Stock Market Guide: Institutional Traders Dirty Tricks

By Steve Wyzeck

Revealed for the first time... if you are losing money because of false breakouts in the stock market then you need to read this entire article.

This behind closed doors secret about institutional traders will save you from being ambushed. This secret has saved me thousands of dollars and now I'm breaking my silence to show you how to do the same.

You are about to learn a low down dirty trick that institutional traders use against you.

After reading this article, these dirty tricks might make you angry.

You may be so amazed and sickened that you simple refuse to believe what you are about to read in this article...

But you need to know what they are doing...

And you will be happy you did.

Because by the time you finish this article you'll have a whole new method for avoiding false breakouts...

First I will talk about what support and resistance lines REALLY are, and then I'll talk about false breakouts.

Learning the how and why resistance lines and support lines form will help protect you against false breakouts.

When investors buy or sell, they form an emotional attachment to the trade. It is emotions that keep a market going higher or sent it into a downtrend.

When stocks fall, a few traders will exit their position and take profits, a few traders will exit their position for a loss, and a few traders will stay in their position and hold on.

What you see on a chart is the emotional commitment, or lack thereof, coming from the crowd that is trading that stock.

Emotions Are Why Support And Resistance Lines Form

If a trader is holding on to a stock and hoping that it is going to come back, and it finally does, she is probably going to sell that stock. Staying in that loser of a stock is just too painful as she laments her entry. This selling to relieve the pain will momentarily stop a rally. These painful memories are precisely why support lines and resistance lines form at certain price levels.

I am going to give you an example so you can better comprehend what I am talking about here. Say a $40 stock sells off and falls to $35. It then stays at $35 for several weeks. Traders get confident that $35 is "the bottom" the longer this level holds. A trader finally buys the stock at $35. Right after buying, the stock drops to $32. Seasoned traders would have set their stop loss right under the $35 level and so would have exited around $34. Amateur traders will stay in their position refusing to take a loss. They will hold this losing position until the stock finally comes back to $35 where they entered. They eagerly jump at the chance to "get out even". This "get out even" selling will temporarily stall a rally and cause a resistance level to form.

Support and Resistance Lines Are Caused By Regret

Traders whose stock screener has alerted them to a stock that has spiked up will feel regret because they missed the move. If the stock retraces, they will quickly buy the stock for a chance at a second move up. This regret then excitement causes buying which forms a support level.

Take your stock chart and draw resistance and support lines at recent tops and bottoms. You should anticipate the trend to slow down at these levels. Use these support lines and resistance lines to either buy (at support) or to take profits (at resistance).

Institutional Traders Cause False Breakouts

When the market rises about resistance and pulls in new buyers and then suddenly reverses and falls back below that resistance, this is called a false breakout.

A false downside breakout happens when a stock falls below support. The bears jump in and short the stock. Suddenly the stock reverses and heads back up retaking the broken support level.

All stocks are fair game but especially any stock that has a high percentage of institutional ownership.

False breakouts provide institutional traders with most of their best trading opportunities which is why institutional traders most often are the ones who cause these patterns to form in charts.

Institutional traders have access to all limit orders. They know how many more buy orders are above a resistance level.

Institutional traders have a secret practice they call "running the stops". A false breakout happens when institutions engage in hunting expeditions to run stops.

I will use an example so you can better understand what "running the stops" is. Let us say that a stock is below its resistance level at $10, the buy limit orders come flowing in near $8.50. Institutional traders can see these buy limit orders. They figure a calculation called the liquidity ratio which reveals how much a given stock will go up if all buy limit orders are executed at $8.50. They figure out that the stock will run to $11 if all the buy limit orders at $8.50 are executed. They then short the stock at $10 to force it down to $8.50 (they can do this because they have most of the money and can manipulate a market with their buying or selling power). At $8.50 they cover their short position and go long as the wave of buy orders are automatically executed pushing the stock up to $11. If greedy traders start piling in, the institutional trader will stay long the trade. As soon as the buy orders start drying up, they sell short and the price falls back below $10. That's when your chart shows a false upside breakout.

False breakouts will knock you out of a trade. But don't do what most amateur traders do which is to take a single run at a stock and once stopped out, go bipolar and say the stock is bad and never return. Obviously there was something you fundamentally liked about the stock in the first place and that has not changed. Professional traders will take several runs at a stock until finally nailing down the trade they want. - 23159

About the Author:

Written by Steve Wyzeck. When are you finally going to get tired enough of losing money in the stock market to do something about it? To make money stock trading visit stock market