Why the Market Moves Sideways
Trading so-called
“Volatile Markets” can seem like a daunting task. Many Retail Traders struggle
during these phases of trading action, and do not recognize how to cope with
“Volatile” Trading Conditions. The problem is not that stock price action is
“Volatile” but that few traders know why this happens, how to trade this type
of price pattern, and when to expect the volatility to convert to sudden
momentum action.
Volatility is a
loosely used term for a broad variety of sideways action. It is rarely defined
adequately so that traders can determine how, when, where, and what to trade.
That leaves many traders frequently frustrated because the modern automated
market moves sideways often.
Volatility is nothing
more than up and down price action, that if not fully understood can and does
cause the common “whipsaw” trade that causes traders to take losses only to
watch the stock move afterward.
Although there are
many “blame games” that Retail Traders are taught. “Market Makers” is the most
common blame game, which is really a myth because over 95% of all retail trade
orders never make it to the exchanges nowadays but are filled by your broker
from their inventory.
The point is that
blaming anyone or anything is simply a waste of time. Instead the focus on How
to cope with “Volatile” Trading Conditions should be the following:
1. Identifying early
that a sideways aka Volatile Trading Condition is about to occur.
2. Determine why this
Trading Condition has occurred, or is about to occur.
3. Analyze the Price
action, to correctly choose the breakout direction.
4. Finds stocks to trade
that have compressing sideways patterns, that will end with a breakout to the
Upside or Downside.
5. Plan your Entries.
Why does the market
move sideways or become volatile?
All sideways action
whether it is a Consolidation or a Trading Range, occurs because of a Shift of
Sentiment™ which alters the balance of power within the trending stock or
market.
See the chart below
is an excellent example of volatile action, as a Shift of Sentiment is
unfolding.
The critical analysis
is to determine where the dominant Market Participant Groups are trading,
either up or down. Are these dominate groups buying or are they selling? When
there is a Shift of Sentiment within the Trend, volatility erupts suddenly.
This is because instead of most Market Participant Groups all on the same side
of the trade driving price upward for instance, suddenly and often without
warning an important Market Participant Group is selling.
This is exactly why
the chart example has a volatile sideways pattern over the past week. It rammed
into resistance, and without most Retail Traders realizing it a Shift of
Sentiment triggered profit taking. The actual Shift of Sentiment began earlier
in the run up, as the value rose above the Dark Pool Buy Zone™ range.
The giant
Institutions use Dark Pools, and Time Weighted Average Volume TWAP orders.
These automated orders stop triggering, once price moves beyond a specific
price. Since Giant Institutions are liquidity takers, this can quickly result
in Professional Traders taking profits early, ahead of a technical resistance
level. It can also confuse the High Frequency Trading HFT automated trigger
order, which can then create a huge Volume surge for one day but without price
moving much.
Summary
The result of
Professional Traders profit taking and HFTs on the opposing side of the Dark
Pools, stalls price shifting it sideways. Meanwhile the less informed Retail
Trader does not see the sideways action; nor do they know to LOOK for a Shift
of Sentiment so they are buying as larger lots are selling, and this is what
creates “Volatility.”
When you learn to
read stock charts properly, a whole world of information suddenly appears
before your eyes. Who controls price, who is buying, and who is selling is all
critical information in learning how to cope with “Volatile”
Trading Conditions. When you recognize this information you can determine the
direction of the breakout, and whether this is a minor retracement or a
reversal pattern.
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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDs with every course.
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