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Entries in Stock Market for beginners (9)

TechniTrader Stock Traders "Why Percentage Stop Losses Trigger High Frequency Traders"

Differences Review in Uptrend and Downtrend Trading

The uptrend and the downtrend are not mirror images of each other, nor can you use the exact same indicators, indicator period settings, or subordinate indicators.

Many retail traders assume that if they learn the upside price action, that when the trend turns down it is just the opposite price action. That is why so many retail traders struggle to exit stocks before the trend tops and runs down. In addition it is why many retail traders who try to sell short as well as options traders who buy puts, take so many losses in their trading.

Lets review, if you are a position trader you will be trading the uptrend and sideways trend. If you are a swing trader you must trade the uptrend and downtrend, and adapt for the sideways trend. Swing traders must be able to take advantage of both the upside and downside price action, in order to net profits which are close to what a position trader can achieve. However, the position trader will generally always have far higher returns.

The sell side or downtrend is very different from the uptrend or the sideways trend, because there are fewer Market Participants. Giant Pension and Mutual Funds Institutions do not sell short. They may buy option puts or ultra-bear ETFs as a hedging or mitigating strategy when the market goes down, because they are longer term investors.

Smaller lot investors, corporations, billionaires, other wealthy individuals, and foreign funds do not sell short.

High Frequency Traders, Professional Traders, and some Retail Traders do sell short or use options to make profits during a downtrend.

That is why the downside trend is so very different than the upside or sideways trend. The downtrend often has much steeper Angles of Descent™ immediately causing a severe drop in price, and often gaps as High Frequency Traders orders trigger on news events. The Downside also has larger rebounds as it bounces off of support. 

How fast the price will fall is dependent on many factors, but the most important factor is always the number of HFTs that trigger the sell-off.

The downtrend can drop with low volume, and can at times gap down through technical support levels. This is due to how and where the retail crowd and the smaller funds set their stop losses. A common mistake that many retail traders make is to use a percentage stop loss. Since often everyone in these groups all use the same percentage stop losses, there are many strategies used by High Frequency Traders and other professionals that cause these percentage stops to trigger. When this happens the stock usually hits the stop loss, then rebounds back up.

It is the “Cluster Order Syndrome” which triggers High Frequency Traders and other algorithms, searching for orders that are clustered around a percentage. As a stock drops, stop losses are triggered and the stock plummets.

The chart example above shows a how a 10% stop loss triggered a huge down day. It was driven by very high Volume, which is the foot print of High Frequency Traders and sell short automated orders. These trigger on algorithms designed to locate Cluster Orders.


The downtrend behaves very differently than the uptrend because not all of the nine Market Participants sell short. More than half of the Market Participants hold stocks for the long term.  On the downtrend algorithms dominant, and many search for anomalies in order flow called “Cluster Orders.”

When retail traders, small funds, and other groups all use the same percentage such as an 8% or the more popular 10% it creates a huge Cluster Order at that price range. Algorithms can search for these Cluster Orders and then cause huge sell downs, because of the combination of selling short AND stop losses firing off at the same time. The stock plummets within seconds often when the stop losses trigger all at once.

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Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a MetaStock chart, courtesy of Innovative Market Analysis, LLC dba MetaStock

Chartered Market Technician
Instructor and Developer of TechniTrader Stock & Option Markets Courses
This Stock Discussion and Training Lesson is sponsored by a MetaStock® Partner

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