition and the risk of a short or intermediate term correction that is coming due to technical and fundamental situations.
Chart 2Each type of bounce will be different based on how that particular market participant buys, when they buy, and how much they buy.
Being able to identify the type of market participant and their buying intent based on the candlestick patterns, candle placement within the trend, size of the bounce, accumulation indicators, and other indicators will help you make better entry, exit, or hold decisions when you are selling short the market.
Every market participant leaves a different “footprint” on the chart based on the size lots they trade, if they are members of dark pools or HFT companies, when they trade, and the duration of the hold time.
These patterns are easy to learn once they are pointed out to you. The benefits of understanding price action beyond mere candlestick continuation or reversal patterns are huge and dramatically increase your profitability.
Take the time to learn the why behind price action.
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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