- Most Serious Traders watch CNBC and read the financial news, such as
the Wall Street Journal. So,
what's wrong with that!
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- What I am about to say is based upon my opinions and experience and most
of all, common sense.
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- Most of us have entered a trade based upon fantastic news
and have lost money as a result. How does this happen?
It seemed so obvious at the time that money would easily be made
and yet, the opposite happens.
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- To begin with, it helps to understand how the large funds move
in and out of stocks. If you don't have an understanding of level
2 and the inner workings of stock trading, you might find this
a little difficult to absorb. Let's imagine that you are a fund
manager and need to sell 2 million shares of EBAY stock. You
contact one or more market makers to sell the stock for you.
Market makers buy and sell stock on a principal basis which means
that they don't charge a commission, but adjust the stock price
to include a profit.
- Below is a Level 2 screen showing only market makers and no ECN's. Notice
the PRNC in the title bar. If we at Princeton Daytrading
decided to make a market in EBAY, you would see our symbol PRNC
in the level 2 window as well. Suppose NITE were the market maker
contracted to sell the 2 million shares of EBAY stock. Notice
that NITE is showing 600 shares for sale and SBSH is showing
he wants to buy 100 shares. The delicate balance here is easily
disturbed by the number of shares being bid or offered. If NITE
changed the 600 shares offered to 2,000,000, the bidders, such
as SBSH, would get scared and retract their bids causing the
stock price to drop, so he can't do that. So, how does he sell
the 2 million shares without driving down the price?
- Consider the following
story
- Suppose an analyst goes on TV and tells
everyone how wonderful the stock is. The public will buy the
stock at 50 3/16 thinking it is a great buy now and it will go
up in price. So, thousands of buy orders come in. NITE then keeps
feeding the 2 million shares in at 50 3/16. If the buying is
strong enough, he will make believe that he is sold out at 50
3/16 and move up to 50 1/4 giving the impression that the price
is indeed rising. When the public sees the price rising they
get excited and buying increases. They don't want to miss out
on this great opportunity. NITE is selling his stock at a faster
and faster rate. When the 2 million shares are sold and the buying
pressure lessens, skillful traders notice the weakening momentum
and begin selling to take their profits, which causes the price
to drop. As more and more of the public try to get out with some
profit the price plunges and those buying for the longer term
end up with a loser.
- So, looking back, what was the analyst's role? To stimulate buying
- so the 2 million shares could be sold. Always put yourself
in the analyst's shoes and try to imagine what you would do to
further your own interests. After all, why would the analyst
care about you and whether or not you make money? He doesn't.
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- Sometimes the analysts
are correct!
- Here is another scenario. When a good
stock has been beaten down because it missed earnings, accumulation
will occur by various funds. If you look at a chart of the stock
you will notice a gradual up trend caused by this accumulation.
When you get the news about how wonderful the stock is, the funds
already own it. Releasing the news will cause the public to buy,
pushing the price up further. You can see this in the chart as
well. Stock bought at the lowest price is then sold to the buying
public at the inflated price at huge profits.
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- At Princeton Daytrading, we use technical analysis because the chart formations
expose the truth about what has really happened. All news that
affects a stock will be reflected in its price. Being an expert
at technical analysis is crucial to consistent success. Listening
to the analysts is the best way I know of to lose money.
- If you notice an error in our newsletter, we would
appreciate your letting us know with an email
- One of our new traders exclaimed - trading without level 2 is
like trading with a blindfold on. How true that is! And having
level 2 is not much help unless you know how to use it effectively.
Our training is so good that we have had people fly into San
Diego from Ohio, Pennsylvania, Texas and even from London, England.
So, rather than losing money on that next lousy trade, invest
it in your education at Princeton
Daytrading where you can develop
your skills as you learn in the most effective and easiest way.
Remember, your money is counting on you!!!
Education is
the key to success in any endeavor
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