Do As I Say

Most people receive their financial education from television or a broker’s recommendation. They rely on the “expert’s” opinions rather than educate themselves and make their own. The problem is that the experts are not always looking out for your best interests. There have been numerous media releases about former brokers, and even a former SEC Director of Trading and Markets, discussing the conflicts of interests and how the equity markets have been rigged.

Further evidence of this bad advice are the upgrades and downgrades that brokerages provide to the public. Time after time the stocks that were upgraded saw a price jump into a supply zone only to see investors squander money as the broker’s information led them to losing choices.

The following upgrade on Abercrombie and Fitch on March 6th is an example. On the morning of the upgrade the stock gapped into a supply zone and those unfortunate people who bought the upgrade saw their money disappear.

Some may think this is a rare occurrence, but it happens more often than you would think. On the following week, March 11th, the upgrade for Five Below suffered the same fate.

Similar price movement happens when there are downgrades on stocks. Instead of stocks dropping after the brokerage lowered their expectations, the prices usually dropped into a demand zone where someone was able to purchase them at a great discount before the prices rose dramatically.

The inverse price movement doesn’t happen with every upgrade/downgrade, but it does happen enough that it should make you suspicious. Even when there is news on a security, it appears that the professionals take the opposite action of the novices who trade with the news. Alliance Fiber Optic had news that sent the stock’s price spiraling downward. It sharply rallied from strong buyers who took advantage of the wholesale prices. Two days later, there was a downgrade on the stock and, not surprisingly, the price rallied intraday after a small drop.

News on companies is often just as bad as the upgrades/downgrades. Most of the time novice traders will sell the stock when there is bad news and buy if there is good. When this happens, prices usually move directly into a supply or demand zone before professionals take advantage of the reversal that follows.

Best Buy (BBY) was on a great rally in 2013 into 2014 before a bad earnings report led to a sell off.

The sell off moved prices right into a weekly demand zone, where professionals took the opportunity to buy at wholesale prices.

So now that we know there is an inherent problem with the equity markets, what can be done about it to protect our money and allow us to profit in our trades and investments? Well, the first thing you should do is to remove yourself from the negative input. There is no need to watch retail news.

When I used to work as a hedge fund trader we paid thousands of dollars to get news as fast as possible. If you want the news first you must be prepared to pay a lot of money for it. Professional traders do not want to wait for the retail news because by the time it is broadcasted to the masses on television or via the internet, the professionals would have already positioned themselves to take advantage of the novice reaction to it.

Another simple solution is to trust your charts. News and recommendations influence people’s thoughts and perceptions. These thoughts and perceptions cause people to act and buy or sell securities. We can see these actions via our charts. By using Online Trading Academy’s Core Strategy, we can easily identify supply and demand zones where the professionals will take advantage of the novice news chasers.

We can then trade with the professionals who are usually on the correct side of the market. This increases our chances for success in our trades and investments and, most importantly, protects us from losing our precious capital. We need to reverse the old saying when it comes to brokerages; we need to do as they do, not as they say!

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