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Last week we spoke about day trading psychology or market psychology. When the markets make a new high, many traders want to jump on the bandwagon because they are afraid of missing out on a big stock move. And there are also other day trading emotions involved, like greed and hope. Any emotion that a day trader feels will most likely be detrimental to his or her trading.
Day traders are greedy people, no doubt about that. And when the market makes new highs, day traders will be hoping that the market will continue upwards and they will make a lot of money day trading that move.
But if we dwell a little bit further into trading psychology and emotions in trading we can continue where we left off in the last episode when we discussed the day trading emotion of FEAR. There are two ways that the emotion of fear will affect your day trading. The first one, the fear of missing out on big profits, was discussed in the last episode. Another way that fear will affect your day trading is the fear of losing money. I think all of us have experienced this quite often.
This is something that the market makers and big players will use to their advantage. They will take advantage of you by instilling fear. Let me explain this with an example:
Let’s say that you and a bunch of other traders and investors own a stock that the big player, “Mr. Market”, wants to own. Mr. Market, by the way, is the term I like to use for the combined big players in the market; hedge funds, trading firms, mutual funds, etc.
So Mr. Market has already accumulated a very big holding of stock, and he is expecting the markets to move up – and he still wants to buy more shares. But there is not an endless supply available for him, and You and the rest of the traders who own the stock that Mr. Market wants to buy, you don’t want to sell. Because, you also expect, or hope, that the stock price will increase and that you will make a lot of money on it.
But, as usual in trading, you can never be certain that the stock price is going to increase.
So what Mr. Market, the composite big player in the market, will do is to manipulate the market in order to fake a down move or a crash, which will scare a lot of traders, like yourself, into selling.
The way this is done is as follows; the market is in a sideways channel – I actually already explained this in more detail in an earlier episode, but how the big players accumulate their holdings, is they decide a price level where the stock is cheap in their eyes, they start buying everything they can get their hands on at that price level. The market starts moving upwards because of all the demand, and the lack of available supply, that this buying is causing.
By buying everything there is to be bought at that price level when the prices are getting too high, then Mr. Market starts selling a small part of all the shares or contracts he bought. This will cause the price to move back down to more affordable levels again – because there is not as much demand when Mr. Market is not accumulating, and there is actually supply coming into the market.
When there is no more available shares or contracts at that price level, at the levels of accumulation, and Mr. Market still wants to buy more before he is satisfied – Mr. Market would then do a kind of market manipulation – completely legal – he would start selling a considerable part of his holdings. And this is done to “shake out” some day traders, forcing them to sell. Some day traders would call this “stop hunting” as a lot of this selling is going to happen because of day traders’ stops getting hit.
While many other day traders will think that the prices are starting to look cheap, and want to buy more – a whole lot more traders that already own the stock will start getting scared – they fear that their opinion on the stock or commodity was actually wrong and that the market is going to crash instead.
It’s easy to see, all of this is easy to understand this if we look at a chart – the stock is in a trading range, a sideways consolidation. The big players accumulate their holdings buying on the up moves, selling part of their holding on the down moves – but on average they are accumulating as much as possible. Everybody expects the market to move up and break out of the trading range to the upside, but then the big players sell a big chunk of stock and the market actually breaks the support because of all the supply, caused by the artificial selling by the big players.
A lot of traders would have stop-loss orders placed below support, so they would sell as these levels get hit. And a lot of traders think the market is crashing so they would sell out of fear. Fear of losing money.
And what happens then when all these day traders are getting scared and sell their stocks? Well, Mr. Market buys everything that these scared traders are selling. And Mr. Market actually gets to buy all those shares at a discount, at lower prices than the original level where they started accumulating their holdings.
And then the market moves right back inside the trading range, and breaks through the resistance and continues upwards. Mr. Market cashes in, and you are left wondering what the heck just happened.
But it is very difficult to day trade without any emotions at all. The best option to reduce emotional trading is to use automated day trading signals, or use a completely automated trading strategy with trading algorithms. At daytradetowin.com we offer software that produces automatic trading signals, so if you need a day trading strategy make sure you check it out. If you’re serious about becoming a professional day trader we recommend that you get a day trading coach or mentor. In our day trading mentorship program we teach 10 different day trading strategies so there is something for everyone. The next mentorship class starts soon, so go to https://daytradetowin.com/day-trading-mentorship-coach and register now while there are seats left.
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Until next time, good trading!